What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-08 · 183 added, 188 removed, 192 unchanged (66% of the section changed)

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Certain factors as discussed under Item 1A - Risk Factors, in our Annual Report

on Form 10-K for the year ended December 31, 2022, and this Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, such as changes in weather, changes in our contractual obligations, changes in government policies, the timing and results of

our rate requests, failure to receive regulatory approval, changes in economic and market conditions generally, and other matters could cause results to differ materially from those in the forward-looking statements.

While the Company may elect to

update forward-looking statements, we specifically disclaim any obligation to do so and you should not rely on any forward-looking statement as a representation of the Company's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2023

on Form 10-K for the year ended December 31, 2022, and this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, such as changes in weather, changes in our contractual obligations, changes in government policies, the timing and

results of our rate requests, failure to receive regulatory approval, changes in economic and market conditions generally, and other matters could cause results to differ materially from those in the forward-looking statements.

While the Company may

elect to update forward-looking statements, we specifically disclaim any obligation to do so and you should not rely on any forward-looking statement as a representation of the Company's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2023

Our profitability is primarily attributable to the sale of water and wastewater services in our regulated utility business.

Our regulated utility segment

comprised 93.2% of total operating revenues for the six months ended June 30, 2023 and 91.8% for the six months ended June 30, 2022.

Water sales are subject to seasonal fluctuations, particularly during summer when water demand may vary with rainfall

and temperature.

Our regulated utility

segment comprised 93.4% of total operating revenues for the nine months ended September 30, 2023 and 92.0% for the nine months ended September 30, 2022.

Water sales are subject to seasonal fluctuations, particularly during summer when water demand

may vary with rainfall and temperature.

In the event temperatures during the typically warmer months are cooler than expected, or rainfall is greater than expected, the demand for water may decrease and our revenues may be adversely affected.

We believe these effects of

weather are short term and do not materially affect the execution of our strategic initiatives.

believe these effects of weather are short term and do not materially affect the execution of our strategic initiatives.

Our wastewater services provide a revenue stream that is not affected by these changes in weather patterns.

We continue to seek growth opportunities to

provide wastewater services in Delaware and the surrounding areas.

We continue to seek

growth opportunities to provide wastewater services in Delaware and the surrounding areas.

Our profitability is also attributed to other non-utility business, such as various contract operations, water, sewer and internal SLP Plans and other

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We are affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand our service capability.

cumulative effect of inflation results in significantly higher facility replacement costs which must be recovered from future cash flows.

Our ability to recover increases in investments in facilities is dependent upon future rate increases, which are

subject to approval by the applicable regulatory authority.

We can provide no assurances that any future rate increase request will be approved, and if approved, we cannot guarantee that any rate increase will be granted in a timely manner and/or will

be sufficient in amount to cover costs for which we initially sought the rate increase.

The impact of inflation could adversely affect our results of operations, financial position or cash flows.

cumulative effect of inflation results in significantly higher facility replacement costs as well as increased operating costs, which must be recovered from future cash flows.

Our ability to recover increases in investments in facilities and operating

costs is dependent upon future rate increases, which are subject to approval by the applicable regulatory authority.

We can provide no assurances that any future rate increase request will be approved, and if approved, we cannot guarantee that any

rate increase will be granted in a timely manner and/or will be sufficient in amount to cover costs for which we initially sought the rate increase.

The impact of inflation could adversely affect our results of operations, financial position or cash

Materials and Supplies

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Regulated Water Subsidiaries

Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water service to residential, commercial, industrial, governmental, municipal

and utility customers.

Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water service to residential, commercial, industrial, governmental,

municipal and utility customers.

Increases in the number of customers contribute to increases, or help to offset any intermittent decreases, in our operating revenue.

As of June 30, 2023, the number of metered water customers in Delaware increased

approximately 1.5% compared to June 30, 2022.

The number of metered water customers in Maryland increased approximately 0.7% compared to June 30, 2022.

The number of metered water customers in Pennsylvania remained consistent compared to June 30,

For the six months ended June 30, 2023, approximately 4.2 billion gallons of water were distributed in our Delaware systems and approximately 51.7 million gallons of water were distributed in our Maryland systems.

