ARTESIAN RESOURCES CORP 10-Q

ITEM 1 – FINANCIAL STATEMENTS ARTESIAN RESOURCES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (In thousands) ASSETS June 30, 2022 December 31, 2021 Utility plant, at original cost (less accumulated depreciation - 2022 - $ 172,261 ; 2021 - $ 159,385 ) $ 639,513 $ 590,431 Current assets Cash and cash equivalents 220 92 Accounts receivable (less allowance for doubtful accounts - 2022 - $ 466 ; 2021 - $ 429 ) 8,114 8,367 Income tax receivable 766 2,234 Unbilled operating revenues 2,149 1,080 Materials and supplies 2,869 1,933 Prepaid property taxes 21 2,306 Prepaid expenses and other 2,792 2,652 Total current assets 16,931 18,664 Other assets Non-utility property (less accumulated depreciation - 2022 - $ 956 ; 2021 - $ 919 ) 3,759 3,751 Other deferred assets 7,116 5,097 Operating lease right of use assets 445 451 Total other assets 11,320 9,299 Regulatory assets, net 6,314 6,321 Total Assets $ 674,078 $ 624,715 LIABILITIES AND STOCKHOLDERS' EQUITY Stockholders' equity Common stock $ 9,459 $ 9,414 Preferred stock — — Additional paid-in capital 105,984 104,989 Retained earnings 65,459 63,607 Total stockholders' equity 180,902 178,010 Long-term debt, net of current portion 173,597 143,259 354,499 321,269 Current liabilities Lines of credit 9,580 26,703 Current portion of long-term debt 1,996 1,591 Dividends payable 2,581 — Accounts payable 8,576 10,206 Accrued expenses 3,748 4,038 Overdraft payable 334 30 Accrued interest 896 917 Income taxes payable 792 - Customer and other deposits 2,394 2,273 Other 2,593 1,448 Total current liabilities 33,490 47,206 Commitments and contingencies Deferred credits and other liabilities Net advances for construction 4,174 4,295 Operating lease liabilities 440 440 Regulatory liabilities 21,632 21,260 Deferred investment tax credits 447 456 Deferred income taxes 52,701 53,133 Total deferred credits and other liabilities 79,394 79,584 Net contributions in aid of construction 206,695 176,656 Total Liabilities and Stockholders’ Equity $ 674,078 $ 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 June 30, For the Six Months Ended June 30, 2022 2021 2022 2021 Operating revenues Water sales $ 19,722 $ 20,078 $ 37,865 $ 37,908 Other utility operating revenue 2,914 1,014 5,440 2,390 Non-utility operating revenue 2,375 1,377 3,893 2,815 Total Operating Revenues 25,011 22,469 47,198 43,113 Operating expenses Utility operating expenses 10,070 9,661 20,566 19,166 Non-utility operating expenses 1,905 862 2,847 1,777 Depreciation and amortization 3,055 2,976 6,140 5,988 State and federal income taxes 1,725 1,542 3,144 2,893 Property and other taxes 1,413 1,341 2,914 2,761 Total Operating Expenses 18,168 16,382 35,611 32,585 Operating income 6,843 6,087 11,587 10,528 Other income, net Allowance for funds used during construction (AFUDC) 324 371 505 615 Miscellaneous (expense) income ( 33 ) ( 59 ) 1,412 1,343 Income before interest charges 7,134 6,399 13,504 12,486 Interest charges 2,088 1,894 3,975 3,775 Net income applicable to common stock $ 5,046 $ 4,505 $ 9,529 $ 8,711 Income per common share: Basic $ 0.53 $ 0.48 $ 1.01 $ 0.93 Diluted $ 0.53 $ 0.48 $ 1.01 $ 0.93 Weighted average common shares outstanding: Basic 9,452 9,395 9,438 9,381 Diluted 9,470 9,425 9,464 9,416 Cash dividends per share of common stock $ 0.2729 $ 0.2610 $ 0.5404 $ 0.5181 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 Six Months Ended June 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 9,529 $ 8,711 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,140 5,988 Deferred income taxes, net ( 640 ) ( 3,073 ) Stock compensation 104 92 AFUDC, equity portion ( 349 ) ( 415 ) Changes in assets and liabilities, net of acquisitions: Accounts receivable, net of allowance for doubtful accounts 204 434 Income tax receivable 1,468 559 Unbilled operating revenues ( 704 ) ( 599 ) Materials and supplies ( 936 ) 68 Prepaid property taxes 2,862 1,891 Prepaid expenses and other ( 130 ) ( 754 ) Other deferred assets 511 ( 467 ) Regulatory assets 185 ( 71 ) Regulatory liabilities ( 254 ) ( 297 ) Income tax payable 792 2,362 Accounts payable ( 4,680 ) ( 1,071 ) Accrued expenses ( 934 ) ( 124 ) Accrued interest ( 21 ) ( 25 ) Deposits and other 441 567 NET CASH PROVIDED BY OPERATING ACTIVITIES 13,588 13,776 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (net of AFUDC, equity portion) ( 23,266 ) ( 19,418 ) Investment in acquisitions, net of cash acquired ( 6,341 ) — Proceeds from sale of assets 41 15 NET CASH USED IN INVESTING ACTIVITIES ( 29,566 ) ( 19,403 ) CASH FLOWS FROM FINANCING ACTIVITIES Net (repayments) under lines of credit agreements ( 17,123 ) ( 1,120 ) Deferred debt issuance cost ( 102 ) — Increase in overdraft payable 304 403 Net advances and contributions in aid of construction 8,013 9,786 Net proceeds from issuance of common stock 936 941 Issuance of long-term debt 30,000 1,720 