ARTESIAN RESOURCES CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS In thousands For the Year Ended ASSETS December 31, 2022 December 31, 2021 Utility plant, at original cost less accumulated depreciation $ 668,031 $ 590,431 Current assets Cash and cash equivalents 1,309 92 Accounts receivable (less allowance for doubtful accounts 2022 - $ 416 ; 2021 -$ 429 ) 13,511 8,367 Income tax receivable 1,632 2,234 Unbilled operating revenues 1,586 1,080 Materials and supplies 4,702 1,933 Prepaid property taxes 2,186 2,306 Prepaid expenses and other 2,878 2,652 Total current assets 27,804 18,664 Other assets Non-utility property (less accumulated depreciation 2022 -$ 990 ; 2021 -$ 919 ) 3,740 3,751 Other deferred assets 10,536 5,097 Goodwill 1,939 — Operating lease right of use assets 467 451 Total other assets 16,682 9,299 Regulatory assets, net 7,274 6,321 Total Assets $ 719,791 $ 624,715 LIABILITIES AND STOCKHOLDERS’ EQUITY Stockholders’ equity Common stock $ 9,503 $ 9,414 Preferred stock — — Additional paid-in capital 107,142 104,989 Retained earnings 71,286 63,607 Total stockholders’ equity 187,931 178,010 Long-term debt, net of current portion 175,619 143,259 363,550 321,269 Current liabilities Lines of credit 20,174 26,703 Current portion of long-term debt 2,003 1,591 Accounts payable 10,929 10,206 Accrued expenses 4,246 4,038 Overdraft payable 43 30 Accrued interest 989 917 Income taxes payable 6 — Customer and other deposits 2,489 2,273 Other 3,190 1,448 Total current liabilities $ 44,069 $ 47,206 Commitments and contingencies (Note 11) — — Deferred credits and other liabilities Net advances for construction $ 3,686 $ 4,295 Operating lease liabilities 466 440 Regulatory liabilities 28,721 21,260 Deferred investment tax credits 439 456 Deferred income taxes 54,552 53,133 Total deferred credits and other liabilities $ 87,864 $ 79,584 Net contributions in aid of construction 224,308 176,656 Total Liabilities and Stockholders’ Equity $ 719,791 $ 624,715 The notes are an integral part of the consolidated financial statements . 30 Table of Contents CONSOLIDATED STATEMENTS OF OPERATIONS In thousands, except per share amounts For the Year Ended December 31, 2022 2021 2020 Operating revenues Water sales $ 78,318 $ 77,821 $ 76,476 Other utility operating revenue 11,506 7,195 6,525 Non-utility operating revenue 9,073 5,843 5,140 Total Operating Revenues 98,897 90,859 88,141 Operating expenses Utility operating expenses 43,772 41,414 40,338 Non-utility operating expenses 6,850 3,942 3,277 Depreciation and amortization 12,620 11,885 11,143 Taxes State and federal income tax expense (benefit) Current 4,285 3,360 8,073 Deferred 1,593 2,377 ( 2,389 ) Property and other taxes 5,871 5,587 5,404 Total Operating Expenses 74,991 68,565 65,846 Operating income 23,906 22,294 22,295 Other income, net Allowance for funds used during construction (AFUDC) 1,329 823 1,170 Miscellaneous 1,265 1,302 971 2,594 2,125 2,141 Income before interest charges 26,500 24,419 24,436 Interest charges 8,502 7,592 7,619 Net income applicable to common stock $ 17,998 $ 16,827 $ 16,817 Income per common share: Basic $ 1.90 $ 1.79 $ 1.80 Diluted $ 1.90 $ 1.79 $ 1.79 Weighted average common shares outstanding: Basic 9,462 9,394 9,327 Diluted 9,481 9,426 9,369 Cash dividends per share of common stock $ 1.09 $ 1.05 $ 1.01 The notes are an integral part of the consolidated financial statements. 31 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands For the Year Ended December 31, 2022 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 17,998 $ 16,827 $ 16,817 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,620 11,885 11,143 Deferred income taxes, net 2,282 2,803 ( 1,963 ) Stock compensation 152 193 178 AFUDC, equity portion ( 894 ) ( 556 ) ( 781 ) Changes in assets and liabilities, net of acquisitions: Accounts receivable, net of allowance for doubtful accounts ( 3,779 ) 94 ( 2,324 ) Income tax receivable 602 ( 1,605 ) ( 610 ) Unbilled operating revenues ( 141 ) 86 45 Materials and supplies ( 2,769 ) ( 398 ) ( 271 ) Income taxes payable 6 ( 28 ) ( 106 ) Prepaid property taxes 697 ( 415 ) 63 Prepaid expenses and other ( 216 ) ( 444 ) 42 Other deferred assets ( 5,473 ) ( 445 ) ( 409 ) Regulatory assets 317 115 390 Regulatory liabilities 6,799 ( 535 ) ( 635 ) Accounts payable ( 3,989 ) 3,547 ( 1,835 ) Accrued expenses ( 564 ) ( 71 ) 301 Accrued interest 72 ( 13 ) 100 Revenue reserved for refund — — — Customer deposits and other 545 270 213 NET CASH PROVIDED BY OPERATING ACTIVITIES 24,265 31,310 20,358 CASH FLOWS USED IN INVESTING ACTIVITIES Capital expenditures (net of AFUDC, equity portion) ( 48,483 ) ( 40,814 ) ( 34,277 ) Investment in acquisitions, net of cash acquired ( 6,341 ) — ( 5,741 ) Proceeds from sale of assets 65 90 46 NET CASH USED IN INVESTING ACTIVITIES ( 54,759 ) ( 40,724 ) ( 39,972 ) CASH FLOWS FROM FINANCING ACTIVITIES Net (repayments) borrowings under lines of credit agreements ( 6,529 ) ( 110 ) 19,313 Increase (decrease) in overdraft payable 13 ( 75 ) 90 Net advances and contributions in aid of construction 16,431 15,817 9,280 Net proceeds from issuance of common stock 2,090 1,390 1,539 Issuance of long-term debt 31,803 4,126 — Dividends paid ( 10,319 ) ( 9,826 ) ( 9,376 ) Debt issuance costs ( 135 ) ( 19 ) ( 28 ) Principal repayments of long-term debt ( 1,643 ) ( 1,825 ) ( 1,772 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 31,711 9,478 19,046 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,217 64 ( 568 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 92 28 596 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,309 $ 92 $ 28 Non-cash Investing and Financing Activity: Utility plant received as construction advances and contributions in aid of construction $ 8,416 $ 3,538 $ 2,403 Contractual amounts of contributions in aid of construction due from developers included in accounts receivable $ 726 $ 545 $ 1,705 Contractual amounts of contributions in aid of construction received from developers previously included in accounts receivable $ 356 $ 1,749 $ 781 Change in amounts included in accounts payable and accrued payables related to capital expenditures $ 3,182 $ 3,763 $ 3,122 Supplemental Cash Flow Information: Interest paid $ 8,430 $ 7,605 $ 7,519 Income taxes paid $ 3,482 $ 5,181 $ 8,792 Purchase price allocation of investment in acquisitions: Utility plant $ 33,345 $ — $ 5,118 Cash 280 — — Goodwill 1,939 — — Other assets 1,033 — 623 Total assets 36,597 — 5,741 Less: Liabilities 2,828 — — Future contractual obligation payable to seller 1,569 — — Contributions in aid of construction 25,579 — — Cash paid for acquisitions 6,621 — 5,741 Cash received from acquisitions 280 — — Net cash paid for acquisitions $ 6,341 $ — $ 5,741 The notes are an integral part of the consolidated financial statements. 32 Table of Contents CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 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, 2019 8,410 882 $ 8,410 $ 882 $ 101,811 $ 49,165 $ 160,268 Net income — — — — — 16,817 16,817 Cash dividends declared Common stock — — — — — ( 9,376 ) ( 9,376 ) Issuance of common stock Dividend reinvestment plan 11 — 11 — 377 — 388 Employee stock options and awards (4) 42 — 42 — 832 — 874 Employee Retirement Plan (3) 12 — 12 — 443 — 455 Balance as of December 31, 2020 8,475 882 $ 8,475 $ 882 $ 103,463 $ 56,606 $ 169,426 Net income — — — — — 16,827 16,827 Cash dividends declared Common stock — — — — — ( 9,826 ) ( 9,826 ) Issuance of common stock Dividend reinvestment plan 10 — 10 — 382 — 392 Employee stock options and awards (4) 38 — 38 — 790 — 828 Employee Retirement Plan (3) 9 — 9 — 354 — 363 Balance as of December 31, 2021 8,532 882 $ 8,532 $ 882 $ 104,989 $ 63,607 $ 178,010 Net income — — — — — 17,998 17,998 Cash dividends declared Common stock — — — — — ( 10,319 ) ( 10,319 ) Issuance of common stock Dividend reinvestment plan 7 — 7 — 366 — 373 Employee stock options and awards (4) 82 — 82 — 1,787 — 1,869 Employee Retirement Plan (3) — — — — — — — Balance as of December 31, 2022 8,621 882 $ 8,621 $ 882 $ 107,142 $ 71,286 $ 187,931 (1) At December 31, 2022, 2021, and 2020, Class A Common Stock had 15,000,000 shares authorized. For the same periods, shares issued, inclusive of treasury shares, were 8,650,392 , 8,561,772 and 8,504,429 , respectively. (2) At December 31, 2022, 2021, and 2020, Class B Common Stock had 1,040,000 shares authorized and 882,000 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, Artesian Resources Corporation authorized up to 331,500 shares of Class A Common Stock for issuance of grants in forms of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the Plan. Includes stock compensation expense for the years ended December 31, 2022, 2021, and 2020, see Note 1-Stock Compensation Plans. The notes are an integral part of the consolidated financial statements. 