| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The audited consolidated financial statements are presented in accordance with the requirements of Form 10-K and accounting principles generally accepted in the United States and consequently include all the disclosures required in the consolidated financial statements included in the Company's annual report on Form 10-K. The accompanying consolidated financial statements include the accounts of Artesian Resources Corporation and its subsidiaries and all intercompany balances and transactions between subsidiaries have been eliminated. Reclassification Certain accounts in the prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements. These reclassifications had no effect on net income or stockholders' equity. Utility Subsidiary Accounting The accounting records of Artesian Water Company, Inc., or Artesian Water, and Artesian Wastewater Management, Inc., or Artesian Wastewater, are maintained in accordance with the uniform system of accounts as prescribed by the Delaware Public Service Commission, or the DEPSC. The accounting records of Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, are maintained in accordance with the uniform system of accounts as prescribed by the Pennsylvania Public Utility Commission, or the PAPUC. The accounting records of Artesian Water Maryland, Inc., or Artesian Water Maryland, and Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland, are maintained in accordance with the uniform system of accounts as prescribed by the Maryland Public Service Commission, or the MDPSC. All five subsidiaries follow the provisions of FASB ASC Topic 980, which provides guidance for companies in regulated industries. These regulated subsidiaries account for the majority of our operating revenue. The operating revenues of our non-regulated division are presented in the Consolidated Statements of Operations. Utility Plant Utility plant is stated at original cost. Cost includes direct labor, materials, AFUDC (see description below) and indirect charges for such capitalized 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, 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. In accordance with a rate order issued by the DEPSC, Artesian Water and Artesian Wastewater accrue an Allowance for Funds Used during Construction, or AFUDC. AFUDC, which represents the cost of funds devoted to construction projects through the date the project is placed in service, is capitalized as part of construction work in progress. The rate used for the AFUDC calculation is based on Artesian Water's and Artesian Wastewater's weighted average cost of debt and the rate of return on equity authorized by the DEPSC. The rate used to capitalize AFUDC for Artesian Water in 2019, 2018, and 2017 was 7.1%, 7.4%, and 7.7%, respectively. The rate used to capitalize AFUDC for Artesian Wastewater in 2019, 2018, and 2017 was 7.1%, 5.9%, and 3.6%, respectively. Utility plant comprises In thousands December 31, Estimated Useful Life (In Years) 2019 2018 Utility plant at original cost Utility plant in service-Water Intangible plant — $ 140 $ 140 Source of supply plant 45-85 22,611 22,320 Pumping and water treatment plant 8-62 90,795 85,399 Transmission and distribution plant Mains 81 277,125 267,352 Services 39 48,190 45,661 Storage tanks 76 27,968 25,167 Meters 26 27,498 26,531 Hydrants 60 15,071 14,514 General plant 5-31 61,512 60,536 Utility plant in service-Wastewater Treatment and disposal plant 21-81 19,315 17,635 Collection mains & lift stations 81 19,348 14,242 General plant 5-31 1,223 1,206 Property held for future use — 24,632 24,395 Construction work in progress — 31,881 19,694 667,309 624,792 Less – accumulated depreciation 136,588 126,114 $ 530,721 $ 498,678 Depreciation and Amortization For financial reporting purposes, depreciation is recorded using the straight-line method at rates based on estimated economic useful lives, which range from 5 to 85 years. Composite depreciation rates for water utility plant were 2.27%, 2.28% and 2.27% for 2019, 2018 and 2017, respectively. In a rate order issued by the DEPSC, the Company was directed effective January 1, 1998 to begin using revised depreciation rates for utility plant. In rate orders issued by the DEPSC, Artesian Water was directed, effective May 28, 1991 and August 25, 1992, to offset depreciation recorded on utility plant by depreciation on utility property funded by Contributions in Aid of Construction, or CIAC, and Advances for Construction, or Advances, respectively. This reduction in depreciation expense is also applied to outstanding CIAC and Advances. Other deferred assets are amortized using the straight-line method over applicable lives, which range from 20 to 24 years. Regulatory Assets The Financial Accounting Standards Board, or FASB, ASC Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party regulatory agency. Certain expenses are recoverable through rates charged to our customers, without a return on investment, and are deferred and amortized during future periods using various methods as permitted by the DEPSC, MDPSC, and PAPUC. The postretirement benefit obligation is the recognition of an offsetting regulatory liability as it relates to the accrual of the expected cost of providing postretirement health care and life insurance benefits to retired employees. Artesian Water contributed $23,000 to its postretirement benefit plan in 2019. These contributions consist of insurance premium payments for medical, dental and life insurance benefits made on behalf of the Company's eligible retired employees. The deferred income taxes will be amortized over future years as the tax effects of temporary differences that previously flowed through to our customers are reversed. Table of Contents Debt related costs include debt issuance costs and other debt