Dividends paid ( 5,096 ) ( 4,856 ) Principal repayments of long-term debt ( 826 ) ( 906 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 16,106 5,968 NET INCREASE IN CASH AND CASH EQUIVALENTS 128 341 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 92 28 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 220 $ 369 Non-cash Investing and Financing Activity: Utility plant received as construction advances and contributions $ 3,243 $ 2,334 Dividends declared but not paid 2,581 2,454 Amounts included in accounts payable and accrued payables related to capital expenditures 1,761 2,723 Supplemental Disclosures of Cash Flow Information: Interest paid $ 3,996 $ 3,800 Income taxes paid $ 743 $ 3,248 Preliminary purchase price of allocation of investment in acquisitions: Utility plant $ 28,335 $ — Cash 280 — Other assets 3,580 — Total assets 32,195 — Less: Liabilities 3,536 — Future contractual obligation payable to seller 1,569 — Contributions in aid of construction 20,469 — Cash paid for acquisition 6,621 — Cash received from acquisition 280 — Net cash paid for acquisition $ 6,341 $ — 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 Net income — — — — — 4,505 4,505 Cash dividends declared Common stock — — — — — ( 4,904 ) ( 4,904 ) Issuance of common stock Dividend reinvestment plan 2 — 2 — 103 — 105 Employee stock options and awards (4) 11 — 11 — 165 — 176 Employee Retirement Plan (3) 3 — 3 — 105 — 108 Balance as of June 30, 2021 8,518 882 8,518 882 104,453 58,007 171,860 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 — — — — — ( 2,518 ) ( 2,518 ) 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) 0 — 0 — 0 — 0 Balance as of March 31, 2022 8,556 882 8,556 882 105,551 65,572 180,561 Net income — — — — — 5,046 5,046 Cash dividends declared Common stock — — — — — ( 5,159 ) ( 5,159 ) Issuance of common stock Dividend reinvestment plan 2 — 2 — 97 — 99 Employee stock options and awards (4) 19 — 19 — 336 — 355 Employee Retirement Plan (3) — — — — — — — Balance as of June 30, 2022 8,577 882 8,577 882 105,984 65,459 180,902 (1) At June 30, 2022 and June 30, 2021, Class A Common Stock had 15,000,000 shares authorized. For the same periods, shares issued, inclusive of treasury shares, were 8,606,597 and 8,548,106 , respectively. (2) At June 30, 2022 and June 30, 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 Company’s 401(k) 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 June 30, 2022, and June 30, 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, municipal and state water providers. Artesian Water also provides water for public and private fire protection to customers in our service territories. On May 26, 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Clayton Water System. The total purchase price was $ 5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System. 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 by Artesian’s Delaware wastewater subsidiaries in Sussex County, Delaware and included all residents within the Town of Milton. MARYLAND REGULATED SUBSIDIARIES Artesian Water Maryland, Inc., or Artesian Water Maryland, 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., or Artesian Wastewater Maryland, 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., or Artesian Water Pennsylvania, 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. 7 Table of Contents 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. 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. Artesian Utility 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 June 30, 2022, the results of its operations for the three and six-month periods ended June 30, 2022 and June 30, 2021, its cash flows for the six-month periods ended June 30, 2022 and June 30, 2021 and the changes in stockholders’ equity for the three and six-month periods ended June 30, 2022 and June 30, 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. 8 Table of Contents 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 and Artesian Water purchased substantially all of the water operating assets from the Town of Clayton in May 2022. As of June 30, 2022, the accounting for these transactions 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. Third-party valuation specialists are assisting with the valuation of the assets acquired. The purchase price allocations are expected to be finalized once the valuations of assets acquired have been completed, no later than one year after the acquisition date in each case. 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. 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. 9 Table of Contents 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. 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. 10 Table of Contents 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. The majority of 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 most of these revenues. We have one operation contract that was paid in advance resulting in a contract liability for services that have not yet been provided. 