ARTESIAN RESOURCES CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Glimpses |

OVERVIEW


Our profitability is primarily attributable to the sale of water. Gross water
sales comprised 88.1% of total operating revenues for the year ended .  Our profitability is also attributed to the various contract
operations, water, sewer and internal SLP Plans and other services we provide.
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 the effects of weather are short
term and do not materially affect the execution of our strategic initiatives.
Our contract operations and other services provide a revenue stream that is not
affected by changes in weather patterns.

While water sales are our primary source of revenues, we continue to seek growth
opportunities to provide wastewater services in Delaware and the surrounding
areas.  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-regulated division due to
our water, sewer, and internal SLP Plans.

Water Division


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 , we had approximately 85,900 metered water
customers in Delaware, an increase of approximately 1,700 compared to .  The number of metered water customers in Maryland  and in
Pennsylvania remained consistent compared to .  For the year
ended , approximately 7.9 billion gallons of water were
distributed in our Delaware systems and approximately 138 million gallons of
water were distributed in our Maryland systems.

Wastewater Division


Artesian Wastewater owns wastewater collection and treatment infrastructure and
began providing regulated wastewater services to customers in Delaware in .  Artesian Wastewater Maryland was incorporated on  and is able
to provide regulated wastewater services to customers in the State of Maryland.
It is not currently providing these services in Maryland.  Our residential and
commercial wastewater customers are billed a flat monthly fee, which contributes
to providing a revenue stream unaffected by weather.  There has been consistent
customer growth over the years.  The number of Delaware wastewater customers
totaled approximately 2,100 as of , an increase of
approximately 300, or 16.6%, compared to .  In addition,
Artesian Wastewater entered into a wastewater services agreement with Allen
Harim Foods, LLC, or Allen Harim, a large industrial customer, under which
service is expected to begin in 2019.  The wastewater services agreement with
Allen Harim is discussed further in the "Strategic Direction" section below.

Non-Regulated Division


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 ,
approximately 19,300, or 23.3%, of our eligible water customers enrolled in the
WSLP Plan, approximately 15,500, or 18.8%, of our eligible customers enrolled in
the SSLP Plan, and approximately 6,300, or 7.6%, of our eligible customers
enrolled in the ISLP Plan.  Approximately 1,700 non-utility customers enrolled
in one of our three protection plans.
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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.  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 division, our strategy is to focus on a wide spectrum of
activities, which include identifying new and dependable sources of supply,
developing the wells, treatment plants and delivery systems to supply water to
customers and educating customers on the wise use of water.  Our strategy
includes focused efforts to expand in new regions 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.

In , Artesian Water purchased existing water assets from Fort DuPont
Redevelopment and Preservation Corporation.  The Fort DuPont National Historic
District, or Fort DuPont, consists of 325-acres and lies between the Delaware
River on the east, the Chesapeake and Delaware Canal on the south and the
Delaware City Branch Canal to the north and west.  The final purchase price for
the water assets consisting of a water treatment plant, storage tank, wells,
mains, and other equipment used to provide potable water and fire suppression
services to portions of Fort DuPont and the surrounding properties was
$852,000.  In connection with the planned future development of Fort DuPont, the
parties intend to design, build and operate a state of the art, cost effective,
safe and reliable water system that will include both new water assets as well
as improvements and upgrades to the existing water assets.  The water system can
be expanded to meet the needs of the planned 600 residential units as well as
new commercial customers, in addition to water service currently provided to the
Governor Bacon Health Center and National Guard facilities.

On , Artesian Water purchased the utility assets of Slaughter
Beach Water Company, or SBWC, for $450,000.  The public water system currently
serves the community of Slaughter Beach located in Sussex County, Delaware along
the Delaware Bay consisting of 265 customers.  The SBWC was founded in 1951 as a
public water system in Delaware.

We believe that Delaware's generally lower cost of living in the region,
availability of development sites in relatively close proximity to the Atlantic
Ocean in Sussex County, and attractive financing rates for construction and
mortgages 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 division, 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. 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.

Artesian Wastewater entered into agreements that will provide growth
opportunities and will utilize our larger regional wastewater facilities.  In
, Artesian Wastewater and Sussex County, a political subdivision of
Delaware, entered into an agreement to provide reciprocal services to address
the periodic need of each for additional wastewater treatment and disposal
capacity in certain service areas within Sussex County.  There are numerous
locations in Sussex County where Artesian Wastewater's and Sussex County's
facilities are capable of being 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.