On April 28, 2023, Artesian Water filed a request with the DEPSC to implement new rates to meet a requested increase in revenue of 23.84%, or approximately

$17.5 million, on an annualized basis.

The actual effective increase is less than 23.84% since Artesian Water has been permitted to recover specific investments made in infrastructure through the assessment of a 7.50% DSIC.

Since the DSIC rate is set

to zero when temporary rates are placed into effect, customers would experience an incremental increase of 16.34%, the net of the overall 23.84% increase less the DSIC rate of 7.50% currently in effect, if the requested increase is granted in full by

This is discussed further in Note 11 – Regulatory Proceedings.

As of September 30, 2023, the number of metered water customers in Delaware

increased approximately 1.3% compared to September 30, 2022.

The number of metered water customers in Maryland increased approximately 0.8% compared to September 30, 2022.

The number of metered water customers in Pennsylvania remained consistent

compared to September 30, 2022.

For the nine months ended September 30, 2023, approximately 6.6 billion gallons of water were distributed in our Delaware systems and approximately 80.0 million gallons of water were distributed in our Maryland

On April 28, 2023, Artesian Water filed a request with the DEPSC to implement

new rates to meet a requested increase in revenue of 23.84%, or approximately $17.5 million, on an annualized basis.

The actual effective increase is less than 23.84% since Artesian Water has been permitted to recover specific investments made in

infrastructure through the assessment of a 7.50% DSIC.

Since the DSIC rate is set to zero when temporary rates are placed into effect, customers would experience an incremental increase of 16.34%, the net of the overall 23.84% increase less the DSIC

rate of 7.50% currently in effect, if the requested increase is granted in full by the DEPSC.

Artesian Water filed an interim rates application to place into effect on November 28, 2023 a temporary base rate increase of 15% of gross water

sales on an annual basis and reduce the 7.5% DSIC rate to zero, subject to refund, until permanent rates are determined by the DEPSC.

This is discussed further in Note 11 –

Regulatory Proceedings.

Regulated Wastewater Subsidiaries

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billed a flat monthly fee, and our large industrial wastewater customer is billed monthly based on wastewater flow, which contributes to providing a revenue stream unaffected by weather.

As of June 30, 2023, the number of Delaware wastewater customers

increased approximately 8.1% compared to June 30, 2022.

As of September 30, 2023, the number of Delaware wastewater

customers increased approximately 7.6% compared to September 30, 2022.

Non-Utility Subsidiaries

Artesian Utility provides contract water and wastewater operation services to private, municipal, and governmental institutions.

Artesian Utility also

offers three protection plans to customers, the WSLP Plan, the SSLP Plan, and the ISLP Plan.

Artesian Utility

also offers three protection plans to customers, the WSLP Plan, the SSLP Plan, and the ISLP Plan.

SLP Plan customers are billed a flat monthly or quarterly rate, which contributes to providing a revenue stream unaffected by weather.

There has been

consistent customer growth over the years.

As of June 30, 2023, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 4.8%, 3.3% and 8.2%, respectively, compared to June 30, 2022.

The non-utility customers

enrolled in one of our three protection plans decreased 2.9%.

been consistent customer growth over the years.

As of September 30, 2023, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 4.2%, 2.9% and 6.8%, respectively, compared to September 30, 2022.

non-utility customers enrolled in one of our three protection plans decreased 3.2%.

Strategic Direction and Recent Developments

Our strategy is to increase customer growth, revenues, earnings and dividends by expanding our water, wastewater and

SLP Plan services across the Delmarva Peninsula.

Our strategy is to increase customer growth, revenues, earnings and dividends by expanding our water,

wastewater and SLP Plan services across the Delmarva Peninsula.

We remain focused on providing superior service to our customers and continuously seek ways to improve our efficiency and performance.

Our strategy has included a focus on building strategic

partnerships with county governments, municipalities and developers.

By providing water and wastewater services, we believe we are positioned as the primary resource for developers and communities throughout the Delmarva Peninsula seeking to fill both

needs simultaneously.

Our strategy has included a focus on building

strategic partnerships with county governments, municipalities and developers.