33 Table of Contents NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The audited consolidated financial statements are presented in accordance with the requirements of Form 10-K and accounting principles generally accepted in the United States and consequently include all the disclosures required in the consolidated financial statements included in the Company's Annual Report on Form 10-K. The accompanying consolidated financial statements include the accounts of Artesian Resources Corporation and its subsidiaries and all intercompany balances and transactions between subsidiaries have been eliminated. Regulated Utility Accounting The accounting records of Artesian Water Company, Inc., or Artesian Water, Artesian Wastewater Management, Inc., or Artesian Wastewater, and, effective January 14, 2022, Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI, are maintained in accordance with the uniform system of accounts as prescribed by the Delaware Public Service Commission, or the DEPSC. The accounting records of Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, are maintained in accordance with the uniform system of accounts as prescribed by the Pennsylvania Public Utility Commission, or the PAPUC. The accounting records of Artesian Water Maryland, Inc., or Artesian Water Maryland, and Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland, are maintained in accordance with the uniform system of accounts as prescribed by the Maryland Public Service Commission, or the MDPSC. All these subsidiaries follow the provisions of Financial Accounting Standards Board, or FASB, ASC Topic 980, which provides guidance for companies in regulated industries. These regulated subsidiaries account for the majority of our operating revenue. See Note 18 to our Consolidated Financial Statements for a full description of our segment information. Utility Plant Utility plant is stated at original cost. Cost includes direct labor, materials, AFUDC (see description below) and indirect charges for such capitalized items as transportation, supervision, pension, medical, and other fringe benefits related to employees engaged in construction activities. When depreciable units of utility plant are retired, the historical costs of plant retired is charged to accumulated depreciation. Any cost associated with retirement, less any salvage value or proceeds received, is charged to the regulated retirement liability. Maintenance, repairs, and replacement of minor items of utility plant are charged to expense as incurred. In accordance with rate filings recorded with the DEPSC, Artesian Water, Artesian Wastewater and TESI accrue an Allowance for Funds Used during Construction, or AFUDC. AFUDC, which represents the cost of funds devoted to construction projects through the date the project is placed in service, is capitalized as part of construction work in progress. The rate used for the AFUDC calculation is based on Artesian Water’s and Artesian Wastewater’s weighted average cost of debt and the rate of return on equity authorized by the DEPSC. The rate used to capitalize AFUDC for Artesian Water in 2022 , 2021 , and 2020 was 6.9 % , 6.7 % , and 7.0 % , respectively. The rate used to capitalize AFUDC for Artesian Wastewater in 2022 , 2021 , and 2020 was 6.9 % , 6.4 % , and 6.3 % , respectively. The rate used to capitalize AFUDC for TESI in 2022 was 5.7 %. 34 Table of Contents Utility plant comprises : In thousands December 31, Estimated Useful Life (In Years) 2022 2021 Utility plant at original cost Utility plant in service-Water Intangible plant — $ 140 $ 140 Source of supply plant 45 - 85 25,223 25,045 Pumping and water treatment plant 8 - 62 116,915 109,087 Transmission and distribution plant Mains 81 338,368 320,767 Services 39 56,396 53,210 Storage tanks 76 34,567 29,972 Meters 26 29,720 28,778 Hydrants 60 17,751 16,789 General plant 5 - 31 65,632 62,604 Utility plant in service-Wastewater Intangible plant — 117 116 Treatment and disposal plant 21 - 81 66,420 43,725 Collection mains & lift stations 81 49,189 33,901 General plant 5 - 31 1,845 1,665 Property held for future use — 4,489 5,536 Construction work in progress — 34,213 18,481 840,985 749,816 Less – accumulated depreciation 172,954 159,385 $ 668,031 $ 590,431 Depreciation and Amortization For financial reporting purposes, depreciation is recorded using the straight-line method at rates based on estimated economic useful lives, which range from 5 to 85 years. Composite depreciation rates for water utility plant were 2.16 % , 2.17 % and 2.23 % for 2022 , 2021 and 2020 , respectively. In a rate order issued by the DEPSC, the Company was directed effective January 1, 1998 to begin using revised depreciation rates for utility plant. In rate orders issued by the DEPSC, Artesian Water was directed, effective May 28, 1991 and August 25, 1992, to offset depreciation recorded on utility plant by depreciation on utility property funded by Contributions in Aid of Construction, or CIAC, and Advances for Construction, or Advances, respectively. This reduction in depreciation expense is also applied to outstanding CIAC and Advances. Other deferred assets are amortized using the straight-line method over applicable lives, which range from 20 to 24 years. Regulatory Assets The 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. Affiliated interest agreement deferred costs relate to the regulatory and administrative costs resulting from efforts necessary to secure water allocations in Artesian Water Pennsylvania’s territory for the provision of service to the surrounding area and interconnection to Artesian Water Pennsylvania’s affiliate regulated water utility Artesian Water. These costs were specifically included for cost recovery pursuant to an Affiliated Interest Agreement between Artesian Water and Artesian Water Pennsylvania and were approved for recovery by the PAPUC and were reclassed from deferred costs to a regulatory asset in 2022. 35 Table of Contents 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) Deferred costs affiliated interest agreement 20 Goodwill (resulting from acquisition of Mountain Hill Water Company in 2008) 50 Deferred acquisition costs (resulting from purchase of water assets in Cecil County, Maryland in 2011 and Port Deposit, Maryland in 2010) 20 Franchise Costs (resulting from purchase of water assets in Cecil County, Maryland in 2011) 80 Regulatory assets, net of amortization, comprise: (in thousands) December 31, 2022 December 31, 2021 Deferred income taxes $ 465 $ 355 Deferred contract costs and other 227 288 Debt related costs 4,682 4,902 Goodwill 266 273 Deferred costs affiliated interest agreement 1,114 — Deferred acquisition and franchise costs 520 503 $ 7,274 $ 6,321 Impairment or Disposal of Long-Lived Assets Our long-lived assets consist primarily of utility plant in service and regulatory assets. A review of our long-lived assets is performed in accordance with the requirements of FASB ASC Topic 360. In addition, the regulatory assets are reviewed for the continued application of FASB ASC Topic 980. The review determines whether there have been changes in circumstances or events that have occurred requiring adjustments to the carrying value of these assets. FASB ASC Topic 980 stipulates that adjustments to the carrying value of these assets would be made in instances where the inclusion in the rate-making process is unlikely. For the years ended December 31, 2022, 2021 and 2020, there was no impairment or regulatory disallowance identified in our review. Goodwill The Company records goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. At December 31, 2022, the Company had approximately $ 1.9 million of goodwill. The $ 1.9 million goodwill arose from the January 2022 acquisition of Tidewater Environmental Services, Inc. Artesian Wastewater operates as the parent holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI. In accordance with the accounting guidance for testing goodwill, the Company annually assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. For 2022, the Company’s assessment of qualitative factors did not indicate that an impairment had occurred for goodwill. Based on the results of the qualitative testing, the Company did not perform quantitative testing on goodwill in 2022. 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. The settlement agreement receivable is related to the long-term portion of reimbursements due in years 2024 and 2025 as further discussed in Note 1-Accounts Receivable. 