ARTESIAN RESOURCES CORP 10-Q

ITEM 1 – FINANCIAL STATEMENTS ARTESIAN RESOURCES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (In thousands) ASSETS September 30, 2023 December 31, 2022 Utility plant, at original cost (less accumulated depreciation - 2023 - $ 181,235 ; 2022 - $ 172,954 ) $ 705,949 $ 668,031 Current assets Cash and cash equivalents 6,458 1,309 Accounts and other receivables (less provision for expected credit loss - 2023 - $ 356 ; 2022 - $ 416 ) 10,488 13,511 Income tax receivable 2,908 1,632 Unbilled operating revenues 1,946 1,586 Materials and supplies 5,487 4,702 Prepaid property taxes 3,374 2,186 Prepaid expenses and other 3,285 2,878 Total current assets 33,946 27,804 Other assets Non-utility property (less accumulated depreciation - 2023 - $ 1,040 ; 2022 - $ 990 ) 3,708 3,740 Other deferred assets 8,506 10,536 Goodwill 1,939 1,939 Operating lease right of use assets 498 467 Total other assets 14,651 16,682 Regulatory assets, net 7,265 7,274 Total Assets $ 761,811 $ 719,791 LIABILITIES AND STOCKHOLDERS' EQUITY Stockholders' equity Common stock $ 10,277 $ 9,502 Preferred stock — — Additional paid-in capital 143,076 107,143 Retained earnings 76,240 71,286 Total stockholders' equity 229,593 187,931 Long-term debt, net of current portion 175,875 175,619 405,468 363,550 Current liabilities Lines of credit — 20,174 Current portion of long-term debt 2,219 2,003 Accounts payable 8,430 10,929 Accrued expenses 4,638 4,246 Overdraft payable 5,052 43 Accrued interest 1,833 989 Income taxes payable 25 6 Customer and other deposits 2,749 2,489 Other 2,230 3,190 Total current liabilities 27,176 44,069 Commitments and contingencies Deferred credits and other liabilities Net advances for construction 3,258 3,686 Operating lease liabilities 492 466 Regulatory liabilities 25,827 28,721 Deferred investment tax credits 427 439 Deferred income taxes 58,229 54,552 Total deferred credits and other liabilities 88,233 87,864 Net contributions in aid of construction 240,934 224,308 Total Liabilities and Stockholders’ Equity $ 761,811 $ 719,791 See notes to the condensed consolidated financial statements. 3 Table of Contents ARTESIAN RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited (In thousands, except per share amounts) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 Operating revenues Water sales $ 21,642 $ 21,702 $ 60,294 $ 59,567 Other utility operating revenue 3,235 2,841 9,083 8,281 Non-utility operating revenue 1,693 2,039 4,940 5,932 Total Operating Revenues 26,570 26,582 74,317 73,780 Operating expenses Utility operating expenses 11,590 10,428 34,488 30,994 Non-utility operating expenses 1,122 1,570 3,328 4,418 Depreciation and amortization 3,444 3,210 9,882 9,350 State and federal income taxes 2,249 1,834 5,156 4,978 Property and other taxes 1,504 1,458 4,531 4,371 Total Operating Expenses 19,909 18,500 57,385 54,111 Operating income 6,661 8,082 16,932 19,669 Other income, net Allowance for funds used during construction (AFUDC) 647 393 1,693 898 Miscellaneous (expense) income ( 35 ) ( 101 ) 1,554 1,311 Income before interest charges 7,273 8,374 20,179 21,878 Interest charges 2,202 2,230 6,960 6,205 Net income applicable to common stock $ 5,071 $ 6,144 $ 13,219 $ 15,673 Income per common share: Basic $ 0.49 $ 0.65 $ 1.33 $ 1.66 Diluted $ 0.49 $ 0.65 $ 1.33 $ 1.65 Weighted average common shares outstanding: Basic 10,276 9,477 9,929 9,451 Diluted 10,279 9,492 9,933 9,473 Cash dividends per share of common stock $ 0.2840 $ 0.2729 $ 0.8464 $ 0.8133 See notes to the condensed consolidated financial statements. 4 Table of Contents ARTESIAN RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (In thousands) For the Nine Months Ended September 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 13,219 $ 15,673 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,882 9,350 Deferred income taxes, net 3,665 1,582 Stock compensation 185 162 AFUDC, equity portion ( 1,040 ) ( 612 ) Changes in assets and liabilities, net of acquisitions: Accounts and other receivables, net of provision for expected credit loss 3,023 ( 3,402 ) Income tax receivable ( 1,276 ) 1,401 Unbilled operating revenues ( 360 ) ( 547 ) Materials and supplies ( 785 ) ( 572 ) Income tax payable 19 1,096 Prepaid property taxes ( 1,188 ) ( 138 ) Prepaid expenses and other ( 407 ) ( 62 ) Other deferred assets 2,004 ( 5,477 ) Regulatory assets ( 76 ) 280 Regulatory liabilities ( 2,988 ) 9,651 Accounts payable ( 829 ) ( 4,086 ) Accrued expenses 156 ( 791 ) Accrued interest 844 445 Deposits and other ( 688 ) 1,097 NET CASH PROVIDED BY OPERATING ACTIVITIES 23,360 25,050 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (net of AFUDC, equity portion) ( 48,838 ) ( 36,660 ) Investment in acquisitions, net of cash acquired — ( 6,341 ) Proceeds from sale of assets 76 49 NET CASH USED IN INVESTING ACTIVITIES ( 48,762 ) ( 42,952 ) CASH FLOWS FROM FINANCING ACTIVITIES Net (repayments) under lines of credit agreements ( 20,174 ) ( 17,303 ) Increase in overdraft payable 5,009 99 Net advances and contributions in aid of construction 16,986 11,576 Net proceeds from issuance of common stock 36,840 1,705 Issuance of long-term debt 1,978 30,828 Equity issuance costs ( 317 ) — Dividends paid ( 8,265 ) ( 7,677 ) Deferred debt issuance costs — ( 120 ) Principal repayments of long-term debt ( 1,506 ) ( 1,190 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 30,551 17,918 NET INCREASE IN CASH AND CASH EQUIVALENTS 5,149 16 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,309 92 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,458 $ 108 5 Table of Contents ARTESIAN RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED Unaudited (In thousands) Non-cash Investing and Financing Activity: Utility plant received as construction advances and contributions $ 2,307 $ 4,407 Change in amounts included in accounts payable, accrued payables and other related to capital expenditures 1,451 1,574 Supplemental Disclosures of Cash Flow Information: Interest paid $ 6,116 $ 5,760 Income taxes paid $ 3,476 $ 1,431 Purchase price allocation of investment in acquisitions: Utility plant $ — $ 34,234 Cash — 280 Goodwill — 2,983 Other assets — 1,033 Total assets — 38,530 Less: Liabilities — 3,852 Future contractual obligation payable to seller — 1,569 Contributions in aid of construction — 26,488 Cash paid for acquisitions — 6,621 Cash received from acquisitions — 280 Net cash paid for acquisitions $ — $ 6,341 See notes to the condensed consolidated financial statements. 6 Table of Contents ARTESIAN RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Unaudited (In thousands) Common Shares Outstanding Class A Non-Voting (1) (3) (4) Common Shares Outstanding Class B Voting (2) $ 1 Par Value Class A Non-Voting $ 1 Par Value Class B Voting Additional Paid-in Capital Retained Earnings Total Balance as of December 31, 2021 8,532 881 $ 8,532 $ 881 $ 104,989 $ 63,607 $ 178,009 Net income — — — — — 4,483 4,483 Cash dividends declared Common stock — — — — — ( 2,518 ) ( 2,518 ) Issuance of common stock Dividend reinvestment plan 2 — 2 — 87 — 89 Employee stock options and awards (4) 23 — 23 — 475 — 498 Employee Retirement Plan (3) — — — — — — — Balance as of March 31, 2022 8,557 881 8,557 881 105,551 65,572 180,561 Net income — — — — — 5,046 5,046 Cash dividends declared Common stock — — — — — ( 5,159 ) ( 5,159 ) Issuance of common stock Dividend reinvestment plan 2 — 2 — 97 — 99 Employee stock options and awards (4) 19 — 19 — 336 — 355 Employee Retirement Plan (3) — — — — — — — Balance as of June 30, 2022 8,578 881 8,578 881 105,984 65,459 180,902 Net income — — — — — 6,144 6,144 Cash dividends declared Common stock — — — — — — — Issuance of common stock Dividend reinvestment plan 2 — 2 — 87 — 89 Employee stock options and awards (4) 30 — 30 — 708 — 738 Employee Retirement Plan (3) — — — — — — — Balance as of September 30, 2022 8,610 881 8,610 881 106,779 71,603 187,873 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, 2022 8,621 881 $ 8,621 $ 881 $ 107,143 $ 71,286 $ 187,931 Net income — — — — — 3,705 3,705 Cash dividends declared Common stock — — — — — ( 2,646 ) ( 2,646 ) Issuance of common stock Dividend reinvestment plan 2 — 2 — 91 — 93 Employee stock options and awards (4) — — — — 56 — 56 Employee Retirement Plan (3) — — — — — — — Balance as of March 31, 2023 8,623 881 8,623 881 107,290 72,345 189,139 Net income — — — — — 4,443 4,443 Cash dividends declared Common stock — — — — — ( 2,700 ) ( 2,700 ) Issuance of common stock Public offering, net of costs 764 — 764 — 35,467 — 36,231 Dividend reinvestment plan 2 — 2 — 98 — 100 Employee stock options and awards (4) 5 — 5 — 55 — 60 Employee Retirement Plan (3) — — — — — — — Balance as of June 30, 2023 9,394 881 9,394 881 142,910 74,088 227,273 Net income — — — — — 5,071 5,071 Cash dividends declared Common stock — — — — — ( 2,919 ) ( 2,919 ) Issuance of common stock Dividend reinvestment plan 2 — 2 — 101 — 103 Employee stock options and awards (4) — — — — 65 — 65 Employee Retirement Plan (3) — — — — — — — Balance as of September 30, 2023 9,396 881 9,396 881 143,076 76,240 229,593 (1) At September 30, 2023 and September 30, 2022, Class A Common Stock had 15,000,000 shares authorized. For the same periods, shares issued, inclusive of treasury shares, were 9,424,518 and 8,638,474 , respectively. (2) At September 30, 2023 and September 30, 2022, Class B Common Stock had 1,040,000 shares authorized and 881,452 shares issued. (3) Artesian Resources Corporation registered 200,000 shares of Class A Common Stock, subsequently adjusted for stock splits, available for purchase through the Company’s 401(k) retirement plan. (4) Under the Equity Compensation Plan, effective December 9, 2015, or the 2015 Plan, Artesian Resources Corporation authorized up to 331,500 shares of Class A Common Stock for issuance of grants in the form of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the 2015 Plan. Includes stock compensation expense for September 30, 2023, and September 30, 2022, See Note 6-Stock Compensation Plans. See notes to the condensed consolidated financial statements 7 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – GENERAL Artesian Resources Corporation, or Artesian Resources, includes income from the earnings of all of our wholly owned subsidiaries. The terms "we", "our", "Artesian" and the "Company" as used herein refer to Artesian Resources and its subsidiaries. DELAWARE REGULATED UTILITY SUBSIDIARIES Artesian Water Company, Inc., or Artesian Water, distributes and sells water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware. In addition, Artesian Water provides services to other water utilities, including operations and billing functions, and has contract operation agreements with private, municipal and state water providers. Artesian Water also provides water for public and private fire protection to customers in our service territories. In May 2022, Artesian Water completed its purchase of substantially all the water operating assets from the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware. This purchase agreement is discussed further in the “Strategic Direction and Recent Developments” section of Management's Discussion and Analysis of Financial Condition and Results of Operations. Artesian Wastewater Management, Inc., or Artesian Wastewater, began providing wastewater services in Sussex County, Delaware in July 2005. Artesian Wastewater is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Delaware as a regulated public wastewater service company. In January 2022, Artesian Wastewater acquired Tidewater Environmental Services, Inc. Artesian Wastewater operates as the parent holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI. TESI was incorporated in 2004 and is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Sussex County, Delaware as a regulated public wastewater service company. Artesian Wastewater purchased all of the stock of TESI from Middlesex Water Company, or Middlesex, for $ 6.4 million in cash and other consideration, including forgiveness of a $ 2.1 million note due from Middlesex. This acquisition more than doubled the number of wastewater customers served by Artesian’s Delaware wastewater subsidiaries in Sussex County, Delaware and included all residents within the Town of Milton, Delaware. MARYLAND REGULATED UTILITY SUBSIDIARIES Artesian Water Maryland, Inc., or Artesian Water Maryland, began operations in August 2007. Artesian Water Maryland distributes and sells water to residential, commercial, industrial and municipal customers in Cecil County, Maryland. Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland, was incorporated on June 3, 2008 and is authorized and able to provide regulated wastewater services to customers in the State of Maryland. It is currently not providing these services. PENNSYLVANIA REGULATED UTILITY SUBSIDIARY Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, began operations in 2002. It provides water service to a residential community in Chester County, Pennsylvania. OTHER NON-UTILITY SUBSIDIARIES We have two other subsidiaries, neither of which are regulated. They are Artesian Utility Development, Inc., or Artesian Utility, and Artesian Development Corporation, or Artesian Development. We also had a third subsidiary, Artesian Storm Water Services, Inc., or Artesian Storm Water, which was dissolved effective June 20, 2023. Artesian Utility was formed in 1996 and designs and builds water and wastewater infrastructure and provides contract water and wastewater operation services on the Delmarva Peninsula to private, municipal and governmental institutions. Artesian Utility also evaluates land parcels, provides recommendations to developers on the size of water or wastewater facilities and the type of technology that should be used for treatment at such facilities, and operates water and wastewater facilities in Delaware for municipal and governmental agencies. Artesian Utility also contracts with developers and government agencies for design and construction of wastewater infrastructure throughout the Delmarva Peninsula. 8 Table of Contents Artesian Utility currently operates wastewater treatment facilities for the Town of Middletown, in southern New Castle County, Delaware, or Middletown, under a 20 -year contract that expires in July 2039. Artesian Utility currently operates three wastewater treatment systems with a combined capacity of up to approximately 3.8 million gallons per day. The wastewater treatment facilities in Middletown provide reclaimed wastewater for use in spray irrigation on public and agricultural lands in the area. Artesian Utility also offers three protection plans to customers, the Water Service Line Protection Plan, or WSLP Plan, the Sewer Service Line Protection Plan, or SSLP Plan, and the Internal Service Line Protection Plan, or ISLP Plan (collectively, SLP Plans). The WSLP Plan covers all parts, material and labor required to repair or replace participating customers' leaking water service lines up to an annual limit. The SSLP Plan covers all parts, material and labor required to repair or replace participating customers' leaking or clogged sewer lines up to an annual limit. The ISLP Plan enhances available coverage to include water and wastewater lines within customers' residences up to an annual limit. Artesian Development is a real estate holding company that owns properties, including land approved for office buildings, a water treatment plant and wastewater facility, as well as property for current operations, including an office facility in Sussex County, Delaware. The office facility consists of approximately 10,000 square feet of office space along with nearly 10,000 square feet of warehouse space. Artesian Storm Water, incorporated in 2017, was formed to provide design, installation, maintenance and repair services related to existing or proposed storm water management systems in Delaware and the surrounding areas. Artesian Storm Water elected to not seek new opportunities. In May 2023, the Board of Directors of Artesian Storm Water unanimously approved its dissolution. Also, in May 2023, the Board of Directors of Artesian Resources Corporation, the sole shareholder of Artesian Storm Water, unanimously approved the dissolution of Artesian Storm Water. The Company filed a Certificate of Dissolution with the Delaware Secretary of State, which became effective on June 20, 2023. NOTE 2 – BASIS OF PRESENTATION Basis of Presentation The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, for Form 10-Q. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Accordingly, these condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes in the Company's annual report on Form 10-K for fiscal year 2022 as filed with the SEC on March 10, 2023. The condensed consolidated financial statements include the accounts of Artesian Resources Corporation and its wholly owned subsidiaries, including its principal operating company, Artesian Water. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments (unless otherwise noted) necessary to present fairly the Company's balance sheet position as of September 30, 2023 , the results of its operations for the three and nine -month periods ended September 30, 2023 and September 30, 2022 , its cash flows for the nine -month periods ended September 30, 2023 and September 30, 2022 and the changes in stockholders’ equity for the three and nine -month periods ended September 30, 2023 and September 30, 2022 . The December 31 , 2022 Condensed Consolidated Balance Sheet was derived from the Company’s December 31 , 2022 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year or for future periods. Regulated Utility Accounting The accounting records of Artesian Water, Artesian Wastewater, and, effective January 14, 2022, 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 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 and Artesian Wastewater Maryland are maintained in accordance with the uniform system of accounts as prescribed by the Maryland Public Service Commission, or the MDPSC. Each of these subsidiaries follow the provisions of Financial Accounting Standards Board, or FASB, ASC Topic 980, which provide guidance for companies in regulated industries. These regulated subsidiaries account for the majority of our operating revenue. See Note 17 to our Condensed Consolidated Financial Statements for a full description of our segment information. 9 Table of Contents Use of Estimates The condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles in the U.S., which require management to make certain estimates and assumptions regarding the reported amounts of assets and liabilities including unbilled revenues, credit losses and reserves for bad debt, regulatory asset recovery, lease agreements, 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. On December 31, 2022, the fair value determinations for TESI and the water operating assets acquired from the Town of Clayton were finalized. A third-party valuation specialist assisted with the valuation of the assets acquired. NOTE 3 – REVENUE RECOGNITION Background Artesian’s operating revenues are primarily attributable to contract services based upon regulated tariff rates approved by the DEPSC, the MDPSC, and the 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 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. Any estimated revenue amounts are recorded as unbilled operating revenue (contract asset) through the end of the accounting period and will be billed at each year end for any shortfall of the actual volume from the required minimal volume. 10 Table of Contents 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 quarterly cycle. Artesian generates fixed-fee revenue for water and wastewater services provided to customers once a customer requests service in our territory. Our wastewater territory is located in Sussex County, Delaware. We recognize revenue from these services on a ratable basis over time as the customer simultaneously receives and consumes all the benefits of the Company remaining ready to provide them water and wastewater service. These contract services are billed either in advance or arrears at tariff rates on a monthly, quarterly or semi-annual basis. For contract services billed in arrears, we record unbilled operating revenue (contract asset) for any services through the end of the accounting period that will be billed in the next monthly or quarterly cycle. For contract services billed in advance, we record deferred revenue (contract liability) and accounts receivable for any amounts for which we have a right to invoice but for which services have not been provided. This deferred revenue is netted with unbilled operating revenue on the Condensed Consolidated Balance Sheet. Artesian generates service charges primarily from non-payment fees, such as water shut-off and reconnection fees and finance charges. These fees are billed and recognized as revenue at the point in time when our tariffs indicate the Company has the right to payment such as days past due have been reached or shut-offs and reconnections have been performed. There is no contract asset or liability associated with these fees. Artesian generates revenue from DSIC, which are surcharges applied to water customer tariff rates in Delaware related to specific types of water distribution system improvements. This rate is calculated on a semi-annual basis based on an approved projected revenue requirement over the following six-month period. This rate is adjusted up or down at the next DSIC filing to account for any differences between actual earned revenue and the projected revenue requirement. Since DSIC revenue is a surcharge applied to tariff rates, we recognize DSIC revenue based on the same guidelines as noted above depending on whether the surcharge was applied to consumption revenue or fixed-fee revenue. Accounts receivable related to tariff contract revenues are typically due within 25 days of invoicing. A provision for expected credit loss 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 provision for expected credit loss and associated bad debt expense has not been significant. 