By providing water and wastewater services, we believe we are positioned as the primary resource for developers and communities throughout the Delmarva Peninsula seeking

to fill both needs simultaneously.

We believe we have a proven ability to acquire and integrate high growth, reputable entities, through which we have captured additional service territories that will serve as a base for future revenue.

We believe this experience

presents a strong platform for further expansion and that our success to date also produces positive relationships and credibility with regulators, municipalities, developers and customers in both existing and prospective service areas.

this experience presents a strong platform for further expansion and that our success to date also produces positive relationships and credibility with regulators, municipalities, developers and customers in both existing and prospective service

In our regulated water subsidiaries, our strategy is to focus on a wide spectrum of activities, which include

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Our ability to develop partnerships with various county governments, municipalities and developers has provided a number of opportunities.

In the last four

years, we completed seven acquisitions including asset purchase agreements with municipal and developer/homeowner association operated systems.

We believe that Delaware's generally lower cost of living in the region and availability of development sites in

relatively close proximity to the Atlantic Ocean in Sussex County have resulted, and will continue to result, in increases to our customer base.

Delaware’s lower property and income tax rate make it an attractive region for new home development and

retirement communities.

four years, we completed seven acquisitions including asset purchase agreements with municipal and developer/homeowner association operated systems.

We believe that Delaware's generally lower cost of living in the region and availability of development sites

in relatively close proximity to the Atlantic Ocean in Sussex County have resulted, and will continue to result, in increases to our customer base.

Delaware’s lower property and income tax rate make it an attractive region for new home development

and retirement communities.

Substantial portions of Delaware currently are not served by a public water system, which could also assist in an increase to our customer base as systems are added.

On May 26, 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the

Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Clayton Water System.

purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System.

On May 26, 2022, Artesian Water completed its purchase of substantially all of the water operating assets from

the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Clayton Water System.

total purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System.

This transfer of Clayton’s exclusive franchise territory was approved by the DEPSC on April 20, 2022.

In our regulated wastewater subsidiaries, we foresee significant growth opportunities and will continue to seek

strategic partnerships and relationships with developers and governmental agencies to complement existing agreements for the provision of wastewater service on the Delmarva Peninsula.

In our regulated wastewater subsidiaries, we foresee significant growth opportunities and will continue to

seek strategic partnerships and relationships with developers and governmental agencies to complement existing agreements for the provision of wastewater service on the Delmarva Peninsula.

There are numerous locations in Sussex County where Artesian

Wastewater’s and Sussex County’s facilities are connected or integrated to allow for the movement and disposal of wastewater generated by one or the other’s system in a manner that most efficiently and cost effectively manages wastewater transmission,

treatment and disposal.

In addition, Artesian Wastewater plans to utilize our larger regional wastewater facilities to expand service areas to new customers while transitioning our smaller treatment facilities into regional pump stations in order to

gain additional efficiencies in the treatment and disposal of wastewater.

We believe this will reduce operational costs at the smaller treatment facilities in the future because they will be converted from treatment and disposal plants to pump stations

to assist with transitioning the flow of wastewater from one regional facility to another.

In addition, since closing the transaction with TESI noted below, Artesian’s Delaware wastewater subsidiaries are the sole regional regulated wastewater

utilities in Delaware, which we believe will enable us to increase efficiencies in the treatment and disposal of wastewater and provide additional opportunities to expand our wastewater operations.

On January 14, 2022, Artesian Wastewater acquired TESI, a wholly-owned subsidiary of Middlesex Water Company, or

Middlesex, that provides regulated wastewater services in Delaware.

transmission, treatment and disposal.

stations in order to gain additional efficiencies in the treatment and disposal of wastewater.

We believe this will reduce operational costs at the smaller treatment facilities in the future because they will be converted from treatment and disposal

plants to pump stations to assist with transitioning the flow of wastewater from one regional facility to another.

In addition, since closing the transaction with TESI noted below, Artesian’s Delaware wastewater subsidiaries are the sole regional

regulated wastewater utilities in Delaware, which we believe will enable us to increase efficiencies in the treatment and disposal of wastewater and provide additional opportunities to expand our wastewater operations.