36 Table of Contents Other deferred assets at December 31, net of amortization, comprise: In thousands 2022 2021 Investment in CoBank $ 5,351 $ 4,850 Settlement agreement receivable-long term 4,991 — Other deferred assets 194 247 $ 10,536 $ 5,097 Advances for Construction Cash advances to reimburse Artesian Water for its costs to construct water mains, services and hydrants are contributed to Artesian Water by real estate developers and builders in order to extend water service to their properties. The value of these contributions is recorded as Advances for Construction. Artesian Water makes refunds on these advances over a specific period of time based on operating revenues generated by the specific plant or as new customers are connected to the mains. After all refunds are made within the contract period, any remaining balance is transferred to CIAC. Contributions in Aid of Construction CIAC includes the non-refundable portion of advances for construction and direct contributions of water mains, services and hydrants, and wastewater treatment facilities and collection systems, or cash to reimburse our water and wastewater subsidiaries for costs to construct water mains, services and hydrants, and wastewater treatment and disposal plants. Effective with the Tax Cuts and Jobs Act, or TCJA, in 2017 CIAC was taxable and the DEPSC, MDPSC and PAPUC allowed the Company to collect additional CIAC to pay the associated tax. In 2021, legislation was enacted to amend the TCJA, which now exempts CIAC from income taxes for regulated water and wastewater utilities, effective for all of 2021 and forward. In 2022 the Company refunded developers a total of $ 3.6 million for the additional CIAC collected in 2021 to pay the associated tax. As of December 31, 2022, Artesian Water received approximately $ 2.0 million in grant funding from the State of Delaware, Delaware Department of Health and Social Services, Division of Public Health, or DPH, pursuant to grant agreements. The grants shall be used by Artesian Water to cover the costs associated with certain construction projects. The grant funds received under the grant agreements are recorded in accordance with the requirements under FASB ASC Topic 980, in Net contributions in aid of construction in the Consolidated Balance Sheets. Artesian Water is eligible to receive an additional $ 3.8 million of grant funds pursuant to the grant agreements. 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. Deferred settlement refunds consist of reimbursements from the Delaware Sand and Gravel Remedial Trust for Artesian Water’s past capital and operating costs, totaling approximately $ 10.0 million, related to the treatment costs associated with the release of contaminants from the Delaware Sand & Gravel Landfill Superfund Site in groundwater that Artesian Water uses for public potable water supply, pursuant to the Settlement Agreement. Approximately $ 2.5 million was paid in August 2022. The remaining $ 7.5 million is due in three equal installments no later than August of each year from 2023 through 2025. Artesian Water received approval from the DEPSC in October 2022 to refund to its customers these reimbursements for past capital and operating costs. The refund for the reimbursements will be applied to current and future customer bills in annual installments. The first refund occurred in October 2022, and future customer refunds will occur no later than August of each year from 2023 through 2025. The amount of the credit will be calculated by dividing the amount of the reimbursement by the number of eligible customers. Beginning in 2022, Artesian Water will record 2022 and future recovery of capital expenditures as Contributions in Aid of Construction and will record expense recovery as an offset to operations and maintenance expense, with the intention that those recoveries will then be available for inclusion and consideration in any future rate applications. For a full discussion of the Settlement Agreement, refer to Part II – Financial Statements and Supplementary Data – Item 8 – Note 17 - Legal Proceedings. 37 Table of Contents 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 5) 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) December 31, 2022 December 31, 2021 Utility plant retirement cost obligation $ — $ 149 Deferred settlement refunds 7,487 — Deferred income taxes (related to TCJA) 21,234 21,111 $ 28,721 $ 21,260 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 subsidiaries 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 statute of limitations for the 2018 tax returns lapsed during the third quarter of 2022, which resulted in the reversal of the reserve in the amount of approximately $ 212,000 . 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. During the third quarter, the Company has reversed approximately $ 10,000 in penalties and interest for the nine months ended September 30, 2022, leaving a zero balance. The Company remains subject to examination by federal and state authorities for the tax years 2019 through 2022 . 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. 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. The Company accounts for stock options issued after January 1, 2006 under FASB ASC Topic 718. 38 Table of Contents Compensation expenses for restricted stock awards were $ 152,000 , $ 193,000 and $ 178,000 in 2022, 2021 and 2020, respectively. 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. As of December 31, 2022, there was $ 76,000 of unrecognized expense related to non-vested awards of restricted shares granted under the 2015 Plan. There was no stock compensation cost capitalized as part of an asset. Stock Options No options were granted in 2022, 2021 or 2020. Shares of Class A Stock have been reserved for future issuance under the 2015 Plan. Stock Awards 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 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. These shares were fully vested and released one year after the grant date. On May 6, 2020, 5,000 shares of Class A Stock were granted as restricted stock awards. The fair value per share was $ 35.01 , the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 6, 2020. These shares were fully vested and released one year after the grant date. Revenue Recognition and Unbilled Revenues See Note 2 to our Consolidated Financial Statements for a full description of our revenue recognition . Leases The Company has agreements for land easements and office equipment under operating leases. Management makes certain estimates and assumptions regarding each lease agreement, renewal and amendment, including, but not limited to, discount rates and probable term, which can impact the escalations in payment that are taken into consideration when calculating the straight line basis. The amount of rent expense and income reported could vary if different estimates and assumptions are used. Management also makes certain estimates and assumptions regarding the fair value of the leased property at lease commencement and the separation of lease and nonlease components. See Note 3 to our Consolidated Financial Statements for a full description of our leases. Accounts Receivable Accounts receivable are recorded at the invoiced amounts. As set forth in a settlement agreement, Artesian Water will receive reimbursements from the Delaware Sand and Gravel Remedial Trust, or Trust, for Artesian Water’s past capital and operating costs, totaling approximately $ 10.0 million, related to the treatment costs associated with the release of contaminants from the Delaware Sand & Gravel Landfill Superfund Site, or Site, in groundwater that Artesian Water uses for public potable water supply. Approximately $ 2.5 million was paid in August 2022. The remaining $ 7.5 million is due in three equal installments no later than August of each year from 2023 through 2025. 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. The allowance for doubtful accounts was $ 0.4 million and $ 0.4 million at December 31, 2022 and December 31, 2021 , respectively. The corresponding expense, excluding the reserve adjustment recorded in 2021, for the years ended December 31, 2022 and 2021 was $ 0.1 million and $ 0.1 million, respectively. 