ARTESIAN RESOURCES CORP 10-Q

ITEM 1 – FINANCIAL STATEMENTS ARTESIAN RESOURCES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (In thousands) ASSETS March 31, 2022 December 31, 2021 Utility plant, at original cost (less accumulated depreciation - 2022 - $ 168,815 ; 2021 - $ 159,385 ) $ 618,424 $ 590,431 Current assets Cash and cash equivalents 478 92 Accounts receivable (less allowance for doubtful accounts - 2022 - $ 444 ; 2021 - $ 429 ) 6,440 8,367 Income tax receivable 977 2,234 Unbilled operating revenues 1,504 1,080 Materials and supplies 2,852 1,933 Prepaid property taxes 1,057 2,306 Prepaid expenses and other 2,328 2,652 Total current assets 15,636 18,664 Other assets Non-utility property (less accumulated depreciation - 2022 - $ 938 ; 2021 - $ 919 ) 3,756 3,751 Other deferred assets 8,134 5,097 Operating lease right of use assets 446 451 Total other assets 12,336 9,299 Regulatory assets, net 6,362 6,321 Total Assets $ 652,758 $ 624,715 LIABILITIES AND STOCKHOLDERS' EQUITY Stockholders' equity Common stock $ 9,438 $ 9,414 Preferred stock — — Additional paid-in capital 105,551 104,989 Retained earnings 65,572 63,607 Total stockholders' equity 180,561 178,010 Long-term debt, net of current portion 142,908 143,259 323,469 321,269 Current liabilities Lines of credit 27,409 26,703 Current portion of long-term debt 1,563 1,591 Accounts payable 12,441 10,206 Accrued expenses 4,282 4,038 Overdraft payable 133 30 Accrued interest 1,339 917 Income taxes payable 244 - Customer and other deposits 2,372 2,273 Other 2,141 1,448 Total current liabilities 51,924 47,206 Commitments and contingencies Deferred credits and other liabilities Net advances for construction 4,310 4,295 Operating lease liabilities 440 440 Regulatory liabilities 21,732 21,260 Deferred investment tax credits 451 456 Deferred income taxes 53,370 53,133 Total deferred credits and other liabilities 80,303 79,584 Net contributions in aid of construction 197,062 176,656 Total Liabilities and Stockholders’ Equity $ 652,758 $ 624,715 See notes to the condensed consolidated financial statements. 3 Table of Contents ARTESIAN RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited (In thousands, except per share amounts) For the Three Months Ended March 31, 2022 2021 Operating revenues Water sales $ 18,143 $ 17,830 Other utility operating revenue 2,525 1,376 Non-utility operating revenue 1,519 1,439 Total Operating Revenues 22,187 20,645 Operating expenses Utility operating expenses 10,495 9,505 Non-utility operating expenses 943 915 Depreciation and amortization 3,085 3,012 State and federal income taxes 1,419 1,351 Property and other taxes 1,502 1,420 Total Operating Expenses 17,444 16,203 Operating income 4,743 4,442 Other income, net Allowance for funds used during construction (AFUDC) 181 244 Miscellaneous income 1,446 1,402 Income before interest charges 6,370 6,088 Interest charges 1,887 1,882 Net income applicable to common stock $ 4,483 $ 4,206 Income per common share: Basic $ 0.48 $ 0.45 Diluted $ 0.47 $ 0.45 Weighted average common shares outstanding: Basic 9,423 9,368 Diluted 9,455 9,407 Cash dividends per share of common stock $ 0.2675 $ 0.2571 See notes to the condensed consolidated financial statements. 4 Table of Contents ARTESIAN RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (In thousands) For the Three Months Ended March 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,483 $ 4,206 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,085 3,012 Deferred income taxes, net 34 ( 1,236 ) Stock compensation 49 43 AFUDC, equity portion ( 125 ) ( 164 ) Changes in assets and liabilities, net of acquisitions: Accounts receivable, net of allowance for doubtful accounts 1,878 1,347 Income tax receivable 1,257 623 Unbilled operating revenues ( 60 ) 15 Materials and supplies ( 919 ) 135 Prepaid property taxes 1,827 869 Prepaid expenses and other 333 254 Other deferred assets ( 499 ) ( 463 ) Regulatory assets 92 91 Regulatory liabilities ( 109 ) ( 125 ) Income tax payable 244 2,036 Accounts payable ( 2 ) ( 51 ) Accrued expenses ( 137 ) ( 809 ) Accrued interest 422 395 Deposits and other ( 34 ) 64 NET CASH PROVIDED BY OPERATING ACTIVITIES 11,819 10,242 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (net of AFUDC, equity portion) ( 9,776 ) ( 6,272 ) Investment in acquisitions, net of cash acquired ( 2,842 ) — Proceeds from sale of assets 2 7 NET CASH USED IN INVESTING ACTIVITIES ( 12,616 ) ( 6,265 ) CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayments) under lines of credit agreements 706 ( 4,097 ) Deferred debt issuance cost ( 30 ) — Increase (decrease) in overdraft payable 103 ( 78 ) Net advances and contributions in aid of construction 2,764 2,751 Net proceeds from issuance of common stock 537 601 Dividends paid ( 2,518 ) ( 2,406 ) Principal repayments of long-term debt ( 379 ) ( 527 ) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,183 ( 3,756 ) NET INCREASE IN CASH AND CASH EQUIVALENTS 386 221 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 92 28 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 478 $ 249 Non-cash Investing and Financing Activity: Utility plant received as construction advances and contributions $ 1,878 $ 1,991 Dividends declared but not paid — — Amounts included in accounts payable and accrued payables related to capital expenditures 684 3,074 Supplemental Disclosures of Cash Flow Information: Interest paid $ 1,465 $ 1,487 Income taxes paid $ — $ 30 See notes to the condensed consolidated financial statements. 