On , Artesian Wastewater entered into a wastewater services
agreement with Allen Harim for Artesian Wastewater to provide treatment and
disposal services for sanitary wastewater discharged from Allen Harim's
properties located in Sussex County, Delaware upon completion of a pipeline to
transfer the sanitary wastewater.  The pipeline was completed in the second
quarter of 2017.  The transfer of sanitary wastewater is pending receipt of a
construction permit and installation of related on-site improvements by Allen
Harim at its facility.  On , Artesian Wastewater entered into a
second wastewater agreement with Allen Harim for Artesian Wastewater to provide
disposal services for approximately 1.5 million gallons per day of treated
industrial process wastewater upon completion of an approximately eight mile
pipeline that will transfer the wastewater from Allen Harim's properties to a 90
million gallon storage lagoon at Artesian's Sussex Regional Recharge Facility.
We will use the reclaimed wastewater for spray irrigation on agricultural land
in the area.  The completion of the industrial process wastewater pipeline and
storage lagoon should occur during 2019. Construction of the facility is 95%
complete and nearing commencement of operation pending permit approval.
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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 and aging infrastructure.  Our capital investment plan for the
next three years includes projects for water treatment plant improvements and
additions in both Delaware and Maryland and wastewater treatment plant
improvements and expansion in Delaware.  Capital improvements are planned and
budgeted to meet anticipated changes in regulations and needs for increased
capacity related to projected growth.  The DEPSC and MDPSC have generally
recognized the operating and capital costs associated with these improvements in
setting water and wastewater rates for current customers and capacity charges
for new customers.

In our non-regulated division, 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.  Artesian Storm Water was recently
formed to expand contract work related to the design, installation, maintenance
and repair services associated with existing or proposed storm water management
systems in Delaware and the surrounding areas.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES


Critical accounting policies and 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.  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 policies
and estimates with the Audit Committee of the Board of Directors.


All additions to utility plant are recorded at cost.  Cost includes direct
labor, materials, and indirect charges for such items as transportation,
supervision, pension, medical, and other fringe benefits related to employees
engaged in construction activities.  When depreciable units of utility plant are
retired, any cost associated with retirement, less any salvage value or proceeds
received, is charged to a regulated retirement liability.  Maintenance, repairs,
and replacement of minor items of utility plant are charged to expense as
incurred.

We record water service revenue, including amounts billed to customers, on a
cycle basis and unbilled amounts based upon estimated usage from the date of the
last meter reading to the end of the accounting period.  As actual usage amounts
are received, adjustments are made to the unbilled estimates in the next billing
cycle based on the actual results.  Estimates are made on an individual customer
basis, based on one of three methods: the previous year's consumption in the
same period, the previous billing period's consumption, or averaging.  While
actual usage for individual customers may differ materially from the estimate,
we believe the overall total estimate of consumption and revenue for the fiscal
period will not differ materially from actual billed consumption.

We record accounts receivable at the invoiced amounts.  The reserve for bad
debts is adjusted based on the provision for bad debts, which is calculated as a
percentage of total water sales.  The Company reviews the bad debt provision
expense and the reserve for bad debts on a quarterly basis.  Account balances
are written off against the reserve when it is probable the receivable will not
be recovered.

The Financial Accounting Standards Board, or FASB, Accounting Standards
Codification, or ASC, Topic 980 stipulates generally accepted accounting
principles for companies whose rates are established or subject to approvals by
a third-party regulatory agency.  Our regulated utilities record deferred
regulatory assets under FASB ASC Topic 980, which are costs that may be
recovered over various lengths of time as prescribed by the DEPSC, MDPSC and
PAPUC.  As the utility incurs certain costs, such as expenses related to rate
case applications, a deferred regulatory asset is created.  Adjustments to these
deferred regulatory assets are made when the DEPSC, MDPSC or PAPUC determines
whether the expense is recoverable in rates, the length of time over which an
expense is recoverable, or, because of changes in circumstances, whether a
remaining balance of deferred expense is recoverable in rates charged to
customers.  In addition, our regulated utilities record deferred and/or
amortized regulatory liabilities under FASB ASC Topic 980, as determined by the
DEPSC, the MDPSC, and the PAPUC.  Regulatory liabilities represent excess
recovery of cost or other items that have been deferred because it is probable
such amounts will be returned to customers through future regulated rates.
Adjustments to reflect changes in recoverability of certain deferred regulatory
assets or certain deferred regulatory liabilities may have a significant effect
on our financial results.