39 Table of Contents The following table summarizes the changes in the Company’s accounts receivable balance: December 31, In thousands 2022 2021 Customer accounts receivable – water $ 5,981 $ 5,986 Customer accounts receivable – wastewater 482 1,326 Settlement agreement receivable 2,532 — Miscellaneous accounts receivable 3,781 786 Developer receivable 1,151 698 13,927 8,796 Less allowance for doubtful accounts 416 429 Net accounts receivable $ 13,511 $ 8,367 The activities in the allowance for doubtful accounts are as follows: December 31, In thousands 2022 2021 Beginning balance $ 429 $ 862 Allowance adjustments 146 ( 236 ) Recoveries 28 25 Write off of uncollectible accounts ( 187 ) ( 222 ) Ending balance $ 416 $ 429 Cash and Cash Equivalents For purposes of the Consolidated Statement of Cash Flows, Artesian Resources considers all temporary cash investments with an original maturity of three months or less to be cash equivalents. Artesian Resources and its subsidiaries utilize their bank’s zero balance account disbursement service to reduce the use of their lines of credit by funding checks as they are presented to the bank for payment rather than at issuance. If the checks currently outstanding, but not yet funded, exceed the cash balance on our books, the net liability is recorded as a current liability on the Consolidated Balance Sheet in the Overdraft Payable account. Inventories Inventories consist of materials and supplies related to water and wastewater utility plant. These materials and supplies are used for new construction and repairs, and are recorded at the purchase cost. Usage costs are determined by the first-in, first-out method. The Company adjusts inventory value based on historical usage and forecasted demand. We are highly dependent on the availability of essential materials and parts from our suppliers for expansion, construction and maintenance of our services. The majority of the materials required for our water and wastewater utility business are typically under contract at fixed prices, however, supply chain issues associated with the COVID-19 pandemic resulted in price increases and delays in procuring certain materials and equipment. We have been successful in minimizing these delays with thorough planning and pre-ordering. As of December 31, 2022, we have increased our quantity of materials and supplies in inventory, at an increased value of approximately $ 2.8 million, reported in Current Assets – Materials and Supplies on the Company’s Consolidated Balance Sheets. Use of Estimates in the Preparation of Consolidated Financial Statements The consolidated financial statements were prepared in conformity with generally accepted accounting principles in the U.S., which require management to make 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, goodwill and contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management’s estimates. 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 December 31, 2022, the fair value determination for TESI and the town of Clayton is finalized. A third-party valuation specialist assisted with the valuation of the assets acquired. 40 Table of Contents NOTE 2 REVENUE RECOGNITION Background Artesian’s operating revenues are primarily attributable to contract services based upon regulated 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. Regulated 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, which are primarily non-utility 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 regulated 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 certain 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 Consolidated Balance Sheet. 41 Table of Contents 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. 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 December 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 42 Table of Contents 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: For the Year Ended December 31, (in thousands) 2022 2021 2020 Tariff Revenue Consumption charges $ 47,809 $ 47,924 $ 47,145 Fixed fees 31,431 27,977 27,109 Service charges 597 579 351 DSIC 5,085 5,093 4,997 Metered wastewater services 649 — — Industrial wastewater services 1,853 675 1,448 Total Tariff Revenue $ 87,424 $ 82,248 $ 81,050 Non-Tariff Revenue Service line protection plans $ 5,020 $ 4,594 $ 4,381 Contract operations 931 884 840 Design and installation 3,315 562 88 Inspection fees 326 341 266 Total Non-Tariff Revenue $ 9,592 $ 6,381 5,575 Other Operating Revenue $ 1,881 $ 2,230 1,516 Total Operating Revenue $ 98,897 $ 90,859 $ 88,141 Contract Assets and Contract Liabilities Our contract assets and liabilities consist of the following: (in thousands) December 31, 2022 December 31, 2021 Contract Assets – Tariff $ 2,618 $ 2,144 Deferred Revenue Deferred Revenue – Tariff $ 1,231 $ 1,227 Deferred Revenue – Non-Tariff 438 287 Total Deferred Revenue $ 1,669 $ 1,514 For the year ended December 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 increases of Contract Assets and Deferred Revenue were primarily due to normal timing differences between our performance and customer payments. Remaining Performance Obligations As of December 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 December 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. 43 Table of Contents NOTE 3 LEASES The Company leases land and office equipment under operating leases from non-related parties. Our leases have remaining lease terms of 20 year to 74 years, some of which include options to automatically extend the leases for up to 66 years and are included as part of the lease liability and right of use assets as we expect to exercise the options. 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. In October 1997, Artesian Water entered into a 33 -year operating lease for a parcel of land with improvements located in South Bethany, a municipality in Sussex County, Delaware. The annual lease payments increase each year by the most recent increase in the Consumer Price Index for Urban Workers, CPI-U, as published by the U.S. Department of Labor, Bureau of Labor Statistics. At each eleven th year of the lease term, the annual lease payment shall be determined based on the fair market value of the parcel of land. Rental payments for 2022, 2021 and 2020 were $ 19,000 , $ 17,000 , and $ 16,500 , respectively. The future minimum rental payment as disclosed in the following table is calculated using CPI-U from August 2022 as well as the adjustment for an appraisal conducted in 2019 to determine the fair market value of the parcel of land. In March 2019, Artesian Water entered into a 3 -year operating lease for office equipment that expired in March 2022. The quarterly lease payments remained fixed throughout the term of the lease. Payments pursuant to the lease agreement for 2022 and 2021 were $ 5,000 and 19,000 respectively. We entered into an operating lease for office equipment that will commence at a future date when the equipment is received. Rent expense for all operating leases except those with terms of 12 months or less comprises: For the Twelve Months Ended December 31, (in thousands) 2022 2021 Minimum rentals $ 32 $ 45 Contingent rentals — — $ 32 $ 45 Supplemental cash flow information related to leases is as follows: Twelve Months Ended Twelve Months Ended December 31, December 31, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 32 $ 45 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 467 $ 451 44 Table of Contents Supplemental balance sheet information related to leases is as follows: (in thousands, except lease term and discount rate) December 31, 2022 December 31, 2021 Operating Leases: Operating lease right-of-use assets $ 467 $ 451 Other current liabilities $ 2 $ 6 Operating lease liabilities 466 440 Total operating lease liabilities $ 468 $ 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 December 31, 2022 are as follows: 45 Table of Contents (in thousands) Operating Leases Year 2023 $ 25 2024 26 2025 26 2026 26 2027 26 Thereafter 1,406 Total undiscounted lease payments $ 1,535 Less effects of discounting ( 1,067 ) Total lease liabilities recognized 468 As of December 31, 2022, we entered into an operating lease for office equipment that will commence at a future date when the equipment is received. As of December 31, 2022, we have not entered into finance leases that will commence at a future date. NOTE 4 FAIR VALUE OF FINANCIAL 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 long-term debt as of December 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. 46 Table of Contents 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 December 31, 2022 2021 Carrying amount $ 177,622 $ 144,850 Estimated fair value 155,425 163,182 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 5 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 subsidiaries 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. As of December 31, 2022, the Company fully utilized all of its federal net operating loss carrybacks and carry-forwards. As of December 31, 2022, the Company has separate company state net operating loss carry-forwards aggregating approximately $ 13.8 million. Most of these net operating loss carry-forwards will expire if unused between 2023 and 2043 . The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to the expiration of the state net operating loss carry-forwards. The valuation allowance increased to approximately $ 600,000 in 2022 from approximately $ 546,000 in 2021. Management believes that it is more likely than not that the Company will realize the benefit of these deferred tax assets, net of the valuation allowance. Components of Income Tax Expense In thousands For the Year Ended December 31, State income taxes 2022 2021 2020 Current $ 1,373 $ 1,216 $ 2,348 Deferred 663 776 ( 279 ) Total state income tax expense $ 2,036 $ 1,992 $ 2,069 For the Year Ended December 31, Federal income taxes 2022 2021 2020 Current $ 2,912 $ 2,144 $ 5,725 Deferred 930 1,601 ( 2,110 ) Total federal income tax expense $ 3,842 $ 3,745 $ 3,615 Reconciliation of effective tax rate: For the Year Ended December 31, In thousands 2022 2022 