related expense. The DEPSC has allowed rate recovery on unamortized issuance costs and make-whole premiums associated with the early retirement of Series O and Q First Mortgage bonds as the replacement of that debt in January 2017 with Series T First Mortgage bonds was deemed more favorable for the ratepayers. The DEPSC has also allowed rate recovery on issuance costs associated with the Series U First Mortgage bond in January 2018 that paid the full indebtedness of the Series P First Mortgage bond and the Series V First Mortgage bond in December 2019 that paid down outstanding lines of credit and a loan payable to Artesian Resources. These amounts are recovered over the term of the new long-term debt issued. For both the Series T First Mortgage bond and the Series U First Mortgage bond, no cash, other than the issuance costs, was paid or received as the trustee facilitated direct exchanges of the bonds issued. For the Series V First Mortgage bond, cash was paid for the issuance costs and $30 million of cash was received from the proceeds of the bonds. Regulatory expenses amortized on a straight-line basis are noted below: Expense Years Amortized Depreciation and salary studies 5 Delaware rate proceedings 2.5 Maryland rate proceedings 5 Debt related costs 15 to 30 (based on term of related debt) Goodwill (resulting from acquisition of Mountain Hill Water Company in 2008) 50 Deferred acquisition costs (resulting from purchase of water assets in Cecil County, Maryland in 2011 and Port Deposit, Maryland in 2010) 20 Franchise Costs (resulting from purchase of water assets in Cecil County, Maryland in 2011) 80 Regulatory assets, net of amortization, comprise: (in thousands) December 31, 2019 December 31, 2018 Postretirement benefit obligation $ 51 $ 74 Deferred income taxes 386 401 Expense of rate case studies 27 22 Debt related costs 5,556 5,815 Goodwill 288 295 Deferred acquisition and franchise costs 583 647 $ 6,891 $ 7,254 Impairment or Disposal of Long-Lived Assets Our long-lived assets consist primarily of utility plant in service and regulatory assets. A review of our long-lived assets is performed in accordance with the requirements of FASB ASC Topic 360. In addition, the regulatory assets are reviewed for the continued application of FASB ASC Topic 980. The review determines whether there have been changes in circumstances or events that have occurred requiring adjustments to the carrying value of these assets. FASB ASC Topic 980 stipulates that adjustments to the carrying value of these assets would be made in instances where the inclusion in the rate-making process is unlikely. For the years ended December 31, 2019, 2018 and 2017, there was no impairment or regulatory disallowance identified in our review. Other Deferred Assets The investment in CoBank, which is a cooperative bank, is related to certain outstanding First Mortgage Bonds and is a required investment in the bank based on the underlying long-term debt agreements. A large portion of the remaining other deferred assets, approximately $0.2 million, is in relation to the Mountain Hill acquisition. Table of Contents Other deferred assets at December 31, net of amortization, comprise: In thousands 2019 2018 Investment in CoBank $ 3,968 $ 3,610 Other 289 321 $ 4,257 $ 3,931 Advances for Construction Cash advances to reimburse Artesian Water for its costs to construct water mains, services and hydrants are contributed to Artesian Water by real estate developers and builders in order to extend water service to their properties. The value of these contributions is recorded as Advances for Construction. Artesian Water makes refunds on these advances over a specific period of time based on operating revenues generated by the specific plant or as new customers are connected to the mains. After all refunds are made within the contract period, any remaining balance is transferred to CIAC. Contributions in Aid of Construction CIAC includes the non-refundable portion of advances for construction and direct contributions of water mains, services and hydrants, and wastewater treatment facilities and collection systems, or cash to reimburse our water and wastewater divisions for costs to construct water mains, services and hydrants, and wastewater treatment and disposal plant. Effective with the Tax Cuts and Jobs Act, or TCJA, CIAC is now taxable and the public service commissions allow the Company to collect additional CIAC to pay the associated tax. Regulatory Liabilities FASB ASC Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party regulatory agency. Certain obligations are deferred and/or amortized 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. The 2018 postretirement benefit obligation is the recognition of an offsetting regulatory asset as it relates to the accrual of the expected cost of providing postretirement health care and life insurance benefits to retired employees when they render the services necessary to earn the benefits. The 2019 postretirement benefit obligation balance is included in Other current liabilities on the Consolidated Balance Sheet. Artesian Water contributed $23,000 to its postretirement benefit plan in 2019. These contributions consist of insurance premium payments for medical, dental and life insurance benefits made on behalf of the Company's eligible retired employees. Utility plant retirement cost obligation consists of estimated costs related to the potential removal and replacement of facilities and equipment on the Company’s water and wastewater properties. Effective January 1, 2012, as authorized by the DEPSC, 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. Each year the liability is increased by an annual amount authorized by the DEPSC. Pursuant to the enactment of the TCJA on December 22, 2017, the Company adjusted its existing deferred income tax