On January 14, 2022, Artesian Wastewater acquired TESI, a wholly-owned subsidiary of Middlesex Water Company,

or Middlesex, that provides regulated wastewater services in Delaware.

Artesian Wastewater purchased all of the stock of TESI from Middlesex for $6.4 million in cash and other consideration, including, forgiveness of a $2.1 million note due from

This acquisition more than doubled the number of wastewater customers served by Artesian in Sussex County, Delaware and included all residents in the Town of Milton.

The general need for increased capital investment in our water and wastewater systems is due to a combination of

population growth, more protective water quality standards, aging infrastructure and acquisitions.

Our planned and budgeted capital improvements over the next three years include projects for water infrastructure improvements and expansion in both

Delaware and Maryland and wastewater infrastructure improvements and expansion in Delaware.

The DEPSC and MDPSC have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates for

current customers and capacity charges for new customers.

The general need for increased capital investment in our water and wastewater systems is due to a combination

of population growth, more protective water quality standards, aging infrastructure and acquisitions.

Our planned and budgeted capital improvements over the next three years include projects for water infrastructure improvements and expansion in

both Delaware and Maryland and wastewater infrastructure improvements and expansion in Delaware.

The DEPSC and MDPSC have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates

for current customers and capacity charges for new customers.

In our non-utility subsidiaries, we continue pursuing opportunities to expand our contract operations.

Through Artesian Utility, we will seek to expand our

contract design, engineering and construction services of water and wastewater facilities for developers, municipalities and other utilities.

Through Artesian Utility, we will seek to

expand our contract design, engineering and construction services of water and wastewater facilities for developers, municipalities and other utilities.

We also anticipate continued growth due to our water, sewer and internal SLP Plans.

Artesian Development

owns two nine-acre parcels of land, located in Sussex County, Delaware, which will allow for construction of a water treatment facility and wastewater treatment facility.

Results of Operations – Analysis of the Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022.

Development owns two nine-acre parcels of land, located in Sussex County, Delaware, which will allow for construction of a water treatment facility and wastewater treatment facility.

Results of Operations – Analysis of the Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022.

Operating Revenues

Revenues totaled $25.3 million for the three months ended June 30, 2023, $0.2 million, or 1.0%, more than revenues for the three months ended June 30, 2022 .

Water sales revenue increased $0.9 million, or 4.6%, for the three months ended June 30, 2023 from the corresponding period in 2022, primarily related to an increase in

overall water consumption due to the brief warm, dry weather conditions experienced during the quarter and an increase in fixed fee charges related to customer growth.

We realized 81.7% and 78.9% of our total operating revenue for the three months

ended June 30, 2023 and June 30, 2022, respectively, from the sale of water.

Other utility operating revenue increased approximately $0.1 million, or 4.0%, for the three months ended June 30, 2023 compared to the three months ended

June 30, 2022.

This increase is primarily due to an increase in wastewater revenue associated with customer growth.

Non-utility operating revenue decreased approximately $0.8 million, or 33.3%, for the three months ended June 30,

2023 compared to the three months ended June 30, 2022.

This decrease is primarily due to a decrease in contract service revenue related to a contract for the design and construction of wastewater infrastructure, slightly offset by an increase in

Service Line Protection Plan revenue.

Revenues totaled $26.6 million for both the three months ended September 30, 2023 and September 30, 2022, respectively .

Other utility operating revenue increased approximately $0.4 million, or 13.9%, for the three months ended September 30, 2023 compared to the three months

ended September 30, 2022.

This increase is primarily due to an increase in wastewater revenue associated with customer growth and an increase in the timing of industrial wastewater revenue.

Water sales revenue decreased $0.1 million, or 0.3%, for the three months ended September 30, 2023 compared to the corresponding period

in 2022, primarily related to a decrease in overall water consumption related to the wetter weather pattern experienced during the summer months of 2023, partially offset by an increase in fixed fee charges related to customer growth.

We realized 81.5%

and 81.6% of our total operating revenue for the three months ended September 30, 2023 and September 30, 2022, respectively, from the sale of water.

Non-utility operating revenue decreased approximately $0.3 million, or 16.9%, for the three months ended September 30, 2023 compared to

the three months ended September 30, 2022.