2021 2021 2020 2020 Amount Percent Amount Percent Amount Percent Reconciliation of effective tax rate Income before federal and state income taxes $ 23,876 100.0 % $ 22,564 100.0 % $ 22,501 100.0 % Amount computed at statutory rate 5,014 21.0 % 4,738 21.0 % 4,725 21.0 % Reconciling items State income tax-net of federal tax benefit 1,696 7.1 % 1,600 7.1 % 1,704 7.6 % Regulatory liability adjustment ( 450 ) ( 1.9 )% ( 451 ) ( 2.0 )% ( 451 ) ( 2.0 )% Other ( 382 ) ( 1.6 )% ( 150 ) ( 0.7 )% ( 294 ) ( 1.3 )% Total income tax expense and effective rate $ 5,878 24.6 % $ 5,737 25.4 % $ 5,684 25.3 % 47 Table of Contents Deferred income taxes at December 31, 2022 and 2021 were comprised of the following: For the Year Ended December 31, In thousands 2022 2021 Deferred tax assets related to: Federal and state operating loss carry-forwards $ 922 $ 629 Less: valuation allowance ( 600 ) ( 493 ) Bad debt allowance 116 240 Stock options 47 148 Other 28 75 Total deferred tax assets $ 513 $ 599 Deferred tax liabilities related to: Property plant and equipment basis differences $ ( 52,565 ) $ ( 48,536 ) Bond retirement costs ( 1,058 ) ( 1,210 ) Property taxes ( 609 ) ( 481 ) Other ( 833 ) ( 685 ) Total deferred tax liabilities $ ( 55,065 ) $ ( 50,912 ) Net deferred tax liability $ ( 54,552 ) $ ( 50,313 ) Schedule of Valuation Allowance Balance at Beginning of Period Additions Charged to Costs and Expenses Deductions Balance at End of Period In thousands Classification For the Year Ended December 31, 2022 Valuation allowance for deferred tax assets $ 546 $ 54 — $ 600 For the Year Ended December 31, 2021 Valuation allowance for deferred tax assets $ 493 $ 53 — $ 546 For the Year Ended December 31, 2020 Valuation allowance for deferred tax assets $ 335 $ 158 — $ 493 48 Table of Contents Under FASB ASC Topic 740, the Company establishes reserves for uncertain tax positions based upon management’s judgment as to the sustainability of these positions. The Company reserved a liability related to the difference in the tax depreciation utilizing the half-year convention rather than the mid-quarter convention for 2018. The following table provides the changes in the Company’s uncertain tax position: For the years ended December 31, In thousands 2022 2021 Balance at beginning of year $ 202 $ 209 Additions based on tax positions related to the current year 146 — Additions based on tax positions related to prior years 10 19 Reductions for tax positions of prior years — — Lapses in statutes of limitations ( 212 ) ( 26 ) Balance at end of year $ 146 $ 202 NOTE 6 PREFERRED STOCK As of December 31, 2022 and 2021, Artesian Resources had no preferred stock outstanding. Artesian Resources has 100,000 shares of $ 1.00 par value Series Preferred stock authorized but unissued. NOTE 7 COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL The Class A Non-Voting Common Stock, or Class A Stock, of Artesian Resources trades on the Nasdaq Global Select Market under the symbol ARTNA. The Class B Common Stock, or Class B Stock, of Artesian Resources trades on the Nasdaq’s OTC Bulletin Board under the symbol ARTNB. The rights of the holders of the Class A Stock and the Class B Stock are identical, except with respect to voting. Under Artesian Resources’ dividend reinvestment plan, which allows for reinvestment of cash dividends and optional cash payments, stockholders were issued approximately 7,000 , 10,000 and 11,000 shares at fair market value for the investment of $ 373 ,000, $ 392 ,000 and $ 388 ,000 of their monies in the years 2022, 2021, and 2020, respectively. NOTE 8 DEBT At December 31, 2022 , Artesian Resources had a $ 40 million line of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources. As of December 31, 2022 , there was $ 26.9 million of available funds under this line of credit. The previous interest rate for borrowings under this line was the London Interbank Offered Rate, or LIBOR , plus 1.00 % . It is expected that the LIBOR rate for USD currency will be discontinued after June 30, 2023. As a result, effective May 20, 2022, this line of credit agreement was amended to replace LIBOR with the Daily Secured Overnight Financing Rate, or SOFR . The interest rate is a one month SOFR plus 10 basis points, or Term SOFR, plus an applicable margin of 0.85 % . Term SOFR cannot be less than 0.00 % . This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time. The term of this line of credit expires on the earlier of May 21, 2023 or any date on which Citizens demands payment. The Company expects to renew this line of credit. At December 31, 2022 , Artesian Water had a $ 20 million line of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $ 10 million of this line available for the operations of Artesian Water Maryland. As of December 31, 2022 , there was $ 12.9 million of available funds under this line of credit. The previous interest rate for borrowings under this line allowed the Company to select either LIBOR plus 1.50 % or a weekly variable rate established by CoBank; the Company historically used the weekly variable interest rate. In October 2022, this line of credit was amended to replace the previous interest rate options with a daily SOFR rate plus 1.45 % option or a term SOFR rate plus 1.45 % option that is locked in for either one or three months . The term of this line of credit expires on October 29, 2023 . Artesian Water expects to renew this line of credit. On April 29, 2022, Artesian Water and 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 were 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 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. 49 Table of Contents On August 12, 2022, Artesian Water entered into three Financing Agreements, or the Financing Agreements, with the Delaware Drinking Water State Revolving Fund (the “Fund”), acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department. The Department makes loans to, and acquires obligations of, eligible persons in Delaware to finance the costs of drinking water facilities in accordance with the Federal Safe Drinking Water Act using funds from the Fund. Under the Financing Agreements, the Department has agreed to advance to Artesian Water up to $ 966 ,000, $ 1,167 ,000 and $ 3,200 ,000 (collectively, the “Loans”) from the Fund to finance all or a portion of the costs to replace specific water transmission mains in service areas located in New Castle County, Delaware (collectively, the “Projects”). In accordance with the Financing Agreements, Artesian Water will from time to time request funds under the Loans as it incurs costs in connection with the Projects. In connection with the Financing Agreements, Artesian Water issued to the Department three General Obligation Notes dated as of August 12, 2022, or the Notes. Under the Notes, borrowings under the Financing Agreements bear interest at a rate of 1.0 % per annum and are further subject to an administrative fee at a rate of 1.0 % per annum (collectively, interest and the administrative fee are referred to herein as “Fee”). The Fee shall be paid semiannually on each February 1 and August 1, beginning on February 1, 2023. The Notes will mature on February 1, 2043 . As of December 31, 2022, approximately $ 1.8 million was borrowed under the Loans. On December 9, 2022, Artesian Water Company entered into three Financing Agreements, or the Financing Agreements, with the Fund, acting by and through the Department. Under the Financing Agreements, the Department has agreed to advance to or to reimburse Artesian Water up to $ 901,170 , $ 1,042,695 and $ 1,050,000 (collectively, the “Loans”) from the Fund to finance all or a portion of the costs to replace specific water transmission mains in service areas located in New Castle County, Delaware (collectively, the “Projects”). In accordance with the Financing Agreements, Artesian Water will from time to time request funds under the Loans as it incurs costs in connection with the Projects. In connection with the Financing Agreements, Artesian Water issued to the Department three General Obligation Notes dated as of December 9, 2022, or the Notes. Under the Notes, borrowings under the Financing Agreements bear interest at a rate of 1.0 % per annum and are further subject to an administrative fee at a rate of 1.0 % per annum (collectively, interest and the administrative fee are referred to herein as “Fee”). The Fee shall be paid semiannually on each June 1 and December 1, beginning on June 1, 2023. Two notes will mature on June 1, 2043 and one will mature on December 1, 2043 . As of December 31, 2022, approximately $ 1.0 million was requested under the Loans, and funds received in January 2023. CoBank may make an annual patronage refund. The $ 20 million line of credit, the First Mortgage Bonds and the promissory note are with CoBank. The patronage refunds earned by Artesian in 2022 and 2021 were $ 1.3 million and $ 1.2 million, respectively. In 2022, CoBank