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. 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 June 30, 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: 11 Table of Contents (in thousands) Three months ended June 30, 2022 Three months ended June 30, 2021 Six months ended June 30, 2022 Six months ended June 30, 2021 Tariff Revenue Consumption charges $ 12,182 $ 12,660 $ 22,749 $ 23,078 Fixed fees 7,751 6,872 15,529 13,871 Service charges 137 119 293 320 DSIC 1,282 1,316 2,464 2,488 Metered wastewater services 129 — 269 — Industrial wastewater services 422 ( 384 ) 828 ( 379 ) Total Tariff Revenue $ 21,903 $ 20,583 $ 42,132 $ 39,378 Non-Tariff Revenue Service line protection plans $ 1,217 $ 1,134 $ 2,439 $ 2,230 Contract operations 242 217 453 447 Design and installation 978 62 1,101 212 Inspection fees 66 52 106 136 Total Non-Tariff Revenue $ 2,503 $ 1,465 $ 4,099 $ 3,025 Other Operating Revenue $ 605 $ 421 $ 967 $ 710 Total Operating Revenue $ 25,011 $ 22,469 $ 47,198 $ 43,113 Contract Assets and Contract Liabilities Our contract assets and liabilities consist of the following: (in thousands) June 30, 2022 December 31, 2021 Contract Assets – Tariff $ 3,156 $ 2,144 Deferred Revenue Deferred Revenue – Tariff $ 1,179 $ 1,227 Deferred Revenue – Non-Tariff 404 287 Total Deferred Revenue $ 1,583 $ 1,514 For the six months ended June 30, 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 June 30, 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 June 30, 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, wastewater inspections and one operation contract, which are expected to be satisfied and associated revenue recognized within the next three months, one year and seven years for the SLP Plan revenue, inspection fee revenue and contract operations 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. 12 Table of Contents Rent expense for all operating leases except those with terms of 12 months or less comprises: (in thousands) Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Minimum rentals $ 2 $ 7 $ 9 $ 14 Contingent rentals — — — — $ 2 $ 7 $ 9 $ 14 Supplemental cash flow information related to leases is as follows: (in thousands) Six Months Ended Six Months Ended June 30, 2022 June 30, 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 9 $ 14 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 445 $ 450 Supplemental balance sheet information related to leases is as follows: (in thousands, except lease term and discount rate) June 30, 2022 December 31, 2021 Operating Leases: Operating lease right-of-use assets $ 445 $ 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 June 30, 2022 are as follows: (in thousands) Operating Leases Year 2023 $ 24 2024 24 2025 24 2026 24 2027 25 Thereafter 1,330 Total undiscounted lease payments $ 1,451 Less effects of discounting ( 1,009 ) Total lease liabilities recognized $ 442 As of June 30, 2022, we have not entered into operating or finance leases that will commence at a future date. 13 Table of Contents 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, for the three and six months ended June 30, 2022 of approximately $ 55,000 and $ 104,000 , respectively, was recorded for restricted stock awards issued in May 2021 and May 2022. Compensation expense, for the three and six months ended June 30, 2021 of approximately $ 49,000 and $ 91,000 , respectively, was recorded for restricted stock awards issued in May 2020 and May 2021. 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. On May 3, 2022, 5,000 shares of Class A Common Stock, or Class A Stock, were granted as restricted stock awards. The fair value per share was $ 45.58 , the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 3, 2022. 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 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 six months ended June 30, 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 FairValue Plan options/restricted stock awards Outstanding at January 1, 2022 83,000 $ 21.65 $ 2,048 5,000 $ 40.11 Granted — — — 5,000 45.58 Exercised/vested and released ( 35,750 ) 20.93 905 ( 5,000 ) 40.11 Expired/cancelled — — — — — Outstanding at June 30, 2022 47,250 $ 22.20 1.425 $ 1,274 5,000 $ 40.11 Exercisable/vested at June 30, 2022 47,250 $ 22.20 1.425 $ 1,274 — — The total intrinsic value of options exercised during the six months ended June 30, 2022 was approximately $ 905,000 . There were no unvested option shares outstanding under the 2015 Plan during the six months ended June 30, 2022. As of June 30, 2022, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan. As of June 30, 2022, there was $ 191,000 total unrecognized expenses related to non-vested awards of restricted shares awarded under the 2015 Plan. The cost will be recognized over 0.84 years, the remaining vesting period for the restricted stock awards. 