ARTESIAN RESOURCES CORP MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
Our profitability is primarily attributable to the sale of water. Gross water sales comprised 85.7% of total operating revenues for the year ended
December 31, 2021. 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 wastewater services, 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 Delawareand 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.
December 31, 2021, the Company's financial results and business operations have not been materially adversely affected by the coronavirus, or COVID-19, outbreak, which was declared a pandemic in March 2020. However, we have experienced delays in procuring some materials and supplies. While we have been successful in managing these delays, there is no assurance that our future financial results or business operations will not be negatively affected. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the situation and impacts on its operations, suppliers, industry, and workforce.
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 which must be recovered from future cash flows. Our ability to recover increases in investments in facilities 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.
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, 2021, the number of metered water customers in Delawareincreased approximately 1.5% compared to December 31, 2020. The number of metered water customers in Marylandincreased approximately 2.2% compared to December 31, 2020. The number of metered water customers in Pennsylvaniaremained consistent compared to December 31, 2020. For the year ended December 31, 2021, approximately 8.3 billion gallons of water were distributed in our Delawaresystems and approximately 134.7 million gallons of water were distributed in our Marylandsystems.
Artesian Wastewater owns wastewater collection and treatment infrastructure and began providing regulated wastewater services to customers in
Delawarein July 2005. Artesian Wastewater Maryland was incorporated on June 3, 2008and is able to provide regulated wastewater services to customers in 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. The number of Delawarewastewater customers increased approximately 14.8% compared to December 31, 2020. In January 2022, Artesian Wastewater completed its agreement to acquire Tidewater Environmental Services, Inc, or TESI, which more than doubled our current number of wastewater customers served in Sussex County, Delaware. The acquisition agreement with TESI is discussed further in the "Strategic Direction and Recent Developments" section below. 18
Table of Contents 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
December 30, 2021, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 4.9%, 2.1% and 28.6%, respectively, compared to December 31, 2020. The non-utility customers enrolled in one of our three protections plans increased 3.7%.
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 Peninsulaseeking 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 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 Delawareservice territory over the last 10 years. We plan to expand our regulated water service area in the Cecil Countydesignated 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 Marylandand 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. Some recent acquisitions are noted below. On August 3, 2020, Artesian Water completed the purchase of substantially all of the water system operating assets from the City of Delaware City, a Delawaremunicipality, or Delaware City, including the right to provide water service to Delaware City'sexisting customers. The total purchase price was $2.1 million. Artesian Water had previously acquired the water assets of an area annexed by Delaware City, known as Fort DuPont, which was earmarked for growth and expansion of Delaware City. On April 2, 2020, Artesian Water completed its purchase of substantially all of the operating assets of the water system of the Town of Frankford, a Delawaremunicipality, or Frankford, including the right to provide water service to Frankford'sexisting customers, or the Frankford Water System. Pursuant to the terms of the agreement, Frankfordtransferred to Artesian Water all of Frankford'sright, title and interest in and to all of the plant and equipment, associated real property, contracts, easements and permits possessed by Frankfordat closing related to the Frankford Water System. The total purchase price was $3.6 million. The Delaware Drinking Water State Revolving Fundissued a $1.5 millionappropriation in July 2021to partially offset the purchase price. On February 16, 2022, Artesian Water signed an agreement, or the Asset Purchase Agreement, to purchase from the Town of Clayton, a Delawaremunicipality, or Clayton, substantially all of the operating assets of Clayton'swater system, including Clayton'sexclusive franchise territory and the right to provide water service to Clayton'sexisting customers, or the Water System. Pursuant to the terms of the Asset Purchase Agreement, Claytonshall transfer to Artesian Water all of Clayton'sright, title and interest in and to substantially all of the municipal water utility, plant and equipment, associated real property, contracts, easements and permits possessed by Claytonat closing related to the Water System. The total purchase price is $5.0 million, less the current payoff amount of any secured debt or debt associated with the Water System. Closing on this transaction is pending due diligence and approval by the Delaware Public Service Commissionrelated to the transfer of exclusive franchise territory. We believe that Delaware'sgenerally lower cost of living in the region, availability of development sites in relatively close proximity to the Atlantic Oceanin Sussex County, and attractive financing rates for construction and mortgages have resulted, and will continue to result, in increases to our customer base. Delaware'slower property and income tax rate make it an attractive region for new home development and retirement communities. Substantial portions of Delawarecurrently are not served by a public water system, which could also assist in an increase to our customer base as systems are added. 19