issued a one-time additional all-cash patronage distribution of $ 233,000 , or 0.16 %, of the average line of credit and loan volume outstanding in the prior year, which was in addition to the standard 0.80 % patronage rate. In 2021, CoBank issued a one-time additional all-cash patronage distribution of $ 226,000 , or 0.165 %, of the average line of credit and loan volume outstanding in the prior year, which was in addition to the standard 0.80 % patronage rate. The weighted average interest rate on the lines of credit discussed above paid by the Company was 3.04 % for the year ended December 31, 2022. These lines of credit, as well as the long-term debt obligations shown below, require us to abide by certain financial covenants and ratios. As of December 31, 2022, we were in compliance with these financial covenants. Long-term debt consists of: December 31, In thousands 2022 2021 First mortgage bonds Series R, 5.96 %, due December 31, 2028 $ 25,000 $ 25,000 Series S, 4.45 %, due December 31, 2033 6,600 7,200 Series T, 4.24 %, due December 20, 2036 40,000 40,000 Series U, 4.71 %, due January 31, 2038 25,000 25,000 Series V, 4.42 %, due October 31, 2049 30,000 30,000 Series W, 4.43 %, due April 30, 2047 30,000 — 156,600 127,200 State revolving fund loans 3.57 %, due September 1, 2023 102 200 3.64 %, due May 1, 2025 373 513 3.41 %, due February 1, 2031 1,577 1,735 3.40 %, due July 1, 2032 1,590 1,729 1.187 %, due November 1, 2041 617 646 1.187 %, due November 1, 2041 724 758 1.187 %, due November 1, 2041 1,128 1,181 2.00 %, due February 1, 2043 846 — 2.00 %, due February 1, 2043 974 — 2.00 %, due June 1, 2043 1,044 — 8,975 6,762 Notes Payable Promissory Note, 5.12 %, due December 30, 2028 $ 10,478 $ 10,888 Asset Purchase, 2.00 %, due May 26, 2027 1,569 — 12,047 10,888 Sub-total 177,622 144,850 Less: current maturities (principal amount) 2,003 1,591 Total long-term debt $ 175,619 $ 143,259 50 Table of Contents Payments of principal amounts due during the next five years and thereafter: In thousands 2023 2024 2025 2026 2027 Thereafter First Mortgage bonds $ 600 $ 600 $ 600 $ 600 $ 600 $ 153,600 State revolving fund loans 656 702 643 581 597 5,796 Asset Purchase-Contractual Obligation 314 314 314 314 313 — Promissory note 433 454 480 505 532 8,074 Total payments $ 2,003 $ 2,070 $ 2,037 $ 2,000 $ 2,042 $ 167,470 Substantially all of Artesian Water’s utility plant is pledged as security for our First Mortgage Bonds. As of December 31, 2022, no other water utility plant has been pledged as security for loans. Two parcels of land in Artesian Wastewater are pledged as security for the promissory note. NOTE 9 STOCK COMPENSATION PLANS On December 9, 2015, the Company’s stockholders approved the 2015 Equity Compensation Plan, or the 2015 Plan, that replaced the 2005 Equity Compensation Plan, or the 2005 Plan, which expired on May 24, 2015. 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 of the Board of Directors, or the Committee. The Committee has the authority to determine the individuals to whom grants will be made under the 2015 Plan, determine the type, size and terms of the grants, determine 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 are eligible for grants under the 2015 Plan. Non-employee directors of the Company are also eligible to receive grants under the 2015 Plan. 51 Table of Contents The following summary reflects changes in the shares of Class A Stock under option: 2022 Shares 2022 Weighted Average Exercise Price 2021 Shares 2021 Weighted Average Exercise Price 2020 Shares 2020 Weighted Average Exercise Price Plan options Outstanding at beginning of year 83,000 $ 21.65 116,347 $ 20.90 153,250 $ 20.40 Granted — — — — — — Exercised ( 76,250 ) 21.63 ( 33,347 ) 19.04 ( 36,903 ) 18.83 Expired — — — — — — Outstanding at end of year 6,750 $ 21.86 83,000 $ 21.65 116,347 $ 20.90 Options exercisable at year end 6,750 $ 21.86 83,000 $ 21.65 116,347 $ 20.90 52 Table of Contents The total intrinsic value of options exercised during 2022, 2021 and 2020 were $ 2,226,000 , $ 736,000 and $ 620,000 , respectively. During 2022, we received $ 1,650,000 in cash from the exercise of options, with a $ 2,459,000 tax benefit realized for those options. The following table summarizes information about employee and director stock options outstanding and exercisable at December 31, 2022: Options Outstanding and Exercisable Range of Exercise Price Shares Outstanding at December 31, 2022 Weighted Average Remaining Life Weighted Average Exercise Price Aggregate Intrinsic Value $ 21.86 6,750 1.35 Years $ 21.86 $ 248,000 As of December 31, 2022, there was no unrecognized expense related to non-vested option shares granted under the 2015 Plan. The following summary reflects changes in the shares of Class A Stock Restricted Stock Awards (RSA): 2022 Shares 2022 Weighted Average Grant Date Fair Value 2021 Shares 2021 Weighted Average Grant Date Fair Value 2020 Shares 2020 Weighted Average Exercise Price Plan RSA’s Outstanding at beginning of year 5,000 $ 40.11 5,000 $ 35.01 5,000 $ 36.11 Granted 5,000 45.58 5,000 40.11 5,000 35.01 Vested/Released ( 5,000 ) 40.11 ( 5,000 ) 35.01 ( 5,000 ) 36.11 Cancelled — — — — — — Unvested Outstanding at end of year 5,000 $ 45.58 5,000 $ 40.11 5,000 $ 35.01 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 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. On May 6, 2020, 5,000 shares of Class A Stock were granted as restricted stock awards. The fair value per share was $ 35.01 , the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 6, 2020. These shares vested and were released one year after the grant date. As of December 31, 2022, there was $ 76,200 of total unrecognized expense related to non-vested awards of restricted shares awarded under the 2015 Plan. The cost will be recognized over 0.34 years, the remaining vesting period for the restricted stock awards. The total intrinsic value of awards released during 2022 was approximately $ 233,100 . 53 Table of Contents NOTE 10 EMPLOYEE BENEFIT PLANS 401(k) Plan Artesian Resources has a defined contribution 401(k) Salary Reduction Plan, or the 401(k) Plan, which covers substantially all employees. Under the terms of the 401(k) Plan, Artesian Resources contributed 2 % of eligible salaries and wages and matched employee contributions up to 6 % of gross pay at a rate of 50 % . Artesian Resources may, at its option, make additional contributions of up to 3 % of eligible salaries and wages. No such additional contributions were made in 2022 , 2021 or 2020 . The 401(k) Plan also provides additional retirement benefits to full-time employees hired prior to April 26, 1994, allowing them to save for future retiree medical costs that will be paid by employees by providing additional cash resources to those employees upon a termination of employment or retirement to meet the cost of future medical expenses. These eligible employees receive an additional contribution of 6 % of eligible salaries and wages. The 401(k) Plan expenses, which include Company contributions and administrative fees, for the years 2022 , 2021 and 2020 , were approximately $ 1.3 million, $ 1.2 million and $ 1.1 million, respectively. NOTE 11 COMMITMENTS AND CONTINGENCIES Leases In the first quarter of 2019, the Company adopted the new standard on leases that was issued by the FASB and has applied this standard as disclosed in Note 3. Easements During 2003, Artesian Water Pennsylvania entered into a 40 year easement agreement to acquire an easement to access, operate, maintain, repair, improve, replace and connect Artesian’s water system to a well, including a parcel of land around the well. Management made certain estimates and assumptions regarding the separation of lease and nonlease components related to this easement agreement. It was determined that the majority of this easement agreement contains non-lease components. Easement payments for 2022, 2021 and 2020 were $ 43,000 , $ 42,000 and $ 41,000 , respectively. Artesian Wastewater entered into a perpetual agreement for the use of approximately 460 acres of land in Sussex County, Delaware for wastewater disposal. Beginning November 2016, Artesian Wastewater was required to pay a minimum of $ 40,000 per year for the use of this land. Once operations began in 2021, the monthly fee is based on the volume of wastewater disposed on the properties charged at a rate per one thousand gallons of wastewater, providing for a minimum monthly payment. Payments for 2022, 2021 and 2020 were $ 113,000 , $ 65,000 , $ 44,000 , respectively. The agreement can be terminated by giving 180 day notice prior to the termination date. Future minimum annual payments related to the easement agreements noted above for the years subsequent to 2022 are as follows: In thousands 2023 $ 60 2024 39 2025 40 2026 41 2027 43 2028 through 2043 782 $ 1,005 54 Table of Contents Interconnections Artesian Water has two water service interconnection agreements