BUSINESS COMBINATIONS

3 Months Ended

Mar. 31, 2022

NOTE 14 – BUSINESS COMBINATIONS

As part of the Company’s growth strategy, on January 14, 2022 Artesian Wastewater completed its agreement to acquire TESI, which provides regulated wastewater services in Delaware. Artesian Wastewater purchased all of the stock of TESI from Middlesex Water Company for $6.4 million in cash and other consideration, including, forgiveness of a $2.1 million note due from Middlesex, consisting of $3.1 million paid at closing. This acquisition more than doubled the number of wastewater customers served in Sussex County, Delaware. The acquisition is being accounted for as a business combination under ASC Topic 805, “Business Combinations,” in accordance with the acquisition method whereby the total purchase price consideration will be allocated to intangible assets and utility plant assets acquired and liabilities assumed based on their respective estimated fair values. The acquisition method of accounting requires, among other things, that assets acquired, and liabilities assumed in a business purchase combination be recognized at their fair values as of the acquisition date. The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions. The Company is still gathering detailed records for valuing utility plant assets and related contributions in aid of construction at replacement cost adjusted for depreciation and valuing real property using a comparative sales approach in order to complete the purchase price allocation for the items as well as some of the assumed liabilities. The purchase price allocation will be finalized once the valuation of assets acquired has been completed, no later than one year after the acquisition date. Any goodwill as a result of the transaction is not expected to be deductible for tax purposes.

The TESI acquisition was approved by the DEPSC on October 27, 2021, subject to the DEPSC determining the appropriate ratemaking treatment of the acquisition price and the assets acquired in Artesian Wastewater Management’s next base rate case.

The Company reflected revenue of $0.7 million for the three months ended March 31, 2022 in its condensed consolidated statement of operations related to the acquisition. The pro forma revenue for the three months ended March 31, 2022 is estimated to be approximately $0.7 million. The Company anticipates the pro forma effects of revenue for the three months ended March 31, 2022 to be approximately the same given there has not been any changes in the rates. The pro forma information is not necessarily indicative of the Company’s future results. Any pro forma effects of earnings is not practicable, as we continue to integrate TESI operations and adjust the operating cost structure as it relates to operating expenses reflective of synergies of the combined operations, and therefore would not present an accurate comparison.

The table below sets forth the preliminary purchase price allocation of this acquisition as of March 31, 2022. The preliminary purchase price allocation is provisional and there could be material changes to the estimates below.

(In thousands)
		TESI
	Utility plant	$	19,455
	Cash		280
	Other assets		2,565
	Total assets		22,300
	Less: Liabilities and contributions in aid of construction (CIAC)
	Liabilities		2,521
	CIAC		16,657
	Net cash purchase price	$	3,122

Additionally, as part of the Company’s growth strategy, on February 16, 2022, Artesian Water signed an agreement, or the Asset Purchase Agreement, to purchase from the Town of Clayton, a Delaware municipality, or Clayton, substantially all of the operating assets of Clayton’s water system, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Water System. Pursuant to the terms of the Asset Purchase Agreement, Clayton shall transfer to Artesian Water all of Clayton’s right, 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 Clayton at 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 expected in the second quarter of 2022, pending due diligence. The DEPSC approved the transfer of Clayton’s exclusive franchise territory on April 20, 2022.