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. There are numerous locations in Sussex Countywhere Artesian Wastewater's and Sussex County'sfacilities are connected or integrated to allow for the movement and disposal of wastewater generated by one or the other's system in a manner that most efficiently and cost effectively manages wastewater transmission, treatment and disposal. In addition, Artesian Wastewater plans to utilize our larger regional wastewater facilities to expand service areas to new customers while transitioning our smaller treatment facilities into regional pump stations in order to gain additional efficiencies in the treatment and disposal of wastewater. We believe this will reduce operational costs at the smaller treatment facilities in the future because they will be converted from treatment and disposal plants to pump stations to assist with transitioning the flow of wastewater from one regional facility to another. In addition, since closing the transaction with TESI noted below, Artesian Wastewater will be the sole regional regulated wastewater utility 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. On January 14, 2022, Artesian Wastewater acquired TESI, a wholly-owned subsidiary of Middlesex Water Company, or Middlesex, that provides regulated wastewater services in Delaware. Artesian Wastewater purchased all of the stock of TESI from Middlesex for $6.4 millionin cash and other consideration, including, forgiveness of a $2.1 millionintercompany note due from Middlesex. This acquisition more than doubled the number of wastewater customers served in Sussex County, Delawareand included all residents in the Town of Milton. Artesian Wastewater began operating its SussexRegional Recharge Facility in late June 2021, shortly after our large industrial customer received its process wastewater treatment operating permit. The associated customer agreement includes a required minimum wastewater flow. Pursuant to a settlement agreement, for the calendar year 2021 only, the minimum required volume of wastewater was prorated on a seven month basis beginning June 1, 2021and ending December 31, 2021. 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 Delawareand Marylandand wastewater infrastructure improvements and expansion in Delaware. The DEPSC and MDPSC have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates for current customers and capacity charges for new customers. In our non-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 Developmentowns 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 formed to expand contract work related to the design, installation, maintenance and repair services associated with existing or proposed storm water management systems in Delawareand 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. Business combinations pursuant to ASC Topic 805 may result in a purchase price allocation and the acquired assets are required to be evaluated by the applicable regulatory agency. Cost includes direct labor, materials, AFUDC (see description in Note 1-Utility Plant) and indirect charges for items such as transportation, supervision, pension, medical, and other fringe benefits related to employees engaged in construction activities. When depreciable units of utility plant are retired, the historical costs of plant retired is charged to accumulated depreciation. Any cost associated with retirement, less any salvage value or proceeds received, is charged to the regulated retirement liability. Maintenance, repairs, and replacement of minor items of utility plant are charged to expense as incurred. 20
We record water service revenue, including amounts billed to customers, on a cycle basis and unbilled amounts based upon estimated usage from the date of the last meter reading to the end of the accounting period. As actual usage amounts are received, adjustments are made to the unbilled estimates in the next billing cycle based on the actual results. Estimates are made on an individual customer basis, using one of three methods: the previous year's consumption in the same period, the previous billing period's consumption, or averaging. While actual usage for individual customers may differ materially from the estimate, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption. We record accounts receivable at the invoiced amounts. An allowance for doubtful accounts is calculated as a percentage of total associated revenues based upon historical trends and adjusted for current conditions. We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related allowance for doubtful accounts and associated bad debt expense has not been significant. However, the Company experienced longer receivable cycles throughout 2020, and into 2021, related to temporary executive orders issued by state governmental agencies requiring utility companies to prohibit late fees and service disconnections for non-payment, resulting in an adjustment to increase the reserve for bad debt. Account balances are written off against the allowance when it is probable the receivable will not be recovered. The
Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party regulatory agency. Our regulated 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. 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 utilities recognize regulatory liabilities, to the extent considered in ratemaking, for deferred taxes provided in excess of the current statutory tax rate and regulatory assets for deferred taxes provided at rates less than the current statutory rate. Such tax-related regulatory assets and liabilities are reported at the revenue requirement level and amortized to income as the related temporary differences reverse, generally over the lives of the related properties. Our long-lived assets consist primarily of utility plant in service and regulatory assets. We review for impairment of our long-lived assets, including utility plant in service, in accordance with the requirements of FASB ASC Topic 360. We review regulatory assets for the continued application of FASB ASC Topic 980. Our review determines whether there have been changes in circumstances or events that have occurred that require adjustments to the carrying value of these assets. Adjustments to the carrying value of these assets would be made in instances where changes in circumstances or events indicate the carrying value of the asset may not be 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 December 31, 2021. 21
Table of Contents Results of Operations 2021 Compared to 2020 Operating Revenues
Water sales revenue increased
$1.3 million, or 1.8%, for the year ended December 31, 2021from the corresponding period in 2020, primarily due to an increase in fixed fee revenue related to customer growth and an increase in non-residential consumption revenue. We realized 85.7% and 86.8% of our total operating revenue for the years ended December 31, 2021and December 31, 2020, respectively, from the sale of water. Other utility operating revenue, predominately consisting of wastewater revenues, increased approximately $0.7 million, or 10.3%, for the year ended December 31, 2021compared to the year ended December 31, 2020. This increase is mainly due to an increase in wastewater revenue related to residential customer growth and housing development growth, mostly offset by a decrease in industrial wastewater service revenue resulting from adjustments related to the amounts recorded for the minimum required volume of wastewater under contract, pursuant to a settlement agreement. In addition, service and finance charges increased, related to executive orders that were issued by state governmental agencies in 2020 requiring utility companies to prohibit late fees and service disconnections for non-payment that since have been lifted. Non-utility operating revenue increased approximately $0.7 million, or 13.7%, for the year ended December 31, 2021compared to the same period in 2020. The increase is primarily due to an increase in contract service revenue related to a contract for the design and construction of wastewater infrastructure for a third party and an increase in Service Line Protection Plan revenue.
Percentage of operating revenue
2021 2020 2019 Water Sales Residential 53.0 % 53.8 % 52.8 % Commercial 19.4 19.5 21.0 Industrial 0.1 0.1 0.1 Government and Other 13.2 13.4 14.1
Other utility operating revenue 7.9 7.4 5.9 Non-utility operating revenue 6.4 5.8 6.1 Total
100.0 % 100.0 % 100.0 % Residential Residential water service revenues in 2021 amounted to
$48.2 million, an increase of $0.8 million, or 1.7%, above the $47.4 millionrecorded in 2020, primarily due to an increase in fixed fee revenue related to customer growth and an increase in overall water consumption. The volume of water sold to residential customers increased to 4,230 million gallons in 2021 compared to 4,209 million gallons in 2020, a 0.5% increase. The number of residential customers served increased by approximately 1,400, or 1.6%, in 2021.
Water service revenues from commercial customers in 2021 increased by 2.6%, to
$17.6 millionin 2021 from $17.2 millionin 2020, primarily due to an increase in overall water consumption. The volume of water sold to commercial customers increased to 2,237 million gallons in 2021 compared to 2,180 million gallons sold in 2020, an increase of 2.6%.
Revenue from water supply to industrial customers fell to
Government and others
Government and other water service revenues in 2021 increased by 1.0%, to
$12.0 millionin 2021 from $11.8 millionin 2020, primarily due to an increase in overall water consumption. The volume of water sold to government and other customers increased to 1,155 million gallons in 2021 compared to 1,050 million gallons in 2020, an increase of 10.0%.
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 10.3%, from
$6.5 millionin 2020 to $7.2 millionin 2021. This increase is primarily due to an increase in wastewater revenue related to residential customer growth and housing development growth, mostly offset by a decrease in industrial wastewater service revenue. In addition, service and finance charges increased, related to executive orders that were issued by state governmental agencies in 2020 requiring utility companies to prohibit late fees and service disconnections for non-payment that since have been lifted.
Non-Utility Operating Revenues
Non-utility operating revenue, derived from non-regulated water and wastewater operations, increased by 13.7%, to
$5.8 millionin 2021 from $5.1 millionin 2020. The increase is primarily due to an increase in contract service revenue related to a contract for the design and construction of wastewater infrastructure for a third party and an increase in Service Line Protection Plan revenue. 22
Table of Contents Operating Expenses Operating expenses, excluding depreciation and income taxes, increased
$1.9 million, or 4.0%, for the year ended December 31, 2021compared to the year ended December 31, 2020. The components of the change in operating expenses primarily include an increase in utility operating expenses of $1.1 million, an increase in non-utility operating expenses of $0.7 millionand an increase in property and other taxes of $0.2 million.