This decrease is primarily due to a decrease in contract service revenue related to a contract for the design and construction of wastewater infrastructure now nearing completion, partially offset by an

increase in Service Line Protection Plan revenue.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $0.8

million, or 6.3%, fo r the three months ended June 30, 2023, compared to the same period in 2022.

Utility operating

expenses increased $1.6 million, or 15.5%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

The net increase is primarily

related to the following;

Payroll and employee benefit costs increased $0.6 million, primarily related to an increase in overall compensation, an increase in the number of

employees and an increase in medical benefit costs.

Operating expenses, excluding

depreciation and income taxes, increased $0.8 million, or 5.6%, fo r the three months ended September 30, 2023, compared to the same period in 2022.

Utility operating expenses increased $1.2 million,

or 11.1%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

The net increase is primarily related to the following;

Payroll and employee benefit costs increased $0.4 million, primarily related to an increase in overall compensation, a decrease in capitalized

payroll related to a 2022 software upgrade, and an increase in medical benefit premium costs.

Repair and maintenance costs increased $0.3 million, primarily associated with water treatment and

distribution operations, including tank painting costs and filter replacement costs, and wastewater treatment and disposal operations.

distribution operations, including filter replacements costs, tank painting costs and a reimbursement from the Delaware Sand and Gravel Remedial Trust in the third quarter of 2022 for Artesian Water’s operating costs related to certain 2022

and 2021 treatment costs pursuant to a settlement agreement.

Administrative costs increased $0.3 million, primarily due to increases in computer system maintenance

and subscription fees, as well as an increase in consulting fees.

Water treatment costs

increased $0.1 million , primarily due to an increase in the cost and volume of chemicals used.

Administrative costs increased $0.2 million, primarily due to an increase in company subscription costs,

customer billing and assistance program costs and legal fees.

Purchased power costs increased $0.1 million due to an increase in usage in wastewater and water

Purchased water costs decreased $0.1 million, primarily related to a decrease of water purchased under

contract, in which the minimum amount of water required to be purchased was reduced in July 2022.

Non-utility operating expenses decreased $0.8 million primarily due to a decrease in costs associated with a wastewater infrastructure design and construction contract.

Non-utility operating expenses decreased $0.5 million, or 28.5%, primarily due to a decrease in costs associated with a wastewater infrastructure design and construction contract.

The ratio of operating expense, excluding depreciation and income taxes, to

total revenue was 56.4% for the three months ended June 30, 2023, compared to 53.5% fo r the three months ended June 30, 2022.

Depreciation and amortization expense increased $0.2 million, or 5.2%, primarily due to continued investment in utility plant providing supply, treatment,

storage and distribution of water to customers and service to our wastewater customers.

Federal and state income tax expense decreased $0.1 million, or 7.7%, primarily due to lower pre-tax income in 2023 compared to 2022, partially offset by a

decrease in 2022 income tax expense related to stock options exercised in the second quarter of 2022, with no similar activity in 2023.

Property and other taxes increased $0.1 million, or 5.2%, primarily due to an increase in utility plant subject to

Property taxes are assessed on land, buildings and certain utility plant, which include the footage and size of pipe, hydrants and wells.

In addition, payroll taxes increased, related to increased payroll related expenses.

Other income increased $0.3 million, primarily due an increase in

allowance for funds used during construction, or AFUDC, as a result of higher long-term construction activity subject to AFUDC for the three months ended June 30, 2023 compared to the same period in 2022.

Interest Charges

Short-term debt interest increased $0.1 million, primarily related to higher

interest rates.

The average short-term interest rate for the three months ended June 30, 2023 was 5.87% compared to 1.68% for the same period in 2022.

Long-term debt interest increased $0.1 million, primarily related to an increase in

long-term debt interest associated with the Series W First Mortgage Bond issued on April 29, 2022 .

Our net income applicable to common stock decreased $0.6 million, or 12.0%.

Total operating revenues increased $0.2 million and other income increased $0.3

million, offset by a $0.9 million increase in total operating expenses and $0.2 million increase in interest charges.