Our long-lived assets consist primarily of utility plant in service and
regulatory assets.  We review for impairment of our long-lived assets, including
utility plant in service, in accordance with the requirements of FASB ASC Topic
360.  We review regulatory assets for the continued application of FASB ASC
Topic 980.  Our review determines whether there have been changes in
circumstances or events that have occurred that require adjustments to the
carrying value of these assets.  Adjustments to the carrying value of these
assets would be made in instances where changes in circumstances or events
indicate the carrying value of the asset may not be recoverable in rates charged
to customers.  The Company believes there are no impairments in the carrying
amounts of its long-lived assets or regulatory assets at .
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Results of Operations

2018 Compared to 2017

Operating Revenues

Revenues totaled $80.4 million for the year ended , $1.8
million, or 2.2%, less than revenues for the year ended .
Water sales revenue decreased $2.2 million, or 3.1%, for the year ended  from the corresponding period in 2017, primarily due to approximately
$3.3 million placed in reserve that will be refunded to customers as a result of
the Tax Cuts and Jobs Act, or TCJA.  This refund amount was approved by the
DEPSC on  and is required to be paid in the second quarter of
2019, the majority of which will be issued as a credit to customer bills.  This
decrease in revenue related to the reserve is partially offset by an increase in
overall water consumption and an increase in customer charges from customer
growth.  We realized 88.1% and 88.8% of our total operating revenue for the
years ended  and , respectively, from the sale
of water.

Other utility operating revenue increased approximately $0.3 million, or 6.7%,
for the year ended  compared to the year ended .  The increase is primarily due to an increase in wastewater revenue from
customer growth, partially offset by a decrease in water service charges.

Non-utility operating revenue increased approximately $0.1 million, or 2.5%, for the year ended compared to the same period in 2017. The increase is primarily due to an increase in SLP Plan revenue.

Percentage of Operating Revenues

                                    2018      2017      2016
Water Sales
Residential                         52.7 %    52.9   %  53.5 %
Commercial                          21.4      21.6      21.6
Industrial                           0.1       0.1       0.1
Government and Other                13.9      14.2      14.1

Other utility operating revenues 5.5 5.1 4.8 Non-utility operating revenues 6.4 6.1 5.9 Total

                              100.0 %   100.0   % 100.0 %



Residential

Residential water service revenues in 2018 amounted to $42.4 million, a decrease
of $1.2 million, or 2.6%, below the $43.6 million recorded in 2017, primarily
due to  revenue placed in reserve that will be refunded to customers as a result
of the TCJA, partially offset by an increase in overall water consumption and an
increase in customer charges from customer growth.  The volume of water sold to
residential customers increased to 3,803 million gallons in 2018 compared
to 3,731 million gallons in 2017, a 1.9% increase.  The number of residential
customers served increased by approximately 1,800, or 2.2%, in 2018.

Commercial


Water service revenues from commercial customers in 2018 decreased by 3.3%, to
$17.2 million in 2018 from $17.8 million in 2017, primarily due to revenue
placed in reserve that will be refunded to customers as a result of the TCJA,
partially offset by an increase in overall water consumption.  The volume of
water sold to commercial customers increased to 2,256 million gallons in 2018
compared to 2,220 million gallons sold in 2017, an increase of 1.6%.

Industrial

Water service revenues from industrial customers decreased to $51,000 in 2018 from $75,000 in 2017. The volume of water sold to industrial customers decreased to 4.8 million gallons in 2018 from 7.5 million gallons in 2017.

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Government and Other


Government and other water service revenues in 2018 decreased by 4.0%, from
$11.7 million in 2017 to $11.2 million in 2018, primarily due to revenue placed
in reserve that will be refunded to customers as a result of the TCJA.  The
volume of water sold to government and other customers decreased to 927 million
gallons in 2018 compared to 935 million gallons in 2017, a decrease of 0.9%.


Other Utility Operating Revenue


Other utility operating revenue, derived from regulated wastewater services,
contract operations, antenna leases on water tanks, finance/service charges and
wastewater customer service revenues, increased 6.7%, from $4.2 million in 2017
to $4.5 million in 2018.  The increase is primarily due to an increase in
wastewater revenue from customer growth, partially offset by a decrease in water
service charges.

Non-Utility Operating Revenue

Non-utility operating revenue, derived from non-regulated water and wastewater operations, increased 2.5%, from $5.0 million in 2017 to $5.1 million in 2018. The increase is primarily due to an increase in SLP Plan revenue.

Operating Expenses


Operating expenses, excluding depreciation and income taxes, increased $0.4
million, or 0.9%, for the year ended  compared to the year
ended .  The components of the change in operating expenses
primarily include an increase in property and other taxes of $0.2 million, an
increase in non-utility operating expenses of $0.1 million and a slight increase
in utility operating expenses.