balances as of December 31, 2017 to reflect the decrease in the corporate income tax rate from 34% to 21% (see Note 5). As of December 31, 2017, management’s preliminary estimate resulted in a decrease in the net deferred income tax liability of approximately $23.5 million, of which $22.5 million was reclassified to a regulatory liability. In 2018, these amounts were revised to $24.3 million and $22.8 million, respectively, based on the final bonus depreciation deduction taken on the Company’s 2017 Federal income tax return and the DEPSC orders dated January 31, 2019 for Artesian Water and Artesian Wastewater. The regulatory liability amount is subject to certain Internal Revenue Service normalization rules that require the benefits to customers be spread over the remaining useful life of the underlying assets giving rise to the associated deferred income taxes. On January 31, 2019, the DEPSC approved the amortization of the regulatory liability amount of $22.2 million over a period of 49.5 years beginning February 1, 2018, subject to audit at a later date. The MDPSC has not issued a final order on the regulatory liability amount of $0.6 million regarding the effects of the TCJA on Maryland customers. Regulatory liabilities comprise: (in thousands) December 31, 2019 December 31, 2018 Postretirement benefit obligation $ — $ 52 Utility plant retirement cost obligation 247 319 Deferred income taxes (related to TCJA) 21,999 22,442 $ 22,246 $ 22,813 Income Taxes The TCJA made many significant changes to the Internal Revenue Code, including, but not limited to (1) reducing the federal corporate tax rate to a flat 21%; (2) creating a 30% limitation on deductible interest expense (not applicable to regulated utilities); (3) eliminating future bonus depreciation deductions on utility plant capital projects that began after December 31, 2017; (4) eliminating the domestic production activities deduction; (5) eliminating the corporate alternative minimum tax and changing how existing alternative minimum tax credits can be realized; (6) changing the rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017 and (7) repealing the exclusion from gross income CIAC for water utilities. The most significant change that impacts Artesian Resources is the reduction of the corporate federal income tax rate from our previous effective rate of 34% to the new flat tax rate of 21% beginning January 1, 2018. The SEC Staff issued Accounting Bulletin No. 118, Income Tax Accounting of the TCJA, allowing provisional amounts to be reported based on reasonable estimates, subject to adjustment during a one year measurement period. In 2018 the Company finalized making such adjustments. However, since many provisions of the TCJA still do not have final guidance issued, it may be necessary for the Company to make future adjustments based on such new guidance. 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. Under FASB ASC Topic 740, an uncertain tax position represents our expected treatment of a tax position taken, or planned to be taken in the future, that has not been reflected in measuring income tax expense for financial reporting purposes. The Company establishes reserves for uncertain tax positions based upon management's judgment as to the sustainability of these positions. These accounting estimates related to the uncertain tax position reserve require judgments to be made as to the sustainability of each uncertain tax position based on its technical merits. The Company believes its tax positions comply with applicable law and that it has adequately recorded reserves as required. However, to the extent the final tax outcome of these matters is different than the estimates recorded, the Company would then adjust its tax reserves or unrecognized tax benefits in the period that this information becomes known. The Company has elected to recognize accrued interest (net of related tax benefits) and penalties related to uncertain tax positions as a component of its income tax expense. The Tax Reform Act of 1986 mandated that Advances and CIAC received subsequent to December 31, 1986, generally are taxable income. The 1996 Tax Act provided an exclusion from taxable income for CIAC and Advances received after June 12, 1996 except for certain contributions for large services that are not included in rate base for rate-making purposes. On December 22, 2017, the TCJA repealed the 1996 exclusion from gross income effective on the enactment date. Investment tax credits were deferred through 1986 and are recognized as a reduction of deferred income tax expense over the estimated economic useful lives of the related assets. Table of Contents Stock Compensation Plans On December 9, 2015, the Company’s stockholders approved the 2015 Equity Compensation Plan, or the 2015 Plan. The 2015 Plan replaced the 2005 Equity Compensation Plan, or the 2005 Plan, which expired on May 24, 2015. The 2015 Plan authorizes an aggregate number of shares of our Class A Non-Voting Common Stock, or Class A Stock, that may be issued or transferred under the 2015 Plan equal to the sum of: 331,500 shares, plus the number of shares of Class A Stock subject to outstanding grants under the 2005 Plan as of December 9, 2015 that terminate, expire or are cancelled, forfeited, exchanged or surrendered without having been exercised, vested or paid under the 2005 Plan. The Company accounts for stock options issued after January 1, 2006 under FASB ASC Topic 718. Compensation costs for restricted stock grants and options were $181,000, $192,000 and $423,000 in 2019, 2018 and 2017, respectively. Cost for options and restricted stock grants were determined based on the fair value at the grant dates and those costs were charged to income over the associated service periods. As of December 31, 2019, there was $63,000 of unrecognized expense