Results of Operations – Analysis of the Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022.

total revenue was 53.5% for the three months ended September 30, 2023, compared to 50.6% fo r the three months ended September 30, 2022.

Depreciation and amortization expense

increased $0.2 million, or 7.3%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.

Federal and state income tax expense

increased $0.4 million, or 22.7%, primarily due to adjustments related to the application of net operating loss valuation allowances, partially offset by lower pre-tax income in 2023 compared to 2022 and a decrease in 2022 income tax expense related

to stock options exercised in the third quarter of 2022, with no similar activity in 2023.

Other income increased $0.3 million, primarily due to an increase in

allowance for funds used during construction, or AFUDC, as a result of higher long-term construction activity subject to AFUDC for the three months ended September 30, 2023 compared to the same period in 2022.

Net income applicable to common stock decreased $1.1 million, or 17.5%, due to the $1.4 million increase in Total Operating Expenses, offset by the $0.3

million increase in Other income, net.

Results of Operations – Analysis of the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022.

Operating Revenues

Revenues totaled $47.7 million for the six months ended June 30, 2023, $0.5 million, or 1.2%, more than revenues for the six months ended June 30, 2022 .

Water sales revenue increased $0.8 million, or 2.1%, for the six months ended June 30, 2023 from the corresponding period in 2022, primarily related to an increase in

overall water consumption due to the brief warm, dry weather conditions experienced during the second quarter of 2023 and an increase in fixed fee charges related to customer growth.

This increase is partially offset by a decrease in water sales

related to a one-time customer refund issued to Town of Frankford customers for a rate change retroactive to February 2022, as approved by the DEPSC in the first quarter of 2023, in accordance with the agreement for the purchase of Frankford’s water

We realized 81.0% and 80.2% of our total operating revenue for the six months ended June 30, 2023 and June 30, 2022, respectively, from the sale of water.

Other utility operating revenue increased approximately $0.4 million, or 7.5%, for the six months ended June 30,

2023 compared to the six months ended June 30, 2022.

This increase is primarily due to an increase in wastewater revenue associated with customer growth.

Non-utility operating revenue decreased approximately $0.6 million, or 16.6%, for the six months ended June 30, 2023

compared to the six months ended June 30, 2022.

This decrease is primarily due to a decrease in contract service revenue related to a contract for the design and construction of wastewater infrastructure, partially offset by an increase in Service

Line Protection Plan revenue.

Revenues totaled $74.3 million for the nine months ended September 30, 2023, $0.5 million, or 0.7%, more than revenues for the nine months ended September

Other utility operating revenue increased approximately $0.8 million, or 9.7%, for the nine months ended September 30, 2023 compared to the nine months ended

September 30, 2022.

This increase is primarily due to an increase in wastewater revenue associated with new customers and the timing of industrial wastewater revenue.

Water sales revenue increased $0.7 million, or 1.2%, for the nine months ended September 30, 2023 from the corresponding period in 2022, primarily related to

an increase in overall water consumption and an increase in fixed fee charges related to new customers.

This increase is partially offset by a one-time refund issued to customers within the Town of Frankford for a rate change retroactive to February

2022, as approved by the DEPSC in the first quarter of 2023, in accordance with the agreement for the purchase of Frankford’s water assets.

We realized 81.1% and 80.7% of our total operating revenue for the nine months ended September 30, 2023 and

September 30, 2022, respectively, from the sale of water.

Non-utility operating revenue decreased approximately $1.0 million, or 16.7%, for the nine months ended September

30, 2023 compared to the nine months ended September 30, 2022.

This decrease is primarily due to a decrease in contract service revenue related to a contract for the design and construction of wastewater infrastructure now nearing completion,

partially offset by an increase in Service Line Protection Plan revenue.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $2.6

million, or 6.9%, fo r the six months ended June 30, 2023, compared to the same period in 2022.

Utility operating expenses increased $2.3 million,

or 11.3%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

The net increase is primarily related to the following.

million, or 6.4%, fo r the nine months ended September 30, 2023, compared to the same period in 2022.