14 Table of Contents 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 June 30, 2022 December 31, 2021 Investment in CoBank $ 5,351 $ 4,850 Other deferred assets 1,765 247 $ 7,116 $ 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. 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) June 30, 2022 December 31, 2021 Deferred income taxes $ 475 $ 355 Deferred contract costs and other 258 288 Debt related costs 4,829 4,902 Goodwill 269 273 Deferred acquisition and franchise costs 483 503 $ 6,314 $ 6,321 15 Table of Contents 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. In May 2022, the Company received a rate order from the DEPSC instructing the Company to continue amortizing the liability over a period of 49.5 years, subject to review in the Company’s next base rate filing. 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) June 30, 2022 December 31, 2021 Utility plant retirement cost obligation $ 169 $ 149 Deferred income taxes (related to TCJA) 21,463 21,111 $ 21,632 $ 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 June 30, For the Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) Weighted average common shares outstanding during the period for Basic computation 9,452 9,395 9,438 9,381 Dilutive effect of employee stock options and awards 18 30 26 35 Weighted average common shares outstanding during the period for Diluted computation 9,470 9,425 9,464 9,416 16 Table of Contents For the three and six months ended June 30, 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 June 30, 2022, 8,577,620 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of June 30, 2021 , 8,519,129 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 $ 19.17 and $ 18.94 at June 30, 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 June 30, 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 Company's requested level of rates. 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. 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 11/20/20 DEPSC Approval Date 12/14/20 Effective Date 01/01/21 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 the three and six months ended June 30, 2022, we earned approximately $ 1.3 million and $ 2.5 million in DSIC revenue, respectively. For the three and six months ended June 30, 2021, we earned approximately $ 1.3 million and $ 2.5 million in DSIC revenue, respectively. 17 Table of Contents 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. 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 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 $ 10,000 in penalties and interest for the six months ended June 30, 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 June 30, 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 June 30, 2022 December 31, 2021 Carrying amount $ 175,593 $ 144,850 Estimated fair value $ 168,490 $ 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. 18 Table of Contents 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 $ 58,000 and $ 71,000 was paid to MNAT during the three and six months ended June 30, 2021, respectively, for legal services 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. 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 by Artesian 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’s next base rate case. 19 Table of Contents The Company reflected revenue of $ 0.7 million and $ 1.4 million for the three and six months ended June 30, 2022 , respectively, in its condensed consolidated statement of operations related to the acquisition. The pro forma revenue for the three and six months ended June 30, 2022 is estimated to be approximately $ 0.7 million and $ 1.4 million, respectively. The Company anticipates the pro forma effects of revenue for the three and six months ended June 30, 2021 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 June 30, 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 3,580 Total assets 23,315 Less: Liabilities and contributions in aid of construction (CIAC) Liabilities 3,536 CIAC 16,657 Net cash purchase price $ 3,122 Additionally, as part of the Company’s growth strategy, on May 26, 2022, Artesian Water completed its purchase of substantially all of the water system operating assets from the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Clayton Water System. The total purchase price was $ 5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System. At closing, Artesian Water paid approximately $ 3.4 million of the total purchase price. The remaining $ 1.6 million is payable in five equal annual installments on the anniversary date of the closing date. Each annual installment is payable with interest at an annual rate of 2.0 % . The acquisition was accounted for as a business combination under ASC Topic 805. The preliminary purchase price allocation is $ 8.9 million of utility plant assets offset by $ 3.8 million of CIAC. This preliminary purchase price allocation will be finalized once the valuation of assets acquired has been completed, no later than one year after the acquisition date. This transfer of Clayton’s exclusive franchise territory was approved by the DEPSC on April 20, 2022. The DEPSC will determine the appropriate ratemaking treatment of the acquisition price and the assets acquired in Artesian Water’s next base rate case. The pro forma effects of the business acquired are not material to the Company’s financial position or results of operations based on estimated annual revenue related to customers acquired. 