Property and other taxes increased $0.2 million, or 5.0%, primarily due to an
increase in utility plant subject to taxation.  Property taxes are assessed on
land, buildings and certain utility plant, which include the footage and size of
pipe, hydrants and wells.

Non-utility expenses increased approximately $0.1 million, or 3.7%, primarily
due to an increase in plumbing services related to the SLP Plans as well as an
increase in payroll and benefit costs.

Utility operating expenses increased $53,000, or 0.1%, for the year ended compared to the year ended . The net increase is primarily related to the following.

- Maintenance costs increased $0.1 million, primarily due to an increase in

hardware and software support fees.

- Purchase power expense increased $0.1 million, primarily due to an increase in

electric demand related to an increase in water production.

- Purchased water expense decreased $0.2 million, primarily due to more water

purchased in 2017 during the relocation of a major transmission main in our

  northern New Castle County, Delaware water system due to state highway
  construction.


Percentage of Operating and Maintenance Expenses

                                   2018       2017       2016
Payroll and Associated Expenses    48.9  %    49.1  %    49.7 %
Administrative                     14.3       14.4       15.6
Purchased Water                    10.1       10.7       10.6
Repair and Maintenance             10.3       10.0        8.1
Purchased Power                     5.8        5.6        6.0
Water Treatment                     3.6        3.4        3.2
Non-utility Operating               7.0        6.8        6.8

Total                             100.0  %   100.0  %   100.0 %


The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 57.4% for the year ended , compared to 55.7% for the year ended .


Depreciation and amortization expense increased $0.7 million, or 7.7%, primarily
due to continued investment in utility plant providing supply, treatment,
storage and distribution of water to customers and service to our wastewater
customers.

Federal and state income tax expense decreased $2.3 million, or 31.6%, primarily
due to the reduction in the Federal corporate income tax rate by the TCJA signed
into law on  as well as amortization and adjustments based on
the DEPSC orders dated  for Artesian Water and Artesian
Wastewater related to the deferred income tax regulatory liability created from
the TCJA.
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Other Income, Net


Other income, net increased $1.0 million, primarily due to an increase in the
amount of the patronage payment from CoBank, ACB, related to the refinancing of
the Series O and Series Q First Mortgage bonds in  and savings
generated from federal tax reform legislation passed at the end of 2017 along
with earnings from significant non-recurring items in the first half of 2018.
The patronage has been equal to 1.00% of the average line of credit and loan
volume outstanding.  In addition, a pledge was made in 2017 to a non-profit
entity in Delaware to support the state's economic development effort.  A
similar pledge was not made in 2018.

Interest Charges


Interest expense increased $0.1 million, primarily due to an increase in
borrowing under lines of credit.  This increase is mostly offset by a decrease
in interest charges due to the refinancing of the Series P First Mortgage bond
in , reducing the interest rate from 6.58% to 4.71%.

Net Income


Our net income applicable to common stock increased $0.3 million, primarily due
to a decrease in federal and state income taxes and an increase in the amount of
the patronage payment from CoBank, ACB, partially offset by a decrease in water
sales revenue.


2017 Compared to 2016

Operating Revenues

Revenues totaled $82.2 million for the year ended , $3.1
million, or 4.0%, above revenues of $79.1 million for the year ended .  Water sales revenues increased $2.5 million, or 3.5%, for the year
ended  compared to the year ended .  The
increase in water sales was primarily due to an increase in the Distribution
System Improvement Charge, or DSIC, an increase in overall water consumption and
an increase in customer charges from customer growth. We realized 88.8% of our
total operating revenue for the year ended  from the sale of
water as compared to 89.3% for the year ended .

Other utility operating revenue increased approximately $0.4 million, or 9.5%,
for the year ended  compared to the year ended .  The increase was primarily due to an increase in wastewater revenue from
customer growth and an increase in water service charges.

Non-utility operating revenue increased approximately $0.3 million, or 6.7%, for
the year ended  compared to the year ended .
The increase was primarily due to an increase in  SLP Plan revenue.

Residential


Residential water service revenues in 2017 amounted to $43.6 million, an
increase of $1.3 million, or 3.1%, above the $42.3 million recorded in 2016,
primarily due to an increase in DSIC revenue and an increase in the number of
customers.  The volume of water sold to residential customers decreased slightly
to 3,731 million gallons in 2017 compared to 3,741 million gallons in 2016, a
0.3% decrease.  The number of residential customers served increased by
approximately 1,400, or 1.8%, in 2017.