related to non-vested awards of restricted shares granted under the 2015 Plan. There was no stock compensation cost capitalized as part of an asset. Stock Options No options were granted in 2017, 2018 or 2019. Shares of Class A Stock have been reserved for future issuance under the 2015 Plan. Stock Awards On May 8, 2019, 5,000 shares of Class A Stock were granted as restricted stock awards. The fair value per share was $36.11, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 8, 2019. Prior to their release date, these restricted stock awards may be subject to forfeiture in the event of the recipient’s termination of service. On May 2, 2018, 5,000 shares of Class A were granted as restricted stock awards. The fair value per share was $38.51, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 2, 2018. Prior to their release date, these restricted stock awards may be subject to forfeiture in the event of the recipient’s termination of service. On June 28, 2017, 6,568 shares of Class A Stock were issued as fully vested unrestricted stock awards. The fair market value per share was $38.06, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on June 28, 2017. On May 3, 2017, 5,000 shares of Class A Stock were granted as restricted stock awards. The fair value per share was $38.10, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 3, 2017. The restricted shares vested one year from the date of grant. Revenue Recognition and Unbilled Revenues On January 1, 2018 the Company adopted Accounting Standards Codification 606, or ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach. The Company identified its sources of revenue streams that fall within the scope of this guidance and applied the five-step model to all qualifying revenue streams to determine when to recognize revenue. See Note 2 to our Consolidated Financial Statements for a full description of our revenue recognition. Leases In the first quarter of 2019 the Company adopted ASC 842, the new standard on leases, using the modified retrospective method and did not apply the standard to the comparative periods presented in this Annual Report on Form 10-K. The Company elected the practical expedient not to evaluate land easements that existed prior to implementation and were not previously accounted for as leases. The Company also elected not to recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less. The Company has agreements for land easements and office equipment under operating leases. The Company evaluated each lease agreement to determine whether the lease was to be accounted for as an operating or financing lease. It was determined that all leases subject to this new standard are operating leases and are recognized on a straight line basis. Management makes certain estimates and assumptions regarding each lease agreement, renewal and amendment, including, but not limited to, discount rates and probable term, which can impact the escalations in payment that are taken into consideration when calculating the straight line basis. The amount of rent expense and income reported could vary if different estimates and assumptions are used. Management also makes certain estimates and assumptions regarding the fair value of the leased property at lease commencement and the separation of lease and nonlease components. See Note 3 to our Consolidated Financial Statements for a full description of our leases. Accounts Receivable Accounts receivable are recorded at the invoiced amounts. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in our existing accounts receivable. The Company reviews the allowance for doubtful accounts on a quarterly basis. Account balances are written off against the allowance when it is probable the receivable will not be recovered. The allowance for doubtful accounts was $0.3 million and $0.2 million at December 31, 2019 and December 31, 2018, respectively. The corresponding expense for each of the years ended December 31, 2019 and 2018 was $0.2 million and $0.1 million, respectively. The following table summarizes the changes in the Company’s accounts receivable balance: December 31, In thousands 2019 2018 2017 Customer accounts receivable – water $ 5,574 $ 5,585 $ 5,487 Contractual amounts due from developers and other 1,603 2,806 3,698 7,177 8,391 9,185 Less allowance for doubtful accounts 264 232 288 Net accounts receivable $ 6,913 $ 8,159 $ 7,796 The activities in the allowance for doubtful accounts are as follows: December 31, In thousands 2019 2018 2017 Beginning balance $ 232 $ 288 $ 263 Allowance adjustments 198 103 215 Recoveries 34 47 41 Write off of uncollectible accounts (200 ) (206 ) (231 ) Ending balance $ 264 $ 232 $ 288 Cash and Cash Equivalents For purposes of the Consolidated Statement of Cash Flows, Artesian Resources considers all temporary cash investments with an original maturity of three months or less to be cash equivalents.Artesian Resources and its subsidiaries utilize their bank's zero balance account disbursement service to reduce the use of their lines of credit by funding checks as they are presented to the bank for payment rather than at issuance. If the checks currently outstanding, but not yet funded, exceed the cash balance on our books, the net liability is recorded as a current liability on the Consolidated Balance Sheet in the Overdraft Payable account. Use of Estimates in the Preparation of Consolidated Financial Statements The consolidated financial statements were prepared in conformity with generally accepted accounting principles in the U.S., which require management to make estimates about the reported amounts of assets and liabilities including unbilled revenues, reserve for a portion of revenues received under temporary rates and regulatory asset recovery and contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's estimates. |