5 Table of Contents ARTESIAN RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Unaudited (In thousands) Common Shares Outstanding Class A Non-Voting (1) (3) (4) Common Shares Outstanding Class B Voting (2) $ 1 Par Value Class A Non-Voting $ 1 Par Value Class B Voting Additional Paid-in Capital Retained Earnings Total Balance as of December 31, 2020 8,475 882 $ 8,475 $ 882 $ 103,463 $ 56,606 $ 169,426 Net income – – – – – 4,206 4,206 Cash dividends declared Common stock – – – – – ( 2,406 ) ( 2,406 ) Issuance of common stock Dividend reinvestment plan 3 – 3 – 95 – 98 Employee stock options and awards (4) 22 – 22 – 438 – 460 Employee Retirement Plan (3) 2 – 2 – 84 – 86 Balance as of March 31, 2021 8,502 882 8,502 882 104,080 58,406 171,870 Common Shares Outstanding Class A Non-Voting (1) (3) (4) Common Shares Outstanding Class B Voting (2) $ 1 Par Value Class A Non-Voting $ 1 Par Value Class B Voting Additional Paid-in Capital Retained Earnings Total Balance as of December 31, 2021 $ 8,532 $ 882 $ 8,532 $ 882 $ 104,989 $ 63,607 $ 178,010 Net income – – – – – 4,483 4,483 Cash dividends declared Common stock – – – – – – – Issuance of common stock Dividend reinvestment plan 2 – 2 – 87 – 89 Employee stock options and awards (4) 22 – 22 – 475 – 497 Employee Retirement Plan (3) – – – – – – – Balance as of March 31, 2022 $ 8,556 $ 882 $ 8,556 $ 882 $ 105,551 $ 65,572 $ 180,561 (1) At March 31, 2022, and March 31, 2021, Class A Common Stock had 15,000,000 shares authorized. For the same periods, shares issued, inclusive of treasury shares, were 8,585,947 and 8,531,099 , respectively. (2) At March 31, 2022, and March 31, 2021, Class B Common Stock had 1,040,000 shares authorized and 881,452 shares issued. (3) Artesian Resources Corporation registered 200,000 shares of Class A Common Stock, subsequently adjusted for stock splits, available for purchase through the Artesian Retirement Plan and the Artesian Supplemental Retirement Plan. (4) Under the Equity Compensation Plan, effective December 9, 2015, or the 2015 Plan, Artesian Resources Corporation authorized up to 331,500 shares of Class A Common Stock for issuance of grants in the form of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the 2015 Plan. Includes stock compensation expense for March 31, 2022 and March 31, 2021, see Note 5-Stock Compensation Plans. See notes to the condensed consolidated financial statements. 6 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – GENERAL Artesian Resources Corporation, or Artesian Resources, includes income from the earnings of all of our wholly owned subsidiaries. The terms "we", "our", "Artesian" and the "Company" as used herein refer to Artesian Resources and its subsidiaries. DELAWARE REGULATED SUBSIDIARIES Artesian Water Company, Inc., or Artesian Water, our principal subsidiary, distributes and sells water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware. In addition, Artesian Water provides services to other water utilities, including operations and billing functions, and has contract operation agreements with private and municipal water providers. Artesian Water also provides water for public and private fire protection to customers in our service territories. Artesian Wastewater Management, Inc., or Artesian Wastewater, began providing wastewater services in Sussex County, Delaware in July 2005. Artesian Wastewater is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Delaware as a regulated public wastewater service company. In January 2022, Artesian Wastewater acquired Tidewater Environmental Services, Inc. Artesian Wastewater operates as the parent holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI. TESI was incorporated in 2004 and is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Sussex County, Delaware as a regulated public wastewater service company. Artesian Wastewater purchased all of the stock of TESI from Middlesex Water Company, or Middlesex, for $6.4 million in cash and other consideration, including forgiveness of a $2.1 million note due from Middlesex. This acquisition more than doubled the number of wastewater customers served in Sussex County, Delaware and included all residents within the Town of Milton. MARYLAND REGULATED SUBSIDIARIES Artesian Water Maryland, Inc. began operations in August 2007. Artesian Water Maryland distributes and sells water to residential, commercial, industrial and municipal customers in Cecil County, Maryland. Artesian Wastewater Maryland, Inc. was incorporated on June 3, 2008 and is able to provide regulated wastewater services to customers in the State of Maryland. It is currently not providing these services. PENNSYLVANIA REGULATED SUBSIDIARY Artesian Water Pennsylvania, Inc. began operations in 2002. It provides water service to a residential community in Chester County, Pennsylvania. OTHER SUBSIDIARIES Our three other subsidiaries, none of which are regulated, are Artesian Utility Development, Inc., or Artesian Utility, Artesian Development Corporation, or Artesian Development, and Artesian Storm Water Services, Inc., or Artesian Storm Water. Artesian Utility was formed in 1996 and designs and builds water and wastewater infrastructure and provides contract water and wastewater operation services on the Delmarva Peninsula to private, municipal and governmental institutions. Artesian Utility also evaluates land parcels, provides recommendations to developers on the size of water or wastewater facilities and the type of technology that should be used for treatment at such facilities, and operates water and wastewater facilities in Delaware for municipal and governmental agencies. Artesian Utility also contracts with developers and government agencies for design and construction of wastewater infrastructure throughout the Delmarva Peninsula. In addition, as further discussed below, Artesian Utility operates the Water Service Line Protection Plan, or WSLP Plan, the Sewer Service Line Protection Plan, or SSLP Plan, and the Internal Service Line Protection Plan, or ISLP Plan. 7 Table of Contents Artesian Utility currently operates wastewater treatment facilities for the town of Middletown, in southern New Castle County, Delaware, or Middletown, under a 20 -year contract that expires in July 2039. The Company currently operates three wastewater treatment systems with a combined capacity of up to approximately 3.8 million gallons per day. The wastewater treatment facilities in Middletown provide reclaimed wastewater for use in spray irrigation on public and agricultural lands in the area. Artesian Utility also offers three protection plans to customers, the WSLP Plan, the SSLP Plan, and the ISLP Plan. The WSLP Plan covers all parts, material and labor required to repair or replace participating customers' leaking water service lines up to an annual limit. The SSLP Plan covers all parts, material and labor required to repair or replace participating customers' leaking or clogged sewer lines up to an annual limit. The ISLP Plan enhances available coverage to include water and wastewater lines within customers' residences up to an annual limit. Artesian Development is a real estate holding company that owns properties, including land approved for office buildings, a water treatment plant and wastewater facility, as well as property for current operations, including an office facility in Sussex County, Delaware. The facility consists of approximately 10,000 square feet of office space along with nearly 10,000 square feet of warehouse space. Artesian Storm Water, incorporated in 2017, was formed to provide design, installation, maintenance and repair services related to existing or proposed storm water management systems in Delaware and the surrounding areas. The ability to offer storm water services will complement the primary water and wastewater services that we provide. Artesian Storm Water is not actively seeking new opportunities. NOTE 2 – BASIS OF PRESENTATION Basis of Presentation The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, for Form 10-Q. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Accordingly, these condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes in the Company's annual report on Form 10-K for fiscal year 2021 as filed with the SEC on March 11, 2022. The condensed consolidated financial statements include the accounts of Artesian Resources Corporation and its wholly owned subsidiaries, including its principal operating company, Artesian Water. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments (unless otherwise noted) necessary to present fairly the Company's balance sheet position as of March 31, 2022, the results of its operations for the three-month periods ended March 31, 2022 and March 31, 2021, its cash flows for the three-month periods ended March 31, 2022 and March 31, 2021 and the changes in stockholders’ equity for the three-month periods ended March 31, 2022 and March 31, 2021. The December 31, 2021 Condensed Consolidated Balance Sheet was derived from the Company’s December 31, 2021 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year or for future periods. Use of Estimates The condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles in the U.S., which require management to make certain estimates and assumptions regarding the reported amounts of assets and liabilities including unbilled revenues, credit losses and reserves for bad debt, regulatory asset recovery, lease agreements and contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's estimates. 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. Artesian Wastewater acquired TESI in January 2022. As of March 31, 2022, the accounting for the transaction was preliminary. Management’s preliminary determination of fair value of the tangible assets acquired using the cost method requires management to make significant estimates and assumptions related to economic lives of the assets, replacement costs, and physical characteristics of the tangible assets acquired. A third party valuation specialist will assist with the valuation of the assets acquired. The purchase price allocation is expected to be finalized once the valuation of assets acquired has been completed, no later than one year after the acquisition date. 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. 8 Table of Contents NOTE 3 – REVENUE RECOGNITION Background Artesian’s operating revenues are primarily attributable to contract services based upon tariff rates approved by the Delaware Public Service Commission, or DEPSC, the Maryland Public Service Commission, or MDPSC, and the Pennsylvania Public Utility Commission, or PAPUC. Tariff contract service revenues consist of water consumption, industrial wastewater services, fixed fees for water and wastewater services including customer and fire protection fees, service charges and Distribution System Improvement Charges, or DSIC, billed to customers at rates outlined in our tariffs that represent stand-alone selling prices. Our non-tariff contract revenues consist of Service Line Protection Plan, or SLP Plan, fees, water and wastewater contract operations, design and installation contract services, and wastewater inspection fees. Other operating revenue primarily consists of developer guarantee contributions for wastewater and rental income for antenna agreements, which are not considered in the scope of Accounting Standards Codification 606, Revenue from Contracts with Customers. Tariff Contract Revenues Artesian generates revenue from the sale of water to customers in Delaware, Cecil County, Maryland, and Southern Chester County, Pennsylvania once a customer requests service in our territory. We recognize water consumption revenue at tariff rates on a cycle basis for the volume of water transferred to customers based upon meter readings for actual gallons of water consumed as well as unbilled amounts for estimated usage from the date of the last meter reading to the end of the accounting period. As actual usage amounts are known based on recurring meter readings, 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 based on management judgments described above, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption. The majority of our water customers are billed for water consumed on a monthly basis, while the remaining customers are billed on a quarterly basis. As a result, we record unbilled operating revenue (contract asset) for any estimated usage through the end of the accounting period that will be billed in the next monthly or quarterly billing cycle. Artesian generates revenue from industrial wastewater services provided to a customer in Sussex County, Delaware. We recognize industrial wastewater service revenue at a contract rate on a monthly basis for the volume of wastewater transferred to Artesian’s wastewater facilities based upon meter readings for actual gallons of wastewater transferred. These services are invoiced at the end of every month based on the actual meter readings for that month, and therefore there is no contract asset or liability associated with this revenue. The contract also provides for a minimum required volume of wastewater flow to our facility. At each year end, any shortfall of the actual volume from the required minimum volume is billed to the industrial customer and recorded as revenue. Additionally, if during the course of the year it is probable that the actual volume will not meet the minimum required volume, estimated revenue amounts would be recorded for the pro rata minimum volume, constrained for potential flow capacity that could occur in the remainder of the year. Pursuant to a settlement agreement, the minimum required volume was prorated on a seven month basis beginning June 1, 2021 and ending December 31, 