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 June 30, 2022, Artesian Water was serving approximately 94,000 customers, Artesian Water Maryland was serving approximately 2,600 customers and Artesian Water Pennsylvania was serving approximately 40 customers. Artesian Wastewater and TESI provide wastewater utility service to customers within their established service territory in Sussex County, Delaware pursuant to rates filed with and approved by the DEPSC. The number of wastewater customers served more than doubled following the acquisition of TESI in January 2022. As of June 30, 2022, Artesian Wastewater combined with TESI were serving approximately 7,300 customers, including one large industrial customer. 20 Table of Contents NOTE 16 – IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS There was no new guidance issued by the FASB during the six months ended June 30, 2022 that is applicable to the Company. NOTE 17 – SUBSEQUENT EVENT On July 19, 2022, final judgment was entered by the United States District Court, or Court, for a Consent Decree between the Delaware Sand and Gravel Remedial Trust, or Trust, and the United States Environmental Protection Agency, or USEPA, that governs the implementation of Amendment No 2 to the USEPA’s 1988 Record of Decision for the Delaware Sand & Gravel Landfill Superfund Site, or Site, located in New Castle County, Delaware, issued on December 12, 2017, or ROD Amendment No. 2, confirming, among other things, the terms and conditions set forth in a Settlement Agreement upon which The Chemours Company FC, LLC, Hercules, LLC, Waste Management of Delaware, Inc., SC Holdings, Inc., Cytec Industries, Inc., Zeneca Inc., and Bayer CropScience Inc., collectively the Percentage Settlors, and the Trust, on one hand, and Artesian Water, on the other hand, have agreed to resolve certain of Artesian Water’s claims and issues relating to releases of contaminants from the Site. ROD Amendment No. 2 sets forth the remedy for the contamination existing at and emanating from the Site, or the Remedy, to address a release of contaminants of concern and of emerging concern, or COC’s, from the Site into groundwater. Artesian Water has found in groundwater that Artesian Water uses for public potable water supply certain COC’s that the Remedy is designed to address, as a result of which Artesian has incurred, and potentially will incur additional, capital and operating costs to treat the groundwater to meet applicable drinking water standards. The Remedy includes requirements that are directly linked to Artesian’s continued operation of the treatment plant associated with groundwater around the Site. As set forth in the Settlement Agreement, Artesian Water shall have access to financial assurances that the Percentage Settlors have provided, or will provide, to the USEPA in connection with the Consent Decree governing the implementation of the Remedy. In addition, the Trust shall reimburse Artesian Water for past capital and operating costs, totaling approximately $ 10.0 million, with approximately $ 2.5 million due by August 18, 2022, within 30 days after the Court’s July 19, 2022 approval of the Consent Decree. The remaining $ 7.5 million will be payable in three equal installments annually on the anniversary date of the Court’s approval of the Consent Decree. In addition, the Trust shall reimburse Artesian Water for documented reasonable and necessary capital and operating costs after July 1, 2021 that Artesian Water incurs to treat Site-related COC’s. Any reimbursements Artesian Water receives from the Trust shall be subject to final determination by the DEPSC as to the appropriate regulatory rate-making treatment. The Trust’s reimbursement of such costs shall end if and when, based upon testing information from the Trust’s Remedy facilities and Artesian Water’s facilities, treatment of Site-related COC’s is no longer necessary for Artesian Water to meet the treatment levels that Artesian Water chooses to not exceed in water it distributes to the general public throughout its service territory to provide a margin of safety in complying with applicable drinking water standards. 21 Table of Contents