Commercial


Water service revenues from commercial customers in 2017 increased by 4.1%, from
$17.1 million in 2016 to $17.8 million in 2017, primarily due to an increase in
DSIC revenue and an increase in overall water consumption. The volume of water
sold to commercial customers increased to 2,220 million gallons in 2017 compared
to 2,178 million gallons sold in 2016, an increase of 1.9%.

Industrial


Water service revenues from industrial customers decreased 2.6% from $77,000 in
2016 to $75,000 in 2017.  The volume of water sold to industrial customers
decreased to 7.5 million gallons in 2017 from 8.2 million gallons in 2016, a
decrease of 8.5%.

Government and Other

Government and other water service revenues in 2017 increased by 4.5%, from $11.2 million in 2016 to $11.7 million in 2017, primarily due to an increase in DSIC revenue. The volume of water sold to government and other customers increased to 935 million gallons in 2017 compared to 810 million gallons in 2016, an increase of 15.4%.

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Other Utility Operating Revenue


Other utility operating revenue, derived from regulated wastewater services,
contract operations, antenna leases on water tanks, finance/service charges and
wastewater customer service revenues, increased 9.5%, from $3.8 million in 2016
to $4.2 million in 2017.  The increase was primarily due to an increase in
wastewater revenue from customer growth and an increase in water service
charges.

Non-Utility Operating Revenue


Non-utility operating revenue, derived from non-regulated water and wastewater
operations, increased 6.7%, from $4.7 million in 2016 to $5.0 million in 2017.
The increase was primarily due to an increase in SLP Plan revenue.

Operating Expenses


Operating expenses, excluding depreciation and income taxes, increased $3.0
million, or 7.1%, for the year ended  compared to the year
ended .  The components of the change in operating expenses
primarily include an increase in utility operating expenses of $2.6 million, an
increase in non-utility operating expenses of $0.2 million and an increase in
property and other taxes of $0.2 million.

Utility operating expenses increased $2.6 million, or 7.3%, for the year ended compared to the year ended . The net increase was primarily related to the following.

· Payroll, employee benefit costs and related expenses increased $1.5 million due

to an increase in overall compensation, including equity compensation awards as

well as an increase in discretionary profit sharing of 1% over last year.

· Repair and maintenance expense increased $1.0 million, primarily due to an

increase of expenses related to the maintenance of water treatment equipment,

specifically carbon filter replacements, and maintenance of water treatment

facilities and storage tanks.

· Purchased water expense increased $0.3 million, primarily due to increased

  purchased water during the relocation of a major transmission main in our
  northern New Castle County, Delaware water system due to state highway
  construction.

· Water treatment expense increased $0.2 million, primarily due to an increase in

the volume of chemicals purchased for water treatment and an increase in sludge

removal related to supplementing the Town of Middletown during well repairs.

· Administration expenses decreased $0.4 million, primarily due to a decrease in

amortization of Delaware rate proceedings related to the 2014 rate case that

was fully amortized at the end of 2016 and a decrease in legal costs associated

with litigation before the DEPSC pertaining to a developer dispute over

Contributions In Aid of Construction that was concluded in .

This

decrease was partially offset by an increase in wastewater consulting services.




Non-utility expenses increased approximately $0.2 million, or 6.7%, primarily
due to an increase in plumbing services related to the SLP Plans as well as an
increase in payroll and benefit costs and consulting fees.

Property and other taxes increased $0.2 million, or 5.3%, primarily due to an
increase in utility plant subject to taxation.  Property taxes are assessed on
land, buildings and certain utility plant, which include the footage and size of
pipe, hydrants and wells.  In addition, payroll taxes increased, primarily
related to increased payroll related expenses.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 55.7% for the year ended , compared to 54.1% for the year ended .


Depreciation and amortization expense increased $0.4 million, or 4.0%, 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 decreased $1.0 million, or 12.4%, primarily
due to the reduction in the Federal corporate income tax rate by the TCJA.
Also, the adoption of amended guidance issued by the FASB in 2017 that updated
how stock compensation activities are recorded resulted in excess tax benefits
being recorded immediately as a reduction to tax expense, compared to recording
within equity previously.  Also, we recognized an additional expense, for tax
purposes only, related to the federal Domestic Production Activities Deduction,
or DPAD, which reduced the effective tax rates.

Other Income, Net


Other income, net decreased $0.2 million, primarily due to a pledge made in 2017
to a non-profit entity in Delaware to support the State's economic development
efforts that partially offset other income.
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Interest Charges


Interest expense decreased $0.5 million, primarily due to the refinancing of the
Series O and Series Q First Mortgage Bonds in , reducing interest
rates from 8.17% and 4.75%, respectively, to 4.24%.  Additionally, there was an
interest rate change from 6.73% to 4.45% effective  for the Series
S First Mortgage Bond.