2021. Artesian generates revenue from metered wastewater services provided to customers in Sussex County, Delaware. We recognize metered wastewater services at tariff rates on a cycle basis for the volume of wastewater transferred to Artesian’s wastewater facilities based upon meter readings for actual gallons of water transferred, as well as unbilled amounts for estimated volume from the date of the last meter reading to the end of the accounting period. As actual volume amounts are known based on recurring meter readings, 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 volume in the same period, the previous billing period’s volume, or averaging. While actual usage for individual customers may differ materially from the estimate based on management judgments described above, we believe the overall total estimate of volume and revenue for the fiscal period will not differ materially from actual billed consumption. The majority of these wastewater customers are billed for the volume of water transferred on a quarterly basis. As a result, we record unbilled operating revenue (contract asset) for any estimated volume through the end of the accounting period that will be billed in the next monthly cycle. 9 Table of Contents Artesian generates fixed fee revenue for water and wastewater services provided to customers once a customer requests service in our territory. Our wastewater territory is located in Sussex County, Delaware. We recognize revenue from these services on a ratable basis over time as the customer simultaneously receives and consumes all the benefits of the Company remaining ready to provide them water and wastewater service. These contract services are billed either in advance or arrears at tariff rates on a monthly, quarterly or semi-annual basis. For contract services billed in arrears, we record unbilled operating revenue (contract asset) for any services through the end of the accounting period that will be billed in the next monthly or quarterly cycle. For contract services billed in advance, we record deferred revenue (contract liability) and accounts receivable for any amounts for which we have a right to invoice but for which services have not been provided. This deferred revenue is netted with unbilled operating revenue on the Condensed Consolidated Balance Sheet. Artesian generates service charges primarily from non-payment fees, such as water shut off and reconnection fees and finance charges. These fees are billed and recognized as revenue at the point in time when our tariffs indicate the Company has the right to payment such as days past due have been reached or shut-offs and reconnections have been performed. There is no contract asset or liability associated with these fees. Artesian generates revenue from DSIC, which are surcharges applied to water customer tariff rates in Delaware related to specific types of water distribution system improvements. This rate is calculated on a semi-annual basis based on an approved projected revenue requirement over the following six-month period. This rate is adjusted up or down at the next DSIC filing to account for any differences between actual earned revenue and the projected revenue requirement. Since DSIC revenue is a surcharge applied to tariff rates, we recognize DSIC revenue based on the same guidelines as noted above depending on whether the surcharge was applied to consumption revenue or fixed fee revenue. Accounts receivable related to tariff contract revenues are typically due within 25 days of invoicing. 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, due to the COVID-19 pandemic causing hardships for many utility customers, the Company experienced longer receivable cycles throughout 2020 and into 2021 and made an adjustment to increase the reserve for bad debt by $ 0.5 million in 2020. In June 2021 we made an adjustment to reduce the reserve by $ 0.3 million. We will continue to monitor factors that affect the reserve for bad debt. Non-tariff Contract Revenues Artesian generates SLP Plan revenue once a customer requests service to cover all parts, materials and labor required to repair or replace leaking water service lines, leaking or clogged sewer lines, or water and wastewater lines within the customer’s residence, up to an annual limit. We recognize revenue from these services on a ratable basis over time as the customer simultaneously receives and consumes all the benefits of having service line protection services. These contract services are billed in advance on a monthly or quarterly basis. As a result, we record deferred revenue (contract liability) and accounts receivable for any amounts for which we have a right to invoice but for which services have not been provided. Accounts receivable from SLP Plan customers are typically due within 25 days of invoicing. An allowance for doubtful accounts is calculated as a percentage of total SLP Plan contract revenue. 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. Artesian generates contract operation revenue from water and wastewater operation services provided to customers. We recognize revenue from these operation contracts, which consist primarily of monthly operation and maintenance services over time as customers receive and consume the benefits of such services performed. These services are invoiced in advance at the beginning of every month and are typically due within 30 days, and therefore there is no contract asset or liability associated with these revenues. An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers’ creditworthiness. The related allowance for doubtful accounts and associated bad debt expense has not been significant. 