Utility operating expenses increased
Repair and maintenance costs have increased
maintenance costs primarily associated with water and wastewater treatment
installations and equipment, an increase in the replacement of water treatment filters, a
increased paint costs for contracted tanks and increased fuel costs.
Increase in salary costs and benefits
an increase in total compensation.
Water treatment costs have increased
chemicals and related equipment in 2021 in water and wastewater
Administrative costs have decreased
provision for debt related to non-payment of water customer balances
resulting from the COVID-19 pandemic, which was partially offset by increases
training and overall employee costs, legal fees associated with
transition from the 401(k) retirement plan to a new registrar, and a
settlement agreement regarding the payment of royalties by an industrial wastewater treatment plant
customer. Non-utility operating expenses increased 20.3%, primarily due to an increase in costs associated with the wastewater infrastructure design and construction contract, an increase in plumbing services related to Service Line Protection Plan repairs, and an increase in payroll and employee benefit costs. Property and other taxes increased
$0.2 million, or 3.4%, 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.
Percentage of operating and maintenance expenses
2021 2020 2019 Payroll and Associated Expenses 49.9 % 51.0 % 50.1 % Administrative 12.3 14.1 13.6 Purchased Water 9.5 9.9 9.9 Repair and Maintenance 10.2 8.3 9.3 Purchased Power 5.4 5.5 5.5 Water Treatment 4.0 3.7 3.8 Non-utility Operating 8.7 7.5 7.8 Total 100.0 % 100.0 % 100.0 %
The ratio of operating expenses, excluding depreciation and income taxes, to total sales was 56.1% for the year ended
Depreciation and amortization expense increased
$0.7 million, or 6.7%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers. Other Income, Net Other income, net remained consistent. Miscellaneous income increased $0.3 millionrelated to an increase in the annual patronage refund from CoBank, ACB. The primary refund calculation for both 2021 and 2020 was based on 0.8% of the average loan balance outstanding. In addition, a special patronage distribution based on 0.2% and 0.1% of the average loan balance outstanding was refunded in March 2021and March 2020, respectively. Allowance for funds used during construction, or AFUDC, decreased $0.3 millionas a result of lower long-term construction activity subject to AFUDC for the twelve months ended December 31, 2021compared to the same period in 2020.
Long-term debt interest decreased
$0.1 million, primarily related to amortizing debt. Short-term debt interest increased $0.1 million, primarily related to higher short-term borrowing levels throughout 2021.
Our net earnings applicable to common shares remained constant. Operating revenue increased
Part I, item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Annual Report on Form 10-K includes a comparative analysis of the fiscal years ended
Cash and capital resources
The Company's primary sources of liquidity for the year ended
December 31, 2021were $31.9 millionof cash provided by operating activities, $15.8 millionin net contributions and advances from developers, $4.1 millionfrom the issuance of long-term debt and $1.4 millionin net proceeds from the issuance of common stock. These funds were used to invest $41.5 millionin capital expenditures and to pay dividends of approximately $9.8 million. We depend on the availability of capital for expansion, construction and maintenance. We rely on our sources of liquidity for investments in our utility plant and to meet our various payment obligations. We expect that our net investments in utility plant in 2022 will be approximately $50.4 million. Our total obligations related to interest and principal payments on indebtedness, rental payments, elevated storage tank agreements and water service interconnection agreements for 2022 are anticipated to be approximately $10.4 million. Operating Activities Our primary source of liquidity for the year ended December 31, 2021was $31.9 millionprovided 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. 