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. A provision for expected credit loss 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 provision for expected credit loss and associated bad debt expense has not been significant. 11 Table of Contents 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. A provision for expected credit loss 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 provision for expected credit loss 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 September 30, 2023, there is no associated contract asset or liability. There is no provision for expected credit loss 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, provision for expected credit loss or bad debt expense associated with inspection fee contracts. Sales Tax The majority of Artesian’s revenues are earned within the State of Delaware, where there is no sales tax. Revenues earned in the State of Maryland and the Commonwealth of Pennsylvania are related primarily to the sale of water by a public water utility and are exempt from sales tax. Therefore, no sales tax is collected on revenues . Disaggregated Revenues The following table shows the Company’s revenues disaggregated by service type; all revenues are generated within a similar geographical location: (in thousands) Three months ended September 30, 2023 Three months ended September 30, 2022 Nine months ended September 30, 2023 Nine months ended September 30, 2022 Tariff Revenue Consumption charges $ 13,681 $ 13,927 $ 37,064 $ 36,676 Fixed fees 8,299 7,924 24,365 23,452 Service charges 169 156 523 449 DSIC 1,403 1,406 3,922 3,870 Metered wastewater services 183 193 435 462 Industrial wastewater services 537 467 1,384 1,295 Total Tariff Revenue $ 24,272 $ 24,073 $ 67,693 $ 66,204 Non-Tariff Revenue Service line protection plans $ 1,441 $ 1,224 $ 4,176 $ 3,662 Contract operations 272 238 793 691 Design and installation 28 621 150 1,723 Inspection fees 138 127 325 234 Total Non-Tariff Revenue $ 1,879 $ 2,210 $ 5,444 $ 6,310 Other Operating Revenue $ 419 $ 299 $ 1,180 $ 1,266 Total Operating Revenue $ 26,570 $ 26,582 $ 74,317 $ 73,780 12 Table of Contents Contract Assets and Contract Liabilities Our contract assets and liabilities consist of the following: (in thousands) September 30, 2023 December 31, 2022 December 31, 2021 Contract Assets – Tariff $ 3,025 $ 2,618 $ 2,144 Deferred Revenue Deferred Revenue – Tariff $ 1,297 $ 1,231 $ 1,227 Deferred Revenue – Non-Tariff 605 438 287 Total Deferred Revenue $ 1,902 $ 1,669 $ 1,514 13 Table of Contents For the nine months ended September 30, 2023, the Company recognized revenue of $ 1.2 million from amounts that were included in Deferred Revenue – Tariff at the beginning of the year and revenue of $ 0.3 million from amounts that were included in Deferred Revenue – Non- Tariff at the beginning of the year. The changes in Contract Assets and Deferred Revenue are primarily due to normal timing differences between our performance and customer payments. Remaining Performance Obligations As of September 30, 2023 and December 31, 2022, 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 September 30, 2023 and December 31, 2022, Deferred Revenue – Non-Tariff is recorded within Other current liabilities and represents our remaining performance obligations for our SLP Plan services, contract water operation services and wastewater inspections, which are expected to be satisfied and associated revenue recognized within the next three months for the SLP revenue, approximately six years for the contract service revenue and one year for the inspection fee revenue. NOTE 4 – 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. Two installments for approximately $ 2.5 million each were paid in August 2022 and July 2023. The remaining $ 5.0 million is due in two equal installments no later than July of 2024 and 2025. A provision for expected credit loss 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 provision for expected credit loss and associated bad debt expense has not been significant. The following table summarizes the changes in the Company’s accounts receivable balance: September 30, December 31, December 31, (in thousands) 2023 2022 2021 Customer accounts receivable – water $ 6,246 $ 5,981 $ 5,986 Customer accounts receivable – wastewater 552 482 1,326 Settlement agreement receivable – short term 2,516 2,532 — Miscellaneous accounts receivable 832 3,781 786 Developer receivable 698 1,151 698 10,844 13,927 8,796 Less: provision for expected credit loss 356 416 429 Net accounts receivable $ 10,488 $ 13,511 $ 8,367 14 Table of Contents NOTE 5 – LEASES The Company leases land and office equipment under operating leases from non-related parties. Our leases have remaining lease terms of 5 years 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. Rent expense for all operating leases, except those with terms of 12 months or less comprises: (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Minimum rentals $ 4 $ 21 $ 11 $ 30 Contingent rentals — — — — $ 4 $ 21 $ 11 $ 30 Supplemental cash flow information related to leases is as follows: (in thousands) Nine Months Ended Nine Months Ended September 30, 2023 September 30, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 11 $ 30 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 498 $ 444 Supplemental balance sheet information related to leases is as follows: (in thousands, except lease term and discount rate) September 30, 2023 December 31, 2022 Operating Leases: Operating lease right-of-use assets $ 498 $ 467 Other current liabilities $ 9 2 Operating lease liabilities 492 466 Total