with a neighboring utility, Chester Water Authority. One agreement, that expired on December 31, 2021, had a “take or pay” clause requiring us to purchase 3 million gallons per day. The other agreement is effective from January 1, 2022 through December 31, 2026, includes automatic five year renewal terms, unless terminated by either party, and has a “take or pay” clause which required us to purchase water on a step down schedule through July 5, 2022, and now requires us to purchase a minimum of 0.5 million gallons per day. Rates charged under this agreement are subject to change. Artesian Water Maryland has one interconnection agreement with the Town of North East that has a “take or pay” clause requiring us to purchase a minimum of 35,000 gallons per day. The agreement extends through June 2024. The minimum annual purchase commitments for all interconnection agreements for 2023 through 2027, calculated at the noticed rates, are as follows: In thousands 2023 $ 809 2024 798 2025 770 2026 770 2027 — $ 3,147 55 Table of Contents Expenses for purchased water were $ 1.8 million, $ 4.3 million and $ 4.3 million for 2022, 2021 and 2020, respectively. Other Commitments In 2020, Artesian Water entered into a short term agreement with Worldwide Industries Corporation to clean and paint a tank in 2020. Pursuant to the agreement, the expenditure in 2020 was $ 0.1 million. In April 2021, Artesian Water entered into a 3 -year agreement with Worldwide Industries Corporation effective July 1, 2021 to paint elevated water storage tanks. Pursuant to the agreement, the total expenditure for the three years is $ 1.2 million. In September 2022, this agreement was amended to paint an additional elevated water storage tank and to extend the term of the agreement for an additional year. Pursuant to the amended agreement, the total expenditure for the four years is $ 2.2 million. Tank painting expense for 2022 , 2021 and 2020 was $ 531,000 , $ 222,000 , and $ 155,000 , respectively. Budgeted mandatory utility plant expenditures, due to planned governmental highway projects, which require the relocation of Artesian Water’s water service mains, expected to be incurred in 2023 through 2025 are as follows: In thousands 2023 $ 2,218 2024 8,780 2025 5,170 $ 16,168 The exact timing and extent of these relocation projects is controlled primarily by the Delaware Department of Transportation. NOTE 12 GEOGRAPHIC CONCENTRATION OF CUSTOMERS Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide regulated 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 December 31, 2022, Artesian Water was serving approximately 94,600 customers, Artesian Water Maryland was serving approximately 2,600 customers and Artesian Water Pennsylvania was serving approximately 40 customers. Artesian Wastewater and TESI provide regulated 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 December 31, 2022, Artesian Wastewater and TESI were serving approximately 7,500 customers combined including one large industrial customer. NOTE 13 REGULATORY 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 Artesian Water, Artesian Wastewater, and TESI • 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. 56 Table of Contents Water and Wastewater Rates Our regulated subsidiaries 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 . Artesian Water provided notice to the DEPSC of its intent to file a request in the second quarter of 2023 to implement new rates to support Artesian Water’s ongoing capital improvement program and to cover increased costs of operations. 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. Any DSIC rate in effect will be reset to zero upon implementation of a temporary increase in base rates charged to customers. 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 11/15/2019 5/29/2020 11/20/2020 DEPSC Approval Date 12/12/2019 6/17/2020 12/14/2020 Effective Date 01/01/2020 0 7/1/2020 0 1/1/2021 Cumulative DSIC Rate 7.50 % 7.50 % 7.50 % Net Eligible Plant Improvements – Cumulative Dollars (in millions) 43.1 43.1 43.1 Eligible Plant Improvements – Installed Beginning Date 10/01/2014 10/01/2014 10/01/2014 Eligible Plant Improvements – Installed Ending Date 04/30/2019 04/30/2019 04/30/2019 The rate reflects the eligible plant improvements installed through April 30, 2019. The January 1, 2021 rate currently remains in effect and is subject to periodic audit by the DEPSC. For the years ended December 31, 2022 , December 31, 2021 and December 31, 2020 , we earned approximately $ 5.1 million, $ 5.1 million and $ 5.0 million in DSIC revenue, respectively. 57 Table of Contents NOTE 14 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 Year Ended December 31, 2022 2021 2020 (in thousands) Weighted average common shares outstanding during the period for Basic computation $ 9,462 $ 9,394 $ 9,327 Dilutive effect of employee stock options 19 32 42 Weighted average common shares outstanding during the period for Diluted computation $ 9,481 $ 9,426 $ 9,369 For the years ended 2022, 2021 and 2020 no shares of restricted stock awards were excluded from the calculations of diluted net income per share. Due to unrecognized compensation costs, the hypothetical repurchase of shares exceeded the number of restricted shares expected to vest during the period, creating an anti-dilutive effect. For the years ended 2022, 2021 and 2020, no stock options 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 Stock. As of December 31, 2022, 8,621,415 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of December 31, 2021, 8,532,795 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of December 31, 2020, 8,475,452 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 $ 19.86 , $ 18.94 , and $ 18.16 at December 31, 2022, December 31, 2021, and December 31, 2020, respectively. These amounts were computed by dividing common stockholders’ equity by the number of weighted average shares of common stock outstanding on December 31, 2022, December 31, 2021, and December 31, 2020, respectively. NOTE 15 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 $ 191,000 and $ 386,000 was paid to MNAT during the years ended December 31, 2021 and December 31, 2020, respectively, 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. 58 Table of Contents NOTE 16 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.” The purchase price allocation is primarily attributed 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 Company utilized a third-party valuation firm to assist with the fair value of the assets acquired. The fair value determination is now finalized. A combination of methods were used to determine the reasonableness of the purchase price: the cost approach and the comparative sales (market) approach. Given the majority of the net assets acquired were tangible utility plant assets and related contributions in aid of construction, the Company primarily utilized the cost approach to record the fair value of the assets as well as some of the assumed liabilities. This approach values the underlying assets to derive market value based on the estimated replacement cost, adjusted for depreciation. Real property was valued using the comparative sales approach. Goodwill was recognized primarily as a result of expected synergies of operations and interconnections to our existing utility plant infrastructure. 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. The Company reflected revenue of $ 3.0 million for the year ended December 31, 2022, in its consolidated statement of operations related to the acquisition. The pro forma revenue for the year ended December 31, 2022 is estimated to be $ 3.0 million. The Company anticipates the pro forma effects of revenue for the year ended December 31, 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 final purchase price allocation of this acquisition as of December 31, 2022. (In thousands) TESI Utility plant $ 25,354 Cash 280 Goodwill 1,939 Other assets 1,033 Total assets 28,606 Less: Liabilities and contributions in aid of construction (CIAC) Liabilities 2,808 CIAC 22,676 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 purchase price allocation is $ 7.9 million of utility plant assets offset by $ 2.9 million of CIAC. The Company utilized similar valuation methodologies to those described above. 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 of approximately $ 0.5 million related to customers acquired. 59 Table of Contents NOTE 17 LEGAL PROCEEDINGS Periodically, we are involved in other proceedings or litigation arising in the ordinary course of business. We do not believe that the ultimate resolution of these matters will materially affect our business, financial position or results of operations. However, we cannot ensure that we will prevail in any litigation and, regardless of the outcome, may incur significant litigation expense and may have significant diversion of management attention. 