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 2021 was to continue to provide high quality reliable service to our growing service territory. Capital expenditures during 2021 were $40.8 millioncompared to $40.0 millioninvested during the same period in 2020. During 2021, we invested approximately $18.4 millionfor our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains and for installing new mains. We invested $8.5 millionto enhance or improve existing treatment facilities and replace aging wells and pumping equipment to better serve our customers. We invested $1.7 millionfor equipment purchases, computer hardware and software upgrades and transportation equipment. Developers financed $6.4 millionfor the installation of water mains and hydrants in 2021 compared to $4.1 millionin 2020. We invested $1.2 millionto upgrade and automate our meter reading equipment. We invested approximately $2.5 millionin mandatory utility plant expenditures due to governmental highway projects, which required the relocation of water service mains in addition to facility improvements and upgrades. We invested $2.1 millionin wastewater projects in Delaware. The following chart summarizes our investment in plant and systems over the past three fiscal years In thousands 2021 2020 2019 Source of supply, treatment and pumping $ 9,681 $ 14,999 $ 13,000Transmission and distribution 20,951 15,993 13,789 General plant and equipment 1,739 3,089 3,180 Developer financed utility plant 6,866 4,132
Wastewater facilities 2,133 2,586
Allowance for Funds Used During Construction, AFUDC (556 ) (781 ) (886 ) Total
$ 40,814 $ 40,018 $ 40,67724
$67.2 milliongross investment expected in 2022, approximately $15.1 millionwill be invested in upgraded and improved booster stations, a new elevated storage tank, new water treatment facilities, water treatment facility upgrades, equipment and wells throughout Delaware, Maryland, and Pennsylvaniato identify, develop, treat, and protect sources of water supply to assure uninterrupted service to our customers. Approximately $12.5 millionwill be invested in renewals associated with the rehabilitation of aging infrastructure. Approximately $12.3 millionwill be for extending transmission and distribution facilities to address service needs in growth areas of our service territory. Approximately $8.7 millionwill be invested in the construction of force mains used for the transmission of wastewater to plants. Approximately $8.0 millionwill be invested into the ongoing construction of a regional wastewater treatment plant along with improvements to existing wastewater treatment plants and wastewater pumping stations. Approximately $4.9 millionwill be invested in the relocations of facilities as a result of government mandates. Approximately $4.8 millionwill be invested in general plant, which includes transportation and equipment upgrades, new corporate automation, and building renovations. Additionally, we will refund $0.9 millionto 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 2022 is expected to be offset by developer contributions of $10.8 millionand grant funds from the State of Delawareof $6.0 million, for a net investment of $50.4 millionin 2022. The Company believes the net investment in utility plant will continue to be recovered through rates charged to customers.
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, a
$30 millionfirst mortgage bond, state revolving fund loans, government grants, and other capital market financing as needed to provide sufficient working capital to maintain normal operations, to meet our financing requirements and to expand through strategic acquisitions. 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
December 31, 2021, Artesian Resourceshad a $40 millionline of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources. As of December 31, 2021, there was $31.3 millionof 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%. It is expected that the LIBOR rate for USD currency after June 30, 2023. As a result, it is possible that, in the future, the LIBOR rate may become unavailable or may no longer be deemed an appropriate reference rate upon which to determine the interest rate on LIBOR Rate Loans. In light of this eventuality, Citizens currently has initiatives underway to identify new or alternative reference rates to be used in place of the LIBOR rate. 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 22, 2022or any date on which Citizens demands payment. The Company expects to renew this line of credit. At December 31, 2021, Artesian Water had a $20 millionline of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 millionof this line available for the operations of Artesian Water Maryland. As of December 31, 2021, there was $2.0 millionof available funds under this line of credit. The interest rate for borrowings under this line allows the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company has historically used the weekly variable interest rate. The patronage refunds earned by Artesian Water for 2021 and 2020 were $1.4 millionand $1.0 millionrespectively. The term of this line of credit expires on July 30, 2022. Artesian Water expects to renew this line of credit.