operating lease liabilities $ 501 $ 468 Weighted Average Remaining Lease Term Operating leases 57 years 61 years Weighted Average Discount Rate Operating leases 5.0 % 5.0 % 15 Table of Contents Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2023 are as follows: (in thousands) Operating Leases Year 2024 $ 34 2025 34 2026 34 2027 34 2028 31 Thereafter 1,401 Total undiscounted lease payments $ 1,568 Less effects of discounting ( 1,067 ) Total lease liabilities recognized $ 501 As of September 30, 2023, we have not entered into operating or finance leases that will commence at a future date. NOTE 6 – 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. Compensation expense, for the three and nine months ended September 30, 2023 of approximately $ 69,000 and $ 185,000 , respectively, was recorded for restricted stock awards issued in May 2022 and May 2023. Compensation expense, for the three and nine months ended September 30, 2022 of approximately $ 57,000 and $ 162,000 , respectively, was recorded for restricted stock awards issued in May 2021 and May 2022. Costs were determined based on the fair value on the dates of the awards and those costs were charged to income over the service periods associated with the awards. There was no stock compensation cost capitalized as part of an asset. On May 9, 2023, 5,000 shares of Class A Common Stock, or Class A Stock, were granted as restricted stock awards. The fair value per share was $ 54.88 , the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 9, 2023. 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 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 were subject to forfeiture in the event of the recipient’s termination of service. 16 Table of Contents The following summary reflects changes in the shares of Class A Stock underlying options and restricted stock awards for the nine months ended September 30, 2023: Options Restricted Awards Option Shares Weighted Average Exercise Price Weighted Average Remaining Life (Yrs.) Aggregate Intrinsic Value (in thousands) Outstanding Restricted Stock Awards Weighted Average Grant Date FairValue Plan options/restricted stock awards Outstanding at January 1, 2023 6,750 $ 21.86 $ 248 5,000 $ 45.58 Granted — — — 5,000 54.88 Exercised/vested and released — — — ( 5,000 ) 45.58 Expired/cancelled — — — — — Outstanding at September 30, 2023 6,750 $ 21.86 0.602 $ 136 5,000 $ 54.88 Exercisable/vested at September 30, 2023 6,750 $ 21.86 0.602 $ 136 — — There were no options exercised during the nine months ended September 30, 2023. There were no unvested option shares outstanding under the 2015 Plan during the nine months ended September 30, 2023. As of September 30, 2023, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan. As of September 30, 2023, there was $ 166,000 total unrecognized expenses related to non-vested awards of restricted shares awarded under the 2015 Plan. The cost will be recognized over 0.61 years, the remaining vesting period for the restricted stock awards. NOTE 7 – OTHER DEFERRED ASSETS The investment in CoBank, ACB, or 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 4 - Accounts Receivable. (in thousands) September 30, 2023 December 31, 2022 Investment in CoBank $ 5,882 $ 5,351 Settlement agreement receivable-long term 2,496 4,991 Other deferred assets 128 194 $ 8,506 $ 10,536 17 Table of Contents NOTE 8 – 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. Amortization of these deferred costs will begin in the fourth quarter of 2023. 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) September 30, 2023 December 31, 2022 Deferred contract costs and other $ 221 $ 227 Rate case studies 138 57 Rate proceedings 222 — Deferred income taxes 449 465 Debt related costs 4,416 4,682 Deferred costs affiliated interest agreement 1,124 1,114 Goodwill 260 266 Deferred acquisition and franchise costs 435 463 $ 7,265 $ 7,274 18 Table of Contents NOTE 9 – 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. The annual amortization currently authorized by the DEPSC could be adjusted in future rate applications. 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. Two installments for approximately $ 2.5 million each were paid in August 2022 and July 2023. The remaining $ 5.0 million is due in two equal installments no later than July of 2024 and 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 two refunds occurred in October 2022 and August 2023. Future customer refunds will occur no later than August 2024 and August 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 began recording 2022 and future recovery of capital expenditures as Contributions in Aid of Construction and began recording expense recovery as an offset to operations and maintenance expense, with the intention that those recoveries will be available for inclusion and consideration in any future rate applications. For a full discussion of the Settlement Agreement, refer to Note 18 - Legal Proceedings. 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 12) 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) September 30, 2023 December 31, 2022 Utility plant retirement cost obligation $ — $ — Deferred settlement refunds 4,991 7,487 Deferred income taxes (related to TCJA) 20,836 21,234 $ 25,827 $ 28,721 NOTE 10 – 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. 