10 Table of Contents Artesian generates design and installation revenue for services related to the design and construction of wastewater infrastructure for a state agency under contract. We recognize revenue from these services over time as services are performed using the percentage-of-completion method based on an input method of incurred costs (cost-to-cost). These services are invoiced at the end of every month based on incurred costs to date. As of March 31, 2022, there is no associated contract asset or liability. There is no allowance for doubtful accounts or bad debt expense associated with this revenue. Artesian generates inspection fee revenue for inspection services related to onsite wastewater collection systems installed by developers of new communities. These fees are paid by developers in advance when a service is requested for a new phase of a development. Inspection fee revenue is recognized on a per lot basis once the inspection of the infrastructure that serves each lot is completed. As a result, we record deferred revenue (contract liability) for any amounts related to infrastructure not yet inspected. There are no accounts receivable, allowance for doubtful accounts or bad debt expense associated with inspection fee contracts. Sales Tax The majority of Artesian’s revenues are earned within the State of Delaware, where there is no sales tax. Revenues earned in the State of Maryland and the Commonwealth of Pennsylvania are related primarily to the sale of water by a public water utility and are exempt from sales tax. Therefore, no sales tax is collected on revenues . Disaggregated Revenues The following table shows the Company’s revenues disaggregated by service type; all revenues are generated within a similar geographical location: (in thousands) Three months ended March 31, 2022 Three months ended March 31, 2021 Tariff Revenue Consumption charges $ 10,566 $ 10,418 Fixed fees 7,778 6,999 Service charges 156 201 DSIC 1,182 1,172 Metered wastewater services 140 — Industrial wastewater services 407 6 Total Tariff Revenue $ 20,229 $ 18,796 Non-Tariff Revenue Service line protection plans $ 1,222 $ 1,096 Contract operations 211 230 Design and installation 123 151 Inspection fees 41 84 Total Non-Tariff Revenue $ 1,597 $ 1,561 Other Operating Revenue $ 361 $ 288 Total Operating Revenue $ 22,187 $ 20,645 Contract Assets and Contract Liabilities Our contract assets and liabilities consist of the following: (in thousands) March 31, 2022 December 31, 2021 Contract Assets – Tariff $ 2,424 $ 2,144 Deferred Revenue Deferred Revenue – Tariff $ 1,085 $ 1,227 Deferred Revenue – Non-Tariff 246 287 Total Deferred Revenue $ 1,331 $ 1,514 11 Table of Contents For the three months ended March 31, 2022, the Company recognized revenue of $ 1.2 million from amounts that were included in Deferred Revenue – Tariff at the beginning of the year and revenue of $ 0.3 million from amounts that were included in Deferred Revenue – Non- Tariff at the beginning of the year. The changes in Contract Assets and Deferred Revenue are primarily due to normal timing differences between our performance and customer payments. Remaining Performance Obligations As of March 31, 2022 and December 31, 2021, Deferred Revenue – Tariff is recorded net of contract assets within Unbilled operating revenues and represents our remaining performance obligations for our fixed fee water and wastewater services, all of which are expected to be satisfied and associated revenue recognized in the next three months. As of March 31, 2022 and December 31, 2021, Deferred Revenue – Non-Tariff is recorded within Other current liabilities and represents our remaining performance obligations for our SLP Plan services and wastewater inspections, which are expected to be satisfied and associated revenue recognized within the next three months and one year for the SLP Plan revenue and inspection fee revenue, respectively. NOTE 4 – LEASES The Company leases land and office equipment under operating leases from non-related parties. Our leases have remaining lease terms of 20 years to 74 years, some of which include options to automatically extend the leases for up to 66 years. Payments made under operating leases are recognized in the consolidated statement of operations on a straight-line basis over the period of the lease. The annual lease payments for the land operating leases increase each year either by the most recent increase in the Consumer Price Index or by 3 %, as applicable based on the lease agreements. Periodically, the annual lease payment for one operating land lease is determined based on the fair market value of the applicable parcel of land. None of the operating leases contain contingent rent provisions. The commencement date of all the operating leases is the earlier of the date we become legally obligated to make rent payments or the date we may exercise control over the use of the land or equipment. The Company currently does not have any financing leases and does not have any lessor leases that require disclosure. Management made certain assumptions related to the separation of lease and nonlease components and to the discount rate used when calculating the right of use asset and liability amounts for the operating leases. As our leases do not provide an implicit rate, we use our incremental borrowing rates for long term and short term agreements and apply the rates accordingly based on the term of the lease agreements to determine the present value of lease payments. Rent expense for all operating leases except those with terms of 12 months or less comprises: (in thousands) Three Months Ended Three Months Ended March 31, 2022 March 31, 2021 Minimum rentals $ 7 $ 7 Contingent rentals – – $ 7 $ 7 Supplemental cash flow information related to leases is as follows: (in thousands) Three Months Ended Three Months Ended March 31, 2022 March 31, 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 7 $ 7 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 446 $ 455 12 Table of Contents Supplemental balance sheet information related to leases is as follows: (in thousands, except lease term and discount rate) March 31, 2022 December 31, 2021 Operating Leases: Operating lease right-of-use assets $ 446 $ 451 Other current liabilities $ 2 6 Operating lease liabilities 440 440 Total operating lease liabilities $ 442 $ 446 Weighted Average Remaining Lease Term Operating leases 61 years 61 years Weighted Average Discount Rate Operating leases 5.0 % 5.0 % Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2022 are as follows: (in thousands) Operating Leases Year 2023 $ 24 2024 24 2025 24 2026 24 2027 25 Thereafter 1,332 Total undiscounted lease payments $ 1,453 Less effects of discounting ( 1,011 ) Total lease liabilities recognized $ 442 As of March 31, 2022, we have not entered into operating or finance leases that will commence at a future date. NOTE 5 – STOCK COMPENSATION PLANS On December 9, 2015, the Company's stockholders approved the 2015 Equity Compensation Plan, or the 2015 Plan. The 2015 Plan provides that grants may be in any of the following forms: incentive stock options, nonqualified stock options, stock