Net Income

Our net income applicable to common stock increased $1.0 million.  Operating
revenues increased $3.1 million, while operating expenses increased $2.4
million.  Partially offsetting the increase in operating expenses was a decrease
in federal and state income tax expense of $1.0 million, primarily due to the
reduction in the Federal corporate income tax rate by the TCJA.  In addition,
other income, net decreased $0.2 million and interest expense decreased $0.5
million.


Liquidity and Capital Resources

Overview


The Company's primary sources of liquidity for the year ended 
were $29.1 million provided by cash flow from operating activities, $12.0
million from new loans in August and , $10.5 million in net
contributions and advances from developers, $6.3 million from lines of credit
borrowings and $1.0 million in net proceeds from the issuance of common stock.
These funds were used to invest $49.1 million in capital expenditures, to pay
dividends of approximately $8.8 million and for scheduled debt repayments of
$1.3 million.

We depend on the availability of capital for expansion, construction and
maintenance. We rely on our sources of liquidity for investments in our utility
plant and to meet our various payment obligations. We expect that our net
investments in our utility plant and systems in 2019 will be approximately $43.6
million. Our total obligations related to interest and principal payments on
indebtedness, rental payments, water service interconnection agreements and tank
painting agreements for 2019 are anticipated to be approximately $11.7
million. We expect to fund our activities for the next year using our available
cash balances, bank credit lines, projected cash generated from operations and
potential capital market financings.  We believe that internally generated funds
along with existing credit facilities will be adequate to provide sufficient
working capital to maintain normal operations and to meet our financing
requirements.  However, because part of our business strategy is to expand
through strategic acquisitions, we may seek additional debt financing or issue
additional equity securities to finance future acquisitions or for other
purposes.  There is no assurance that we will be able to secure funding on terms
acceptable to us, or at all.

Operating Activities

Our primary source of liquidity for the year ended  was $29.1
million provided by cash flow from operating activities.  Cash flow from
operating activities is primarily provided by our utility operations, and is
impacted by the timeliness and adequacy of rate increases and changes in water
consumption as a result of year-to-year variations in weather conditions,
particularly during the summer.  A significant part of our ability to maintain
and meet our financial objectives is to ensure that our investments in utility
plant and equipment are recovered in the rates charged to customers.  As such,
from time to time, we file rate increase requests to recover increases in
operating expenses and investments in utility plant and equipment.  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 2018 was to continue to provide high
quality reliable service to our growing service territory. We invested
approximately $49.1 million in capital expenditures during 2018 compared to
$41.1 million invested during the same period in 2017.  During 2018, we invested
approximately $13.1 million for our rehabilitation program for transmission and
distribution facilities by replacing aging or deteriorating mains and for new
transmission and distribution facilities.  We invested $11.4 million to enhance
or improve existing treatment facilities and replace aging wells and pumping
equipment to better serve our customers.  We invested $4.4 million for equipment
purchases, computer hardware and software upgrades and transportation
equipment.  Developers financed $4.7 million for the installation of water mains
and hydrants in 2018 compared to $5.9 million in 2017.  We invested $2.1 million
to upgrade and automate our meter reading equipment.  We invested approximately
$1.1 million in mandatory utility plant expenditures due to governmental highway
projects, which required the relocation of water service mains in addition to
facility improvements and upgrades. An additional $12.3 million was invested in
wastewater projects in Delaware, of which $10.6 million was invested in the
ongoing construction of an eight mile pipeline and a 90 million gallon storage
lagoon for spray irrigation to dispose of treated wastewater from a new
industrial customer.
                                       23

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The following chart summarizes our investment in plant and systems over the past
three fiscal years.

In thousands                                              2018         2017         2016

Source of supply, treatment and pumping               $ 11,470     $  5,778     $  2,323
Transmission and distribution                           16,395       14,265       14,865
General plant and equipment                              4,454        6,080        2,083
Developer financed utility plant                         4,772        5,909 

7,996

Wastewater facilities                                   12,389        9,290 

1,130

Allowance for Funds Used During Construction, AFUDC       (427 )       (227 )       (146 )

Total                                                 $ 49,053     $ 41,095     $ 28,251



Of the $48.2 million we expect to invest in 2019, approximately $10.6 million
will be invested in extending transmission and distribution facilities to
address service needs in growth areas of our service territory.  Approximately
$4.8 million will be invested in renewals associated with the rehabilitation of
aging infrastructure and approximately $4.2 million will be invested in the
relocations of facilities as a result of government mandates.  Approximately
$15.4 million will be invested for new treatment facilities, facility upgrades,
equipment and wells throughout Delaware and Maryland to identify, develop, treat
and protect sources of water supply to assure uninterrupted service to our
customers.  In addition, we will refund $0.9 million to customers, real estate
developers and builders related to previous advances for construction they
provided to Artesian for distribution facilities on their properties.