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. Approximately $ 2.5 million was paid in August 2022, and 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. As of December 31, 2022, Artesian Water received approximately $ 0.4 million of reimbursements from the Trust. 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. Artesian Water received approval from the DEPSC in October 2022 to refund the reimbursements for past capital and operating costs to its customers. The refund for the reimbursements will be applied to current and future customer bills in annual installments. The first refund occurred in October 2022, and future customer refunds occurring no later than August of each year from 2023 through 2025. The amount of the credit is calculated by dividing the amount of the reimbursement by the number of eligible customers. Artesian Water will record 2022 and future recovery of capital expenditures as Contributions in Aid of Construction and will record expense recovery as an offset to operations and maintenance expense, with the intention that those recoveries will then be available for inclusion and consideration in any future rate applications. 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. NOTE 18 BUSINESS SEGMENT INFORMATION The Company’s operating segments are comprised of its businesses which generate revenues and incur expenses, for which separate operational financial information is available and is regularly evaluated by management for the purpose of making operating decisions, assessing performance, and allocating resources. The Company operates its businesses primarily through one reportable segment, the Regulated Utility segment. The Regulated Utility segment is the largest component of the Company’s business and includes an aggregation of our five regulated utility subsidiaries that are in the business of providing regulated water and wastewater services on the Delmarva Peninsula. Our regulated water utility services include treating, distributing, and selling water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware and in Cecil County, Maryland and to a residential community in Chester County, Pennsylvania. Our regulated wastewater utility services include the treatment and disposal of wastewater for customers in Sussex County, Delaware. The Company is subject to regulations as to its rates, services, and other matters by the states of Delaware, Maryland and Pennsylvania with respect to utility service within these states. The Company also operates other non-utility businesses, primarily comprised of: Service Line Protection Plan services for water, sewer and internal plumbing; design, construction and engineering services; and contract services for the operation and maintenance of water and wastewater systems in Delaware and Maryland. These non-utility businesses do not individually or in the aggregate meet the criteria for disclosure of a reportable segment in accordance with generally accepted accounting principles and are collectively presented throughout this Annual Report on Form 10-K within “Other” or “Non-utility”, which is consistent with how management assesses the results of these businesses. The accounting policies of the operating segments are the same as those described in Note 1-Summary of Significant Accounting Policies. The Regulated Utility segment includes inter-segment costs related to leased office space provided by one non-utility business, calculated on the lower of cost or market method, which are eliminated to reconcile to the Consolidated Statements of Operations. The Regulated Utility segment also allocates certain corporate costs to the non-utility businesses. The measurement of depreciation, interest, and capital expenditures are predominately related to our Regulated Utility segment. These amounts in our non-utility business are negligible and account for approximately less than 1% of consolidated amounts as of December 31, 2022, December 31, 2021, and December 31, 2020. In thousands Years Ended December 31, 2022 2021 2020 Revenues: Regulated Utility $ 89,818 $ 85,016 $ 83,001 Other (non-utility) 9,248 5,996 5,327 Inter-segment elimination ( 169 ) ( 153 ) ( 187 ) Consolidated Revenues $ 98,897 $ 90,859 $ 88,141 Operating Income: Regulated Utility $ 22,580 $ 21,103 $ 21,148 Other (non-utility) 1,326 1,191 1,147 Consolidated Operating Income $ 23,906 $ 22,294 $ 22,295 Income Taxes: Regulated Utility $ 5,091 $ 5,146 $ 5,093 Other (non-utility) 787 591 591 Consolidated Income Taxes $ 5,878 $ 5,737 $ 5,684 Assets: Regulated Utility $ 713,113 $ 618,751 Other (non-utility) 6,678 5,964 Consolidated Assets $ 719,791 $ 624,715 60 Table of Contents NOTE 19 IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS There was no new guidance issued by the FASB during the year ended December 31, 2022 that is applicable to the Company. 61 Table of Contents Report of Independent Registered Public Accounting Firm Stockholders and Board of Directors Artesian Resources Corporation Newark, Delaware Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Artesian Resources Corporation (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, cash flows and changes in stockholders’ equity, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 , in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Valuation of Tangible Assets in TESI Acquisition As described in Note 16 to the consolidated financial statements, the Company acquired all of the stock of TESI from Middlesex Water Company on January 14, 2022. Management allocated the total purchase price of $3.1 million to the net identifiable assets, based on estimated fair values. Management allocated $25.4 m illion to utility plant assets, the majority of which were tangible assets valued using the cost method with assistance from a third-party valuation firm. We identified the valuation of the utility plant tangible assets in the TESI acquisition as a critical audit matter. Management’s determination of fair value of the utility plant tangible assets acquired using the cost method required management to make significant estimates and assumptions related to the useful lives and replacement costs of these tangible assets. Auditing these elements was complex because it involved especially subjective auditor judgment, including the extent of specialized skills and knowledge needed. The primary procedures we performed to address this critical audit matter included: • Utilizing personnel with specialized knowledge and skills in valuation who assisted in evaluating the appropriateness of useful lives and cost trend assumptions used in estimating replacement costs by comparing them to published third-party sources. • Assessing the appropriateness of useful lives used in estimating replacement costs by comparing to peer company data. Valuation of Tangible Assets in the Town of Clayton Acquisition Additionally, as described in Note 16 to the consolidated financial statements, the Company acquired substantially all the water system operating assets from the Town of Clayton (Clayton) on May 26, 2022. Management allocated the total purchase price of $5.0 million to the net identifiable assets, based on estimated fair values. Management allocated $7.9 million to utility plant assets, the majority of which were tangible assets valued using the cost method with assistance from a third-party valuation firm. We identified the valuation of the utility plant tangible assets in the Clayton acquisition as a critical audit matter. Management’s determination of fair value of the utility plant tangible assets acquired using the cost method required management to make significant estimates and assumptions related to useful lives, replacement costs, and physical characteristics of these tangible assets. Auditing these elements was complex because it involved especially subjective auditor judgment, including the extent of specialized skills and knowledge needed. The primary procedures we performed to address this critical audit matter included: • Utilizing personnel with specialized knowledge and skills in valuation who assisted in evaluating the appropriateness of useful lives, cost trend assumptions, and certain physical characteristics of the utility plant tangible assets used in estimating replacement costs by comparing them to third party sources, and independently recalculating the replacement costs. • Assessing the appropriateness of: o The useful lives used in estimating replacement costs by comparing to peer company data, o Certain physical characteristics of the utility plant tangible assets by comparing them to independent external data, and o The replacement costs of certain utility plant tangible assets by comparing to recent actual costs or construction quotes for similar utility plant tangible assets. / s/ BDO USA, LLP We have served as the Company’s auditor since 2005. Wilmington, Delaware March 10, 2023 62 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.