units, stock awards, dividend equivalents and other stock-based awards. The 2015 Plan is administered and interpreted by the Compensation Committee, or the Committee, of the Board of Directors of the Company, or the Board. The Committee has the authority to determine the individuals to whom grants will be made under the 2015 Plan, the type, size and terms of the grants, the time when grants will be made and the duration of any applicable exercise or restriction period (subject to the limitations of the 2015 Plan), and deal with any other matters arising under the 2015 Plan. The Committee presently consists of three directors, each of whom is a non-employee director of the Company. All of the employees of the Company and its subsidiaries and non-employee directors of the Company are eligible for grants under the 2015 Plan. Compensation expense of $ 49,000 , related to the May 2021 issue of restricted stock awards, was recorded for the three months ended March 31, 2022. Compensation expense of $ 43,000 was recorded for the three months ended March 31, 2021 for restricted stock awards issued in May 2020. Costs were determined based on the fair value on the dates of the awards and those costs were charged to income over the service periods associated with the awards. There was no stock compensation cost capitalized as part of an asset. 13 Table of Contents On May 4, 2021, 5,000 shares of Class A Common Stock, or Class A Stock, were granted as restricted stock awards. The fair value per share was $ 40.11 , the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 4, 2021. Prior to their release date, these restricted stock awards may be subject to forfeiture in the event of the recipient’s termination of service. The following summary reflects changes in the shares of Class A Stock underlying options and restricted stock awards for the three months ended March 31, 2022: Options Restricted Awards Option Shares Weighted Average Exercise Price Weighted Average Remaining Life (Yrs.) Aggregate Intrinsic Value (in thousands) Outstanding Restricted Stock Awards Weighted Average Grant Date Fair Value Plan options/restricted stock awards Outstanding at January 1, 2022 83,000 $ 21.65 $ 2,048 5,000 $ 40.11 Granted — — — — — Exercised/vested and released ( 22,250 ) 20.12 600 — — Expired/cancelled — — — — — Outstanding at March 31, 2022 60,750 $ 22.22 1.659 $ 1,600 5,000 $ 40.11 Exercisable/vested at March 31, 2022 60,750 $ 22.22 1.659 $ 1,600 — — The total intrinsic value of options exercised during the three months ended March 31, 2022 was approximately $ 600,000 . There were no unvested option shares outstanding under the 2015 Plan during the three months ended March 31, 2022. As of March 31, 2022, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan. As of March 31, 2022, there was $ 18,000 total unrecognized expenses related to non-vested awards of restricted shares awarded under the 2015 Plan. The cost will be recognized over 0.09 years, the remaining vesting period for the restricted stock awards. NOTE 6 – 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. Other deferred assets is primarily associated with the acquisition of TESI in January 2022 based on the preliminary purchase price allocation. 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. In addition, other deferred assets includes the Mountain Hill Water Company acquisition. In thousands March 31, 2022 December 31, 2021 Investment in CoBank $ 5,351 $ 4,850 Other deferred assets 2,783 247 $ 8,134 $ 5,097 N OTE 7 - REGULATORY ASSETS The 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 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. 14 Table of Contents Debt related costs include debt issuance costs and other debt related expense. The DEPSC has approved deferred regulatory accounting treatment for issuance costs associated with Artesian Water’s First Mortgage bonds. Debt issuance costs and other debt related expenses are reviewed during Artesian Water’s rate applications as part of its cost of capital calculations. Regulatory expenses amortized on a straight-line basis are noted below: Expense Years Amortized Deferred contract costs and other 5 Rate case 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) March 31, 2022 December 31, 2021 Deferred income taxes $ 481 $ 355 Deferred contract costs and other 273 288 Debt related costs 4,844 4,902 Goodwill 271 273 Deferred acquisition and franchise costs 493 503 $ 6,362 $ 6,321 NOTE 8 – 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, MDPSC, and 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. 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 Tax Cuts and Jobs Act, or TCJA, on December 22, 2017, the Company adjusted its existing deferred income tax balances to reflect the decrease in the corporate income tax rate from 34 % to 21 % (see Note 11) resulting in a decrease in the net deferred income tax liability of $ 24.3 million, of which $ 22.8 million was reclassified to a regulatory liability related to Artesian Water and Artesian Water Maryland. 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. This audit is currently underway by the DEPSC, with no final ruling yet made. 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. 15 Table of Contents Regulatory liabilities comprise: (in thousands) March 31, 2022 December 31, 2021 Utility plant retirement cost obligation $ 158 $ 149 Deferred income taxes (related to TCJA) 21,574 21,111 $ 21,732 $ 21,260 NOTE 9 - NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share is based on the weighted average number of common shares outstanding, the potentially dilutive effect of employee stock options and restricted stock awards. The following table summarizes the shares used in computing basic and diluted net income per share: For the Three Months Ended March 31, 2022 2021 (in thousands) Weighted average common shares outstanding during the period for Basic computation 9,423 9,368 Dilutive effect of employee stock options and awards 32 39 Weighted average common shares outstanding during the period for Diluted computation 9,455 9,407 For the three months ended March 31, 2022 and 2021, no shares of restricted stock awards were excluded from the calculations of diluted net income per share. The Company has 15,000,000 authorized shares of Class A Stock and 1,040,000 authorized shares of Class B Common Stock, or Class B Stock. As of March 31, 2022, 8,556,970 