We also plan to invest $3.6 million in general plant, which includes new
corporate automation, building renovations and transportation and equipment
upgrades.  Additionally, $8.7 million will be invested in Artesian Wastewater
for ongoing construction of wastewater plants and force mains.  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 2019 is expected to be offset by developer
contributions and advances of $4.6 million for a net investment of $43.6 million
in 2019.


Financing Activities

We expect to fund our activities for the next twelve months using our available
cash balances, bank credit lines, projected cash generated from operations and
potential capital market financings if necessary.

We have several sources of liquidity to finance our investment in utility plant
and other fixed assets. We estimate that the projected investment will be
financed by our operations and external sources, including short-term borrowings
under our revolving credit agreements discussed below.

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.

Lines of Credit


At , 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 , there was $35.1 million of available funds
under this line of credit.  The interest rate for borrowings under this line is
the London Interbank Offered Rate, or LIBOR, plus 1.00%.  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  or any date on which Citizens demands payment. The
Company expects to renew this line of credit.

At , 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 , there was $9.0 million of
available funds under this line of credit.  The interest rate for borrowings
under this line is LIBOR plus 1.50%.  CoBank may make an annual patronage
refund, which has been equal to 1.00% of the average line of credit and loan
volume outstanding by Artesian Water.  The patronage refunds earned by Artesian
Water for 2018 and 2017 were $1.2 million and $0.6 million respectively.  The
term of this line of credit expires on . Artesian Water expects to
renew this line of credit.

Our 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, guaranty certain obligations, enter into, or
undertake, certain mergers, consolidations or acquisitions, transfer certain
assets or change our business.  In addition, this line of credit requires us to
abide by certain financial covenants and ratios.  As of , we
were in compliance with these covenants.
                                       24

--------------------------------------------------------------------------------

  Table of Contents

Line of Credit Commitments                 Commitment Due by Period
                            Less than
In thousands                 1 Year       1-3 Years     4-5 Years     Over 5 Years
Lines of Credit               $ 15,942      $  -----      $  -----      $      -----



Long-Term Debt

Artesian's long-term debt agreements 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, guaranty certain obligations, enter into, or
undertake, certain mergers, consolidations or acquisitions, transfer certain
assets or change our business. In addition, we are required to abide by certain
financial covenants and ratios.  As of , we were in compliance
with these covenants.

Contractual Obligations                                 Payments Due by Period
                                    Less than           1-3           4-5       After 5
In thousands                           1 Year         Years         Years         Years         Total
First mortgage bonds (principal
and interest)                     $     5,378     $  10,680     $  10,566     $ 143,409     $ 170,033
State revolving fund loans
(principal and interest)                1,002         2,005         1,348         3,626         7,981
Promissory note (principal and
interest)                                 960         1,919         1,922        14,459        19,260
Operating leases                           78           117           123         1,290         1,608
Unconditional purchase
obligations                             3,872         7,773           114             9        11,768
Tank painting contractual
obligation                                426           ---           ---           ---           426
Total contractual cash
obligations                       $    11,716     $  22,494     $  14,073     $ 162,793     $ 211,076



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.  The state revolving fund loan obligation has an amortizing mortgage
payment payable over a 20-year period, and will be refinanced as future
securities are issued.  The promissory note obligation has an amortizing 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.

On , Artesian Water and CoBank entered into a Bond Purchase
Agreement relating to the issue and sale by Artesian Water to CoBank of a $40
million principal amount First Mortgage Bond, Series T, or the Series T Bond,
due , or the Series T Maturity Date.  The Series T Bond was
issued pursuant to Artesian Water's Indenture of Mortgage dated as of , as amended and supplemented by supplemental indentures, including the
Twenty-Second Supplemental Indenture dated as of  from Artesian
Water  to Wilmington Trust Company, as Trustee.  The Indenture is a first
mortgage lien against substantially all of Artesian Water's utility plant.  The
proceeds from the sale of the Series T Bond were used to prepay indebtedness of
Artesian Water under two existing First Mortgage Bonds: Series O, principal
amount $20 million with interest rate of 8.17% and related prepayment costs of
$4.5 million; and Series Q, principal amount $15.4 million with interest rate of
4.75%.  The DEPSC approved the issuance of the Series T Bond on .  The DEPSC also approved deferral of the prepayment costs associated with
the First Mortgage Bond, Series O and the previously deferred debt related costs
associated with the First Mortgage Bonds, Series O and Series Q.