19 Table of Contents The following table summarizes the shares used in computing basic and diluted net income per share: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Weighted average common shares outstanding during the period for basic computation 10,276 9,477 9,929 9,451 Dilutive effect of employee stock options and awards 3 15 4 22 Weighted average common shares outstanding during the period for diluted computation 10,279 9,492 9,933 9,473 For the three and nine months ended September 30, 2023 and 2022, no shares of restricted stock awards were excluded from the calculations of diluted net income per share. The Company has 15,000,000 authorized shares of Class A Stock and 1,040,000 authorized shares of Class B Common Stock, or Class B Stock. As of September 30, 2023, 9,395,541 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of September 30, 2022 , 8,609,497 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 $ 23.12 and $ 19.86 at September 30, 2023 and December 31, 2022 , respectively. These amounts were computed by dividing common stockholders' equity by the number of weighted average shares of common stock outstanding on September 30, 2023 and December 31, 2022 , respectively. NOTE 11 – 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. 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. 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. 20 Table of Contents 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. The new rates are designed to support Artesian Water’s ongoing capital improvement program and to cover increased costs of operations, including chemicals and electricity for water treatment, water quality testing, fuel, taxes, interest, labor and benefits. In accordance with applicable Delaware law, Artesian Water is permitted to implement a temporary base rate increase of 15 % of gross water sales on an annual basis, or $ 2.5 million, whichever is lower, 60 days after the application is filed. Since Artesian Water has DSIC surcharges in excess of the allowable temporary increase and imposing the temporary increase would require DSIC to be reset to zero, Artesian Water has elected not to request the initial temporary rate increase. However, since the application is not expected to be resolved within the seven-month statutory timeframe, 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. Artesian Water’s last comprehensive application for an increase in base rate charges was filed in April 2014. 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 application with the DEPSC to collect DSIC rates and (2) the rate upon which eligible plant improvements are based: Application Date 11/20/20 DEPSC Approval Date 12/14/20 Effective Date 01/01/21 Cumulative DSIC Rate 7.50 % Net Eligible Plant Improvements – Cumulative Dollars (in millions) $ 43.1 Eligible Plant Improvements – Installed Beginning Date 10/01/2014 Eligible Plant Improvements – Installed Ending Date 04/30/2019 The rate reflects the eligible plant improvements installed through April 30, 2019. The January 1, 2021 rate currently remains in effect and is subject to periodic audit by the DEPSC. For the three and nine months ended September 30, 2023, we earned approximately $ 1.4 million and $ 3.9 million in DSIC revenue, respectively. For the three and nine months ended September 30, 2022, we earned approximately $ 1.4 million and $ 3.9 million in DSIC revenue, respectively. NOTE 12 – 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. 21 Table of Contents Under FASB ASC Topic 740, an uncertain tax position represents our expected treatment of a tax position taken, or planned to be taken in the future, that has not been reflected in measuring income tax expense for financial reporting purposes. The Company establishes reserves for uncertain tax positions based upon management's judgment as to the sustainability of these positions. These accounting estimates related to the uncertain tax position reserve require judgments to be made as to the sustainability of each uncertain tax position based on its technical merits. The Company believes its tax positions comply with applicable law and that it has adequately recorded reserves as required. However, to the extent the final tax outcome of these matters is different than the estimates recorded, the Company would then adjust its tax reserves or unrecognized tax benefits in the period that this information becomes known. The statute of limitations for the 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 of 2022 , the Company reversed approximately $ 10,000 in penalties and interest leaving a zero balance. Through the third quarter of 2023, the Company has accrued approximately $8,000 in penalties and interest related to positions taken on the 2022 corporate income tax return. 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. N OTE 13 – FAIR VALUE OF FINANC IAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. Current Assets and Liabilities For those current assets and liabilities that are considered financial instruments, the carrying amounts approximate fair value because of the short maturity of those instruments. Long-term Financial Liabilities As of September 30, 2023 and December 31, 2022, all of the Company's outstanding lo ng-term debt interest rates were a fixed-rate. The fair value of the Company’s long-term debt is determined by discounting their future cash flows using current market interest rates on similar instruments with comparable maturities consistent with FASB ASC 825. Under the fair value hierarchy, the fair value of the long-term debt in the table below is classified as Level 2 measurements. Level 2 is valued using observable inputs other than quoted prices. The fair values for long-term debt differ from the carrying values primarily