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of March 31, 2021 , 8,502,122 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. The par value for both classes is $ 1.00 per share. Equity per common share was $ 19.16 and $ 18.94 at March 31, 2022 and December 31, 2021 , respectively. These amounts were computed by dividing common stockholders' equity by the number of weighted average shares of common stock outstanding on March 31, 2022 and December 31, 2021 , respectively. N OTE 10 - REGULATO RY PROCEEDINGS Our water and wastewater utilities generate operating revenue from customers based on rates that are established by state Public Service Commissions through a rate setting process that may include public hearings, evidentiary hearings and the submission of evidence and testimony in support of the requested level of rates by the Company. We are subject to regulation by the following state regulatory commissions: • The DEPSC, regulates both Artesian Water and Artesian Wastewater. • The MDPSC, regulates both Artesian Water Maryland and Artesian Wastewater Maryland. • The PAPUC, regulates Artesian Water Pennsylvania. Our water and wastewater utility operations are also subject to regulation under the federal Safe Drinking Water Act of 1974, or Safe Drinking Water Act, the Clean Water Act of 1972, or the Clean Water Act, and related state laws, and under federal and state regulations issued under these laws. These laws and regulations establish criteria and standards for drinking water and for wastewater discharges. Capital expenditures and operating costs required as a result of water quality standards and environmental requirements have been traditionally recognized by state regulatory commissions as appropriate for inclusion in establishing rates. 16 Table of Contents Water and Wastewater Rates Our regulated utilities periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business. In Delaware, utilities are permitted by law to place rates into effect, under bond, on a temporary basis pending completion of a rate increase proceeding. The first temporary increase may be up to the lesser of $ 2.5 million on an annual basis or 15 % of gross water sales. Should the rate case not be completed within seven months , by law, the utility may put the entire requested rate relief, up to 15 % of gross water sales, in effect under bond until a final resolution is ordered and placed into effect. If any such rates are found to be in excess of rates the DEPSC finds to be appropriate, the utility must refund customers the portion found to be in excess with interest. The timing of our rate increase requests is therefore dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we hope to recover through the rate increase. We can provide no assurances that rate increase requests will be approved by applicable regulatory agencies and, if approved, we cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase. Other Proceedings Delaware law permits water utilities to put into effect, on a semi-annual basis, increases related to specific types of distribution system improvements through a DSIC. This charge may be implemented by water utilities between general rate increase applications that normally recognize changes in a water utility's overall financial position. The DSIC approval process is less costly when compared to the approval process for general rate increase requests. The DSIC rate applied between base rate filings is capped at 7.50 % of the amount billed to customers under otherwise applicable rates and charges, and the DSIC rate increase applied cannot exceed 5.0 % within an y 12-month period. The following table summarizes (1) Artesian Water’s applications with the DEPSC to collect DSIC rates and (2) the rates upon which eligible plant improvements are based: Application Date 11/20/2020 DEPSC Approval Date 12/14/2020 Effective Date 01/01/2021 Cumulative DSIC Rate 7.50 % Net Eligible Plant Improvements – Cumulative Dollars (in millions) $ 43.1 Eligible Plant Improvements – Installed Beginning Date 10/01/2014 Eligible Plant Improvements – Installed Ending Date 04/30/2019 The rate reflects the eligible plant improvements installed through April 30, 2019. The DSIC rate effective January 1, 2021 is still subject to audit by the DEPSC at a later date. For each of the three months ended March 31, 2022 and March 31, 2021, we earned approximately $ 1.2 million in DSIC revenue. NOTE 11 – INCOME TAXES Deferred income taxes are provided in accordance with FASB ASC Topic 740 on all differences between the tax basis of assets and liabilities and the amounts at which they are carried in the consolidated financial statements based on the enacted tax rates expected to be in effect when such temporary differences are expected to reverse. The Company’s rate regulated 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. 17 Table of Contents 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 statute of limitations for the 2017 Corporate tax returns lapsed during the fourth quarter of 2021, which resulted in the reversal of the reserve in the amount of approximately $ 26,000 . 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 Company has accrued approximately $ 5,000 in penalties and interest for the three months ended March 31, 2022 . The Company remains subject to examination by federal and state authorities for the tax years 2018 through 2021 . 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. N OTE 12 – FAIR VALUE OF FINANC IAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. Current Assets and Liabilities For those current assets and liabilities that are considered financial instruments, the carrying amounts approximate fair value because of the short maturity of those instruments. Long-term Financial Liabilities All of Artesian Resources’ outstanding lo ng-term debt as of March 31, 2022 and December 31, 2021 was fixed-rate. The fair value of the Company’s long-term debt is determined by discounting their future cash flows using current market interest rates on similar instruments with comparable maturities consistent with FASB ASC 825. Under the fair value hierarchy, the fair value of the long-term debt in the table below is classified as Level 2 measurements. Level 2 is valued using observable inputs other than quoted prices. The fair values for long-term debt differ from the carrying values primarily due to interest rates that differ from the