The Series T Bond carries an annual interest rate of 4.24% through and including
the Series T Maturity Date. Interest is payable on  and 
of each year, beginning , until Artesian Water's obligation with
respect to the payment of principal, premium (if any) and interest shall be
discharged.  Overdue payments shall bear interest as provided in the
Twenty-Second Supplemental Indenture.  The terms of the Series T Bond also
include certain limitations on Artesian Water's indebtedness.

On , Artesian Water Maryland signed an interconnection agreement
with the Town of North East that has a "take or pay" clause requiring us to
purchase a minimum of 35,000 gallons of water per day that shall commence on the
first day of the month following the date on which the interconnection is
completed.  The interconnection was completed in the first quarter of 2019.

On , Artesian Water and CoBank entered into a Bond Purchase
Agreement relating to the issue and sale by Artesian Water to CoBank of a $25
million principal amount First Mortgage Bond, Series U, or the Series U Bond,
due , or the Series U Maturity Date.  The Series U Bond was
issued pursuant to Artesian Water's Indenture of Mortgage dated as of , as amended and supplemented by supplemental indentures, including the
Twenty-Third Supplemental Indenture, dated as of  from Artesian
Water to Wilmington Trust Company, as Trustee.  The Indenture is a first
mortgage lien against substantially all of Artesian Water's utility plant.  The
proceeds from the sale of the Series U Bond, together with other funds of
Artesian Water, were used to pay in full at maturity indebtedness of Artesian
Water under those certain First Mortgage Bonds, Series P.  The DEPSC approved
the issuance of the Series U Bond on .
                                       25

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Table of Contents


The Series U Bond carries an annual interest rate of 4.71% through and including
the Series U Maturity Date. Interest is payable on , ,
 and  in each year and on the Series U Maturity Date,
beginning  until Artesian Water's obligation with respect to the
payment of principal, premium (if any) and interest shall be discharged.
Overdue payments shall bear interest as provided in the Twenty-Third
Supplemental Indenture.  The term of the Series U Bond also includes certain
limitations on Artesian Water's indebtedness.

On , Artesian Wastewater and CoBank entered into a Master Loan
Agreement, or the MLA, and two supplements to the MLA, in which CoBank will loan
Artesian Wastewater up to a total principal amount of $12 million.  As of
, $12.0 million was issued from this loan.  Artesian Wastewater
agreed to pay interest, pursuant to a promissory note, on the unpaid principal
balance of the loans at 5.12% per annum. Interest shall be calculated and paid
quarterly in arrears on the thirtieth (30th) day of each of March, June,
September and December.  Artesian Wastewater agrees to repay each loan, pursuant
to a promissory note, in eighty consecutive quarterly installments, each due on
the thirtieth (30th) day of each March, June, September, and December, with the
first installment due on , and the last installment due on
.  The amount of each installment shall be the same principal
amount that would be required to be repaid if the loan was scheduled to be
repaid in level installments of principal and interest and such schedule was
calculated utilizing 5.12% as the rate accruing on the loan; provided, however,
that the last installment of each loan shall be in an amount equal to the then
unpaid principal balance of the loan.  Two parcels of land in Artesian
Wastewater are pledged as security for this loan pursuant to the terms of a
mortgage and security agreement between Artesian Wastewater and CoBank.  Closing
on the debt financing was approved by the DEPSC on .

In order to control purchased power cost, in  Artesian Water entered
into an electric supply contract with MidAmerican. The fixed rate for
MidAmerican will be lowered 10.8% starting in .  The current
contract term has been in effect since .  The new fixed price
contract will be effective from  through . In ,
Artesian Water Maryland entered into an electric supply agreement with
Constellation NewEnergy.  The fixed rate for Constellation NewEnergy will be
lowered 4.9% starting in .  The current contract term has been in effect
since .  The new fixed price contract will be effective from  through .

Payments for unconditional purchase obligations reflect minimum water purchase
obligations based on rates that are subject to change under our interconnection
agreement with the Chester Water Authority, which expires  and
minimum water purchase obligations based on a contract rate under our
interconnection agreement with the Town of North East, which expires .


IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 19 to our Consolidated Financial Statements for a full description of the impact of recent accounting pronouncements.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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