due to interest rates that differ from the current market interest rates. The carrying amount and fair value of Artesian Resources' long-term debt (including current portion) are shown below: (in thousands) September 30, 2023 December 31, 2022 Carrying amount $ 178,094 $ 177,622 Estimated fair value $ 148,652 $ 155,425 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 14 – COMMON STOCK OFFERING On May 23, 2023, the Company completed the sale of 695,650 shares of its Class A Stock, par value $ 1.00 per share, at a price to the public of $ 50 per share. The net proceeds to the Company from the offering, after deducting the underwriting discounts and commissions and other offering costs, were approximately $ 33.0 million. The Company also granted the underwriter a 30 -day option to purchase up to an additional 104,348 shares of Class A Stock at the public offering price, less the underwriting discount . On June 16, 2023, the underwriter exercised its over-allotment option, to purchase 67,689 shares of Class A Stock at the public offering price. The net proceeds to the Company resulting from the exercise of the over-allotment option, after deducting the underwriting discounts and commissions and other offering costs, were approximately $ 3.2 million. All of the shares of Class A Stock sold in the offering were offered by the Company. 22 Table of Contents The proceeds from both the initial offering and the over-allotment option were used to repay short-term borrowings, including borrowings incurred under our lines of credit with Citizens Bank and CoBank, incurred primarily to finance capital expenditures, including investment in utility plant and equipment, and other general corporate purposes. NOTE 15 – 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. A combination of methods was 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. 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 results of operations for the three and nine months ended September 30, 2023 and September 30, 2022 related to the business acquired are included in the Company’s condensed consolidated statements of operations. 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. The first installment payment was paid in May 2023. 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. 23 Table of Contents 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. As of December 31, 2022, the fair value determinations for TESI and the water operating assets acquired from the Town of Clayton were finalized. NOTE 16 – GEOGRAPHIC CONCENTRATION OF CUSTOMERS Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water utility service to customers within their established service territory in all three counties of Delaware and in portions of Maryland and Pennsylvania, pursuant to rates filed with and approved by the DEPSC, the MDPSC and the PAPUC. As of September 30, 2023, Artesian Water was serving approximately 95,600 customers, Artesian Water Maryland was serving approximately 2,600 customers and Artesian Water Pennsylvania was serving approximately 40 customers. Artesian Wastewater and TESI provide wastewater utility service to customers within their established service territory in Sussex County, Delaware pursuant to rates filed with and approved by the DEPSC. As of September 30, 2023, the number of wastewater customers served was approximately 8,000 , including one large industrial customer. NOTE 17 – 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 Quarterly Report on Form 10-Q 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 2 – Basis of Presentation. 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 September 30, 2023 and September 30, 2022. 24 Table of Contents (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenues: Regulated Utility $ 24,877 $ 24,541 $ 69,377 $ 67,846 Other (non-utility) 1,747 2,074 5,101 6,034 Inter-segment elimination ( 54 ) ( 33 ) ( 161 ) ( 100 ) Consolidated Revenues $ 26,570 $ 26,582 $ 74,317 $ 73,780 Operating Income: Regulated Utility $ 6,387 $ 7,784 $ 16,104 $ 18,647 Other (non-utility) 274 298 828 1,022 Consolidated Operating Income $ 6,661 $ 8,082 $ 16,932 $ 19,669 Income Taxes: Regulated Utility $ 1,929 $ 1,657 $ 4,300 $ 4,470 Other (non-utility) 320 177 856 508 Consolidated Income Taxes $ 2,249 $ 1,834 $ 5,156 $ 4,978 September 30, 2023 December 31, 2022 Assets: Regulated Utility $ 749,834 $ 713,113 Other (non-utility) 11,977 6,678 Consolidated Assets $ 761,811 $ 719,791 NOTE 18 - 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. 25 Table of Contents 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. Two installments of approximately $ 2.5 million each were paid in August 2022 and July 2023. The remaining $ 5.0 million is due in two equal installments no later than July of 2024 and 2025. In addition, the Trust shall reimburse Artesian Water for documented reasonable and necessary capital and operating costs after July 1, 2021 that Artesian Water incurs to treat Site-related COC’s. Any reimbursements Artesian Water receives from the Trust shall be subject to final determination by the DEPSC as to the appropriate regulatory rate-making treatment. 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 two refunds occurred in October 2022 and August 2023. Future customer refunds will occur no later than August 2024 and August 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 19 – IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS There was no new guidance issued by the FASB during the nine months ended September 30, 2023 that is applicable to the Company.