Utility operating

expenses increased $3.5 million, or 11.3%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

The net increase is

primarily related to the following;

Payroll and employee benefit costs increased $1.7 million, primarily related to an increase in overall compensation, an increase in the number of

employees and an increase in medical benefit costs.

employees, a decrease in capitalized payroll related to a 2022 software upgrade and an increase in medical benefit premium costs.

Repair and maintenance costs increased $0.9 million, primarily associated with water treatment and

distribution operations, including tank painting costs and technology costs, and wastewater treatment and disposal operations, including a one-time acquisition adjustment related to TESI in 2022.

These increases are partially offset by a decrease in water treatment filter replacements, due to the timing of scheduled replacements.

distribution operations, including tank painting costs, and wastewater treatment and disposal operations, including a one-time acquisition adjustment related to TESI in 2022 and a reimbursement from

the Delaware Sand and Gravel Remedial Trust in the third quarter of 2022 for Artesian Water’s operating costs related to certain 2021 treatment costs pursuant to a settlement agreement.

Administrative costs increased $0.8 million, primarily due to

increases in computer system maintenance and subscription fees, consulting fees, legal fees, a one-time adjustment related to the TESI acquisition in 2022, and customer billing costs.

Water treatment costs

increased $0.5 million , primarily due to an increase in the cost and volume of chemicals used.

Administrative costs increased $0.3 million, primarily due to an increase in company subscription costs, a

one-time adjustment related to the TESI acquisition in 2022, customer billing and assistance program costs and legal fees.

Purchased power costs increased $0.2 million due to an increase in usage in wastewater and water

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contract, in which the minimum amount of water required to be purchased was reduced in July 2022.

Non-utility operating expenses decreased $0.6 million primarily due to a decrease in costs associated with a wastewater infrastructure design and

construction contract.

Non-utility operating expenses decreased $1.1 million, or 24.7%, primarily due to a decrease in costs associated with a wastewater infrastructure

design and construction contract.

Property and other taxes increased $0.2 million, or 3.6%, primarily due to an increase in utility plant subject to taxation and an increase in payroll taxes,

related to increased payroll related expenses.

Property taxes are assessed on land, buildings and certain utility plant, which include the footage and size of pipe, hydrants and wells.

The ratio of operating expense, excluding depreciation and income taxes, to

total revenue was 58.9% for the six months ended June 30, 2023, compared to 55.8% fo r the six months ended June 30, 2022.

Depreciation and amortization expense increased $0.3 million, or 4.9%, primarily due to continued investment in utility plant providing supply, treatment,

storage and distribution of water to customers and service to our wastewater customers.

Federal and state income tax expense decreased $0.2 million, or 7.6%, primarily due to lower pre-tax income in 2023 compared to 2022, partially offset by a

decrease in 2022 income tax expense related to stock options exercised in the first six months of 2022, with no similar activity in 2023.

total revenue was 57.0% for the nine months ended September 30, 2023, compared to 53.9% fo r the nine months ended September 30, 2022.

Depreciation and amortization expense

increased $0.5 million, or 5.7%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.

Federal and state income tax expense increased $0.2 million, or 3.6%, primarily due to adjustments related to the application of net operating loss

valuation allowances, partially offset by lower pre-tax income in 2023 compared to 2022 and a decrease in 2022 income tax expense related to stock options exercised in the first nine months of 2022, with no similar activity in 2023.

Other income increased $1.0 million, primarily due to a $0.8 million

increase in allowance for funds used during construction, or AFUDC, as a result of higher long-term construction activity subject to AFUDC for the six months ended June 30, 2023 compared to the same period in 2022.

increase in allowance for funds used during construction, or AFUDC, as a result of higher long-term construction activity subject to AFUDC for the nine months ended September 30, 2023 compared to the same period in 2022.

Miscellaneous income increased

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Interest Charges

Long-term debt interest increased $0.4 million, primarily related to an

Long-term debt interest expense increased $0.4 million, primarily related to an

increase in long-term debt interest associated with the Series W First Mortgage Bond issued on April 29, 2022 .

Short-term debt interest increased $0.3 million, primarily

related to higher interest rates.

The average short-term interest rate for the six months ended June 30, 2023 was 5.94% compared to 1.84% for the same period in 2022.

Short-term debt interest expense increased $0.3 million,

primarily related to higher interest rates.