current market interest rates. The carrying amount and fair value of Artesian Resources' long-term debt (including current portion) are shown below: In thousands March 31, 2022 December 31, 2021 Carrying amount $ 144,471 $ 144,850 Estimated fair value $ 147,505 $ 163,182 The fair value of Advances for Construction cannot be reasonably estimated due to the inability to estimate accurately the timing and amounts of future refunds expected to be paid over the life of the contracts. Refund payments are based on the water sales to new customers in the particular development constructed. The fair value of Advances for Construction would be less than the carrying amount because these financial instruments are non-interest bearing. NOTE 13 – RELATED PARTY TRANSACTIONS Mr. Michael Houghton currently serves as a director. During 2021, Mr. Houghton was a Partner in the law firm of Morris, Nichols, Arsht & Tunnell LLP, or MNAT, in Wilmington, Delaware. Mr. Houghton retired from MNAT as a Partner, effective January 1, 2022, however, Mr. Houghton continues to perform legal services for MNAT as an independent contractor and non-partner. In the normal course of business, the Company utilized the services of MNAT in 2021 for various regulatory, real estate and public policy matters. Approximately $ 13,000 was paid to MNAT during the three months ended March 31, 2021, for legal and director related services. As set forth in the Charter of the Audit Committee of the Board, the Audit Committee is responsible for reviewing and, if appropriate, approving all related party transactions between us and any officer, any director, any person known to be the beneficial owner of more than 5 % of any class of the Company's voting securities or any other related person that would potentially require disclosure. In its review and approval of the related party transactions with MNAT, the Audit Committee considered the nature of the related person's interest in the transactions; the satisfactory performance of work contracted with the related party prior to the election of Mr. Houghton as a director; and the material terms of the transactions, including, without limitation, the amount and type of transactions, the importance of the transactions to the related person, the importance of the transactions to the Company and whether the transactions would impair the judgment of a director or officer to act in the best interest of the Company. The Audit Committee approves only those related person transactions that are in, or are consistent with, the best interests of the Company and its stockholders. 18 Table of Contents 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. 19 Table of Contents NOTE 15 - GEOGRAPHIC CONCENTRATION OF CUSTOMERS Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water utility service to customers within their established service territory in all three counties of Delaware and in portions of Maryland and Pennsylvania, pursuant to rates filed with and approved by the DEPSC, the MDPSC and the PAPUC. As of March 31, 2022, Artesian Water was serving approximately 92,000 customers, Artesian Water Maryland was serving approximately 2,600 customers and Artesian Water Pennsylvania was serving approximately 40 customers. Artesian Wastewater provides wastewater utility service to customers within its established service territory in Sussex County, Delaware pursuant to rates filed with and approved by the DEPSC. As of March 31, 2022, Artesian Wastewater was serving approximately 3,400 customers, including one large industrial customer. Effective January 14, 2022, following the acquisition of TESI, the number of wastewater customers served more than doubled. All wastewater customers are located in Sussex County, Delaware. NOTE 16 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS In March 2020, the FASB issued new guidance that provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as the market transitions from reference rates that are expected to be discontinued, such as the London Inter-bank Offered Rate, or LIBOR. The guidance was effective upon issuance and may be applied prospectively to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected. It is expected that the LIBOR rate will no longer be published for most currencies as of December 31, 2021, however, publication for USD currency should continue through June 30, 2023. LIBOR is expected to be phased out completely by 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. The guidance is optional and may be elected over time as reference rate reform activities occur. In light of this eventuality, one of the banks with which we have a line of credit arrangement, currently has initiatives underway to identify new or alternative reference rates to be used in place of the LIBOR rate. The Company is evaluating the impact of the new guidance on our financial position, results of operations and cash flows. NOTE 17 - SUBSEQUENT EVENT On April 29, 2022, Artesian Water and CoBank, ACB, or CoBank, entered into a Bond Purchase Agreement, or the Agreement, relating to the issue and sale by Artesian Water to CoBank of a $ 30 million principal amount First Mortgage Bond, Series W, or the Bond, due April 30, 2047, or the Maturity Date. The Bond was issued pursuant to Artesian Water’s Indenture of Mortgage dated as of July 1, 1961, as amended and supplemented by supplemental indentures, including the Twenty-Fifth Supplemental Indenture dated as of April 29, 2022, or the Supplemental Indenture, from Artesian Water to Wilmington Trust Company, as Trustee. The Supplemental Indenture is a first mortgage lien against substantially all of Artesian Water’s utility plant. The proceeds from the sale of the Bond shall be used to pay down outstanding lines of credit of the Company and a loan payable to Artesian Resources, with any additional proceeds used to fund future capital investments in Artesian Water. The Delaware Public Service Commission approved the issuance of the Bond on April 20, 2022. The Bond carries an annual interest rate of 4.43 % through but excluding the Maturity Date. Interest is payable on June 30th, September 30th, December 30th and March 30th in each year and on the Maturity Date, beginning June 30, 2022, 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 Supplemental Indenture. The term of the Bond also includes certain limitations on Artesian Water’s indebtedness. 20 Table of Contents