The Company’s significant cash requirements include the following line of credit commitments and contractual obligations:
Material Cash Requirements 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)
$ 6,623 $ 13,169 $ 13,056 $ 188,219 $ 221,067State revolving fund loans (principal and interest) 820 1,535 1,122 4,336 7,813 Lines of credit 26,703 --- --- --- 26,703 Promissory note (principal and interest) 961 1,921 1,923 11,576 16,381 Operating leases 29 48 49 1,335 1,461 Operating agreements 63 77 81 825 1,046 Unconditional purchase obligations 1,518 1,489 1,403 --- 4,410 Tank painting contractual obligation 392 588 --- --- 980 Total contractual cash obligations $ 37,109 $ 18,827 $ 17,634 $ 206,291 $ 279,86125
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, 2021, 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 $150,000plus 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. On February 7, 2022, Artesian Water entered into an interest rate lock agreement, or the Agreement, with CoBank. The Company is seeking to finance a $30 millionprincipal amount First Mortgage Bond, or the Bond. The Agreement allows for a maturity period of 25 years and a fixed interest rate of 4.43% per annum, or the Fixed Rate, for the Bond. The Agreement is effective through May 7, 2022, or the Settlement Date. Pursuant to the Agreement, the Bond is not subject to redemption based on mortgage style amortization. Interest on the outstanding principal balance will be payable quarterly on the 30th day of January, April, July and October each year. The proceeds from the sale of the Bond shall be used to pay down outstanding lines of credit of Artesian Water, with any additional proceeds used to fund future capital investments in Artesian Water. Closing on the debt financing is subject to approval by the DEPSC. Also pursuant to the Agreement, the Company agrees to pay to CoBank, on demand, a broken funding charge if the Company does not, for any reason whatsoever, borrow the entire $30 millionprincipal amount on or before the Settlement Date. The broken funding charge shall be in an amount equal to the present value of the sum of all losses and expenses incurred by CoBank in retiring, liquidating, or reallocating any debt, obligation, or cost incurred or allocated by CoBank to fund or hedge the Fixed Rate. On July 15, 2021, Artesian Water entered into a Financing Agreement, or the Financing Agreement, with the Delaware Drinking Water State Revolving 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 Artesian Water up to approximately $2.5 million, or the Loan, to finance all or a portion of the cost to acquire the Town of Frankfordwater system and to replace water transmission mains and renew services and hydrants in the Town of Frankford, collectively, the Project. In accordance with the Financing Agreement, Artesian Water will from time to time request funds under the Loan as it incurs costs in connection with the Project. Artesian Water requested an initial draw of approximately $1.5 millionfor the acquisition of the Town of Frankfordwater system. Upon receipt of the initial draw, an amount equal to approximately $1.5 millionwas forgiven by the Department and is no longer considered outstanding or unpaid principal under the Financing Agreement. The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 1.0% per annum and an administrative fee at the rate of 1.0% per annum. On April 28, 2020, Artesian Water entered into three financing agreements, or the Financing Agreements, with the Delaware Drinking Water State Revolving 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 Agreements, the Department agreed to advance to Artesian Water up to approximately $1.7 million, $1.0 millionand $1.3 million, collectively, the Loans, to finance all or a portion of the costs to replace specific water transmission mains in service areas located in New Castle County, Delaware, collectively, the Projects. The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 0.6% per annum and an administrative fee at the rate of 0.6% per annum. As of December 31, 2021, the full amount that will be borrowed under the Loans is approximately $2.6 million. In order to control purchased power cost, in August 2018Artesian Water entered into an electric supply contract with MidAmerican effective from September 2018through May 2022. In February 2021, Artesian Water entered into a new electric supply contract with MidAmerican that is effective from May 2021to May 2025. The fixed rate was lowered 5.6% starting in May 2021. In August 2018, Artesian Water Marylandentered into an electric supply agreement with Constellation NewEnergy, Inc., effective from May 2019through May 2022. In February 2022, Artesian Water Maryland entered into an electric supply agreement with Constellation NewEnergy, Inc., effective from May 2022through November 2025. 26
Payments for unconditional purchase obligations reflect minimum water purchase obligations based on rates that are subject to change under two interconnection agreements with the
Chester Water Authority. One agreement, that expired on December 31, 2021, had a "take or pay" clause requiring us to purchase 3 million gallons per day. The other agreement is effective from January 1, 2022through December 31, 2026, includes automatic five year renewal terms, unless terminated by either party, and has a "take or pay" clause requiring us to purchase water on a step down schedule through July 5, 2022, thereafter requiring us to purchase a minimum of 0.5 million gallons per day. In addition, payments for unconditional purchase obligations reflect minimum water purchase obligations based on a contract rate under our interconnection agreement with the Town of North East, which expires June 26, 2024. In April 2021, Artesian Water entered into a 3-year agreement with Worldwide Industries Corporationeffective July 1, 2021to paint elevated water storage tanks. Pursuant to the agreement, the total expenditure for the three years is $1.2 million.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 18 to our Consolidated Financial Statements for a full description of the impact of recent accounting pronouncements.
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