The average short-term interest rate for the nine months ended September 30, 2023 was 6.14% compared to 2.44% for the same period in 2022.

Our net income applicable to common stock decreased $2.5 million, or 15.7%.

Total operating revenues increased $0.5 million and other income increased $0.7

million, offset by a $1.9 million increase in total operating expenses and $0.8 million increase in interest charges.

Total Operating Revenues increased $0.5

million and Other income, net increased $1.0 million, offset by a $3.3 million increase in Total Operating Expenses and $0.8 million increase in Interest charges.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sourc es of liquidity for the six months ended June 30, 2023

were $15.2 million of cash provided by operating activities, $10.1 million in net contributions and advances from developers, which includes $2.7 million of grant funds from the State of Delaware, $1.2 million from the issuance of long-term debt and

$36.4 million in net proceeds from the issuance of Class A Stock.

Our primary sourc es of liquidity for the nine months ended September 30,

2023 were $23.4 million of cash provided by operating activities, $17.0 million in net contributions and advances from developers, which includes $3.6 million of grant funds from the State of Delaware, $2.0 million from the issuance of long-term debt

and $36.5 million in net proceeds from the issuance of Class A Stock.

On May 23, 2023 and June 16, 2023, the Company completed the sale of 695,650 shares and 67,689 shares of its Class A Stock, respectively.

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Capital expenditures during

the first six months of 2023 were $32.3 million compared to $23.3 million during the same period in 2022.

During the first six months of 2023, we continued to focus our

the first nine months of 2023 were $48.8 million compared to $36.7 million during the same period in 2022.

During the first nine months of 2023, we continued to focus our

investment through our rehabilitation program for transmission and distribution facilities by replacing aging or

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Developers contributed $6.0

million of these total investments during the first six months of 2023.

million of these total investments during the first nine months of 2023.

We depend on the availability of capital for expansion, construction and maintenance.

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Lines of Credit and Long-Term Debt

At June 30, 2023, Artesian Resources had a $40 million line of credit with

At September 30, 2023, 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 June 30, 2023, there was $40.0 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%.

As of September 30, 2023, there was $40.0 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%.

The LIBOR rate for USD currency was discontinued as of 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.

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%, which was increased to

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The Company expects to renew this line of credit.

At June 30, 2023, 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 June 30, 2023, there was $20.0 million of available funds under this

line of credit.

At September 30, 2023, 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 September 30, 2023, there was $20.0 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 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 31, 2024.

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transfer certain assets or change our business.

As of June 30, 2023, we were in compliance with these covenants.

As of September 30, 2023, we were in compliance with these covenants.

Long-term debt obligations reflect the maturities of certain series of our first mortgage bonds, which we intend to refinance when due if not refinanced

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In February 2022, Artesian Water Maryland entered into an electric supply agreement with Constellation NewEnergy, Inc., effective from May 2022 through November 2025.

January 2022, following the acquisition of Tidewater Environmental Services, Inc., TESI dba Artesian Wastewater assumed an electricity supply contract with WGL Energy that is effective through December 2024.

These fixed rate electric supply contracts

are for normal purchases and are not derivative instruments.

January 2022, following the acquisition of Tidewater Environmental Services, Inc.

dba Artesian Wastewater, or TESI, assumed an electricity supply contract with WGL Energy that is effective through December 2024.

These fixed rate electric supply

contracts are for normal purchases and are not derivative instruments.

Payments for unconditional purchase obligations reflect minimum water purchase obligations based on rates that are subject to change under an interconnection

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contract rate under our interconnection agreement with the Town of North East, which expires June 26, 2024.

The agreement includes two automatic five-year renewal terms, unless terminated by either party.

In April 2021, Artesian Water entered into a 3-year agreement with Worldwide Industries Corporation effective July 1, 2021 to paint elevated water storage

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financial statements contained in this Quarterly Report on Form 10-Q .

We did not adopt any accounting policy in the first six months of 2023 that had a material impact on our financial condition, liquidity or results of operations.

We did not adopt any accounting policy in the first nine months of 2023 that had a material impact on our financial condition, liquidity or results of operations.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis