ARTESIAN RESOURCES CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS In thousands For the Year Ended ASSETS December 31, 2023 December 31, 2022 Utility plant, at original cost less accumulated depreciation $ 714,284 $ 668,031 Current assets Cash and cash equivalents 2,505 1,309 Accounts and other receivables (less provision for expected credit loss 2023 - $ 328 ; 2022 - $ 416 ) 12,830 13,511 Income tax receivable 1,799 1,632 Unbilled operating revenues 1,934 1,586 Materials and supplies 5,983 4,702 Prepaid property taxes 2,269 2,186 Prepaid expenses and other 3,297 2,878 Total current assets 30,617 27,804 Other assets Non-utility property (less accumulated depreciation 2023 - $ 1,052 ; 2022 - $ 990 ) 3,693 3,740 Other deferred assets 8,504 10,536 Goodwill 1,939 1,939 Operating lease right of use assets 506 467 Total other assets 14,642 16,682 Regulatory assets, net 7,289 7,274 Total Assets $ 766,832 $ 719,791 LIABILITIES AND STOCKHOLDERS’ EQUITY Stockholders’ equity Common stock $ 10,285 $ 9,502 Preferred stock — — Additional paid-in capital 143,369 107,142 Retained earnings 76,743 71,286 Total stockholders’ equity 230,397 187,930 Long-term debt, net of current portion 178,307 175,619 408,704 363,549 Current liabilities Lines of credit — 20,174 Current portion of long-term debt 2,235 2,003 Accounts payable 9,697 10,929 Accrued expenses 3,519 4,246 Overdraft payable 9 43 Accrued interest 2,275 989 Income taxes payable 2 6 Customer and other deposits 2,983 2,489 Other 1,694 3,191 Total current liabilities $ 22,414 $ 44,070 Commitments and contingencies (Note 11) — — Deferred credits and other liabilities Net advances for construction $ 2,797 $ 3,686 Operating lease liabilities 503 466 Regulatory liabilities 25,676 28,721 Deferred investment tax credits 423 439 Deferred income taxes 58,381 54,552 Total deferred credits and other liabilities $ 87,780 $ 87,864 Net contributions in aid of construction 247,934 224,308 Total Liabilities and Stockholders’ Equity $ 766,832 $ 719,791 The notes are an integral part of the consolidated financial statements . 30 Table of Contents CONSOLIDATED STATEMENTS OF OPERATIONS In thousands, except per share amounts For the Year Ended December 31, 2023 2022 2021 Operating revenues Water sales $ 80,033 $ 78,318 $ 77,821 Other utility operating revenue 12,195 11,506 7,195 Non-utility operating revenue 6,633 9,073 5,843 Total Operating Revenues 98,861 98,897 90,859 Operating expenses Utility operating expenses 46,205 43,772 41,414 Non-utility operating expenses 4,428 6,850 3,942 Depreciation and amortization 13,335 12,620 11,885 Taxes State and federal income tax expense (benefit) Current 2,962 4,285 3,360 Deferred 3,386 1,593 2,377 Property and other taxes 6,099 5,871 5,587 Total Operating Expenses 76,415 74,991 68,565 Operating income 22,446 23,906 22,294 Other income, net Allowance for funds used during construction (AFUDC) 2,002 1,329 823 Miscellaneous 1,407 1,265 1,302 3,409 2,594 2,125 Income before interest charges 25,855 26,500 24,419 Interest charges 9,156 8,502 7,592 Net income applicable to common stock $ 16,699 $ 17,998 $ 16,827 Net income per common share: Basic $ 1.67 $ 1.90 $ 1.79 Diluted $ 1.67 $ 1.90 $ 1.79 Weighted average common shares outstanding: Basic 10,018 9,462 9,394 Diluted 10,022 9,481 9,426 Cash dividends per share of common stock $ 1.14 $ 1.09 $ 1.05 The notes are an integral part of the consolidated financial statements. 31 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands For the Year Ended December 31, 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 16,699 $ 17,998 $ 16,827 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 13,335 12,620 11,885 Amortization of debt expense 355 354 351 Provision for bad debt expense 92 68 ( 224 ) Deferred income taxes, net 3,813 2,282 2,803 Stock compensation 254 152 193 AFUDC, equity portion ( 1,243 ) ( 894 ) ( 556 ) Changes in assets and liabilities, net of acquisitions: Accounts and other receivables 807 ( 3,847 ) 318 Income tax receivable ( 167 ) 602 ( 1,605 ) Unbilled operating revenues ( 348 ) ( 141 ) 86 Materials and supplies ( 1,281 ) ( 2,769 ) ( 398 ) Income taxes payable ( 4 ) 6 ( 28 ) Prepaid property taxes ( 83 ) 697 ( 415 ) Prepaid expenses and other ( 419 ) ( 216 ) ( 444 ) Other deferred assets 1,998 ( 5,473 ) ( 445 ) Regulatory assets ( 497 ) ( 37 ) ( 236 ) Regulatory liabilities ( 3,168 ) 6,799 ( 535 ) Accounts payable 284 ( 3,989 ) 3,547 Accrued expenses 614 ( 564 ) ( 71 ) Accrued interest 1,286 72 ( 13 ) Revenue reserved for refund — — — Customer deposits and other ( 476 ) 545 270 NET CASH PROVIDED BY OPERATING ACTIVITIES 31,851 24,265 31,310 CASH FLOWS USED IN INVESTING ACTIVITIES Capital expenditures (net of AFUDC, equity portion) ( 62,177 ) ( 48,483 ) ( 40,814 ) Investment in acquisitions, net of cash acquired — ( 6,341 ) — Proceeds from sale of assets 99 65 90 NET CASH USED IN INVESTING ACTIVITIES ( 62,078 ) ( 54,759 ) ( 40,724 ) CASH FLOWS FROM FINANCING ACTIVITIES Repayments under lines of credit agreements ( 23,477 ) ( 41,038 ) ( 10,797 ) Borrowings under lines of credit agreements 3,303 34,509 10,687 (Decrease) increase in overdraft payable ( 34 ) 13 ( 75 ) Proceeds from contributions in aid of construction and advances 24,747 17,494 17,059 Payouts for contributions in aid of construction and advances ( 2,228 ) ( 1,063 ) ( 1,242 ) Net proceeds from issuance of common stock 37,073 2,090 1,390 Equity issuance cost ( 317 ) — — Issuance of long-term debt 5,608 31,803 4,126 Dividends paid ( 11,242 ) ( 10,319 ) ( 9,826 ) Debt issuance costs — ( 135 ) ( 19 ) Principal repayments of long-term debt ( 2,010 ) ( 1,643 ) ( 1,825 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 31,423 31,711 9,478 NET INCREASE IN CASH AND CASH EQUIVALENTS 1,196 1,217 64 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,309 92 28 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,505 $ 1,309 $ 92 Non-cash Investing and Financing Activity: Utility plant received as construction advances and contributions in aid of construction $ 3,492 $ 8,416 $ 3,538 Contractual amounts of contributions in aid of construction due from developers included in accounts receivable $ 1,695 $ 726 $ 545 Contractual amounts of contributions in aid of construction received from developers previously included in accounts receivable $ 799 $ 356 $ 1,749 Change in amounts included in accounts payable and accrued payables related to capital expenditures $ ( 3,384 ) $ 3,182 $ 641 Supplemental Cash Flow Information: Interest paid $ 7,515 $ 8,430 $ 7,605 Income taxes paid $ 3,590 $ 3,482 $ 5,181 Purchase price allocation of investment in acquisitions: Utility plant $ — $ 33,345 $ — Cash — 280 — Goodwill — 1,939 — Other assets — 1,033 — Total assets — 36,597 — Less: Liabilities — 2,828 — Future contractual obligation payable to seller — 1,569 — Contributions in aid of construction — 25,597 — Cash paid for acquisitions — 6,621 — Cash received from acquisitions — 280 — Investment in acquisitions, net of cash acquired $ — $ 6,341 $ — The notes are an integral part of the consolidated financial statements. 32 Table of Contents CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY In thousands Common Shares Outstanding Class A Non-Voting (1) (3) (4) Common Shares Outstanding Class B Voting (2) $ 1 Par Value Class A Non-Voting $ 1 Par Value Class B Voting Additional Paid-in Capital Retained Earnings Total Balance as of December 31, 2020 8,475 881 $ 8,475 $ 881 $ 103,463 $ 56,606 $ 169,425 Net income — — — — — 16,827 16,827 Cash dividends declared Common stock — — — — — ( 9,826 ) ( 9,826 ) Issuance of common stock Dividend reinvestment plan 10 — 10 — 382 — 392 Employee stock options and awards (4) 38 — 38 — 790 — 828 Employee Retirement Plan (3) 9 — 9 — 354 — 363 Balance as of December 31, 2021 8,532 881 $ 8,532 $ 881 $ 104,989 $ 63,607 $ 178,009 Net income — — — — — 17,998 17,998 Cash dividends declared Common stock — — — — — ( 10,319 ) ( 10,319 ) Issuance of common stock Dividend reinvestment plan 7 — 7 — 366 — 373 Employee stock options and awards (4) 82 — 82 — 1,787 — 1,869 Employee Retirement Plan (3) — — — — — — — Balance as of December 31, 2022 8,621 881 $ 8,621 $ 881 $ 107,142 $ 71,286 $ 187,930 Net income — — — — — 16,699 16,699 Cash dividends declared Common stock — — — — — ( 11,242 ) ( 11,242 ) Issuance of common stock Public offering, net of costs 763 — 763 — 35,464 — 36,227 Dividend reinvestment plan 8 — 8 — 373 — 381 Employee stock options and awards (4) 12 — 12 — 390 — 402 Employee Retirement Plan (3) — — — — — — — Balance as of December 31, 2023 9,404 881 $ 9,404 $ 881 $ 143,369 $ 76,743 $ 230,397 (1) At December 31, 2023, 2022, and 2021, Class A Stock had 15,000,000 shares authorized. For the same periods, shares issued, inclusive of treasury shares, were 9,433,288 , 8,650,392 and 8,561,772 , respectively. (2) At December 31, 2023, 2022, and 2021, Class B Stock had 1,040,000 shares authorized and 881,452 shares issued. (3) Artesian Resources Corporation registered 200,000 shares of Class A Stock, subsequently adjusted for stock splits, available for purchase through the Company’s 401(k) retirement plan. (4) Under the Equity Compensation Plan, effective December 9, 2015, Artesian Resources Corporation authorized up to 331,500 shares of Class A Stock for issuance of grants in forms of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the Plan. Includes stock compensation expense for the years ended December 31, 2023, 2022, and 2021, See Notes to Consolidated Financial Statements - Note 9-Stock Compensation Plans. The notes are an integral part of the consolidated financial statements. 33 Table of Contents NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The audited consolidated financial statements are presented in accordance with the requirements of Form 10-K and accounting principles generally accepted in the United States and consequently include all the disclosures required in the consolidated financial statements included in the Company’s Annual Report on Form 10-K. The accompanying consolidated financial statements include the accounts of Artesian Resources Corporation and its subsidiaries and all intercompany balances and transactions between subsidiaries have been eliminated. Reclassification Certain accounts in the prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements. These reclassifications had no effect on net income or stockholders’ equity. Regulated Utility Accounting The accounting records of Artesian Water Company, Inc., or Artesian Water, Artesian Wastewater Management, Inc., or Artesian Wastewater, and, effective January 14, 2022, Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI, are maintained in accordance with the uniform system of accounts as prescribed by the Delaware Public Service Commission, or the DEPSC. The accounting records of Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, are maintained in accordance with the uniform system of accounts as prescribed by the Pennsylvania Public Utility Commission, or the PAPUC. The accounting records of Artesian Water Maryland, Inc., or Artesian Water Maryland, and Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland, are maintained in accordance with the uniform system of accounts as prescribed by the Maryland Public Service Commission, or the MDPSC. All these subsidiaries follow the provisions of Financial Accounting Standards Board, or FASB, ASC Topic 980, which provides guidance for companies in regulated industries. These regulated subsidiaries account for the majority of our operating revenue. See Note 18 (Business Segment Information) to our Consolidated Financial Statements for a full description of our segment information. Use of Estimates in the Preparation of Consolidated Financial Statements The consolidated financial statements were prepared in conformity with generally accepted accounting principles in the U.S., which require management to make certain estimates and assumptions regarding the reported amounts of assets and liabilities including unbilled revenues, credit losses and reserves for bad debt, regulatory asset recovery, lease agreements, goodwill and contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management’s estimates. All additions to utility plant are recorded at cost. Business combinations pursuant to ASC Topic 805 may result in a purchase price allocation and the acquired assets are required to be evaluated by the applicable regulatory agency. Artesian Wastewater acquired TESI in January 2022 and Artesian Water purchased substantially all of the water operating assets from the Town of Clayton in May 2022. On December 31, 2022, the fair value determinations for TESI and the water operating assets acquired from the Town of Clayton were finalized. Utility Plant Utility plant is stated at original cost. Cost includes direct labor, materials, AFUDC (see description below) and indirect charges for such capitalized items as transportation, supervision, pension, medical, and other fringe benefits related to employees engaged in construction activities. When depreciable units of utility plant are retired, the historical costs of plant retired is charged to accumulated depreciation. Any cost associated with retirement, less any salvage value or proceeds received, is charged to the regulated retirement liability. Maintenance, repairs, and replacement of minor items of utility plant are charged to expense as incurred. 34 Table of Contents Allowance for Funds Used during Construction, or AFUDC, is a non-cash credit to income with a corresponding charge to utility plant that represents the cost of borrowed funds or a return on equity funds devoted to plant under construction. Presented in the table below is AFUDC for the years ended December 31: In thousands 2023 2022 2021 AFUDC - Debt $ 759 $ 435 $ 267 AFUDC - Equity $ 1,243 $ 894 $ 556 35 Table of Contents Utility plant comprises : In thousands December 31, Estimated Useful Life (In Years) 2023 2022 Utility plant at original cost Utility plant in service-Water Intangible plant — $ 140 $ 140 Source of supply plant 45 - 85 29,960 25,223 Pumping and water treatment plant 8 - 62 130,337 116,915 Transmission and distribution plant Mains 81 370,977 338,368 Services 39 60,818 56,396 Storage tanks 76 40,933 34,567 Meters 26 30,318 29,720 Hydrants 60 18,980 17,751 General plant 5 - 31 67,317 65,632 Utility plant in service-Wastewater Intangible plant — 116 117 Treatment and disposal plant 21 - 81 67,789 66,178 Collection mains & lift stations 81 51,539 49,431 General plant 5 - 31 2,478 1,845 Property held for future use — 4,028 4,489 Construction work in progress — 23,724 34,213 899,454 840,985 Less – accumulated depreciation 185,170 172,954 $ 714,284 $ 668,031 Depreciation and Amortization For financial reporting purposes, depreciation is recorded using the straight-line method at rates based on estimated economic useful lives, which range from 5 to 85 years. Composite depreciation rates for water utility plant were 2.13 % , 2.16 % and 2.17 % for 2023 , 2022 and 2021 , respectively. In a rate order issued by the DEPSC, the Company was directed effective January 1, 1998, to begin using revised depreciation rates for utility plant. In rate orders issued by the DEPSC, Artesian Water was directed, effective May 28, 1991 and August 25, 1992, to offset depreciation recorded on utility plant by depreciation on utility property funded by Contributions in Aid of Construction, or CIAC, and Advances for Construction, or Advances, respectively. This reduction in depreciation expense is also applied to outstanding CIAC and Advances. Other deferred assets are amortized using the straight-line method over applicable lives, which range from 20 to 24 years. Regulatory Assets The FASB ASC Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party regulatory agency. Certain expenses are recoverable through rates charged to our customers, without a return on investment, and are deferred and amortized during future periods using various methods as permitted by the DEPSC, MDPSC, and PAPUC. 36 Table of Contents 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 began 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 3 Maryland rate proceedings 5 Debt related costs 15 to 30 (based on term of related debt) Deferred costs affiliated interest agreement 20 Goodwill (resulting from acquisition of Mountain Hill Water Company in 2008) 50 Deferred acquisition costs (resulting from purchase of water assets in Cecil County, Maryland in 2011 and Port Deposit, Maryland in 2010) 20 Franchise Costs (resulting from purchase of water assets in Cecil County, Maryland in 2011) 80 Regulatory assets, net of amortization, comprise: (in thousands) December 31, 2023 December 31, 2022 Deferred contract costs and other $ 209 $ 227 Rate case studies 136 57 Rate proceedings 385 — Deferred income taxes 444 465 Debt related costs 4,322 4,682 Deferred costs affiliated interest agreement 1,110 1,114 Goodwill 258 266 Deferred acquisition and franchise costs 425 463 $ 7,289 $ 7,274 Impairment or Disposal of Long-Lived Assets Our long-lived assets consist primarily of utility plant in service and regulatory assets. A review of our long-lived assets is performed in accordance with the requirements of FASB ASC Topic 360. In addition, the regulatory assets are reviewed for the continued application of FASB ASC Topic 980. The review determines whether there have been changes in circumstances or events that have occurred requiring adjustments to the carrying value of these assets. FASB ASC Topic 980 stipulates that adjustments to the carrying value of these assets would be made in instances where the inclusion in the rate-making process is unlikely. For the years ended December 31, 2023, 2022 and 2021, there was no impairment or regulatory disallowance identified in our review. 37 Table of Contents Goodwill The Company records goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. At December 31, 2023 and December 31, 2022, the Company had approximately $ 1.9 million of goodwill, respectively. The $ 1.9 million of goodwill arose from the January 2022 acquisition of Tidewater Environmental Services, Inc. Artesian Wastewater operates as the parent holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI, and is a subsidiary of our Regulated Utility segment. In accordance with the accounting guidance for testing goodwill for impairment, the Company performs an annual assessment. In 2023, the Company used the optional qualitative assessment, "step zero", to identify and evaluate relevant events and circumstances to conclude whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill. Relevant events and circumstances assessed included macroeconomic conditions, industry and market conditions, cost factors, financial performance, management and overall strategy. After evaluating and weighing these relevant events and circumstances, it was concluded that there was no impairment of goodwill and it was not necessary to perform quantitative testing. Other Deferred Assets The investment in CoBank, which is a cooperative bank, is related to certain outstanding First Mortgage Bonds and is a required investment in the bank based on the underlying long-term debt agreements. The settlement agreement receivable is related to the long-term portion of reimbursements due in years 2024 and 2025 as further discussed in Note 1 – Accounts Receivable. Other deferred assets at December 31, net of amortization, comprise: In thousands 2023 2022 Investment in CoBank $ 5,882 $ 5,351 Settlement agreement receivable-long term 2,496 4,991 Other deferred assets 126 194 $ 8,504 $ 10,536 Advances for Construction Cash advances to reimburse Artesian Water for its costs to construct water mains, services and hydrants are contributed to Artesian Water by real estate developers and builders in order to extend water service to their properties. The value of these contributions is recorded as Advances for Construction. Artesian Water makes refunds on these advances over a specific period of time based on operating revenues generated by the specific plant or as new customers are connected to the mains. After all refunds are made within the contract period, any remaining balance is transferred to CIAC. Contributions in Aid of Construction CIAC includes the non-refundable portion of advances for construction and direct contributions of water mains, services and hydrants, and wastewater treatment facilities and collection systems, or cash to reimburse our water and wastewater subsidiaries for costs to construct water mains, services and hydrants, and wastewater treatment and disposal plants. Effective with the Tax Cuts and Jobs Act, or TCJA, in 2017 CIAC was taxable and the DEPSC, MDPSC and PAPUC allowed the Company to collect additional CIAC to pay the associated tax. In 2021, legislation was enacted to amend the TCJA, which now exempts CIAC from income taxes for regulated water and wastewater utilities, effective for all of 2021 and forward. In 2022 the Company refunded developers a total of $ 3.6 million for the additional CIAC collected in 2021 to pay the associated tax. For the years ended December 31, 2023 and December 31, 2022, Artesian Water received approximately $ 3.8 million and $ 2.0 million, respectively, in grant funding from the State of Delaware, Delaware Department of Health and Social Services, Division of Public Health, or DPH, pursuant to grant agreements. The grants were used by Artesian Water to cover the costs associated with certain construction projects. The grant funds received under the grant agreements were recorded in accordance with the requirements under FASB ASC Topic 980, in Net contributions in aid of construction in the Consolidated Balance Sheets. Pursuant to the grant agreements, Artesian Water is no longer eligible to receive grant funds under these grants. 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. 38 Table of Contents 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 17 – Legal Proceedings. The deferred settlement refunds were $ 5.0 million and $ 7.5 million at December 31, 2023 and December 31, 2022, respectively. Pursuant to the enactment of the Tax Cuts and Jobs Act, or TCJA, on December 22, 2017, the Company adjusted its existing deferred income tax balances to reflect the decrease in the corporate income tax rate from 34 % to 21 % (see Note 5 – Income Taxes) 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. The deferred income taxes, related to TCJA, were $ 20.7 million and $ 21.2 million at December 31, 2023 and December 31, 2022, respectively. Income Taxes Deferred income taxes are provided in accordance with FASB ASC Topic 740 on all differences between the tax basis of assets and liabilities and the amounts at which they are carried in the consolidated financial statements based on the enacted tax rates expected to be in effect when such temporary differences are expected to reverse. The Company’s rate regulated subsidiaries recognize regulatory liabilities, to the extent considered in ratemaking, for deferred taxes provided in excess of the current statutory tax rate and regulatory assets for deferred taxes provided at rates less than the current statutory rate. Such tax-related regulatory assets and liabilities are reported at the revenue requirement level and amortized to income as the related temporary differences reverse, generally over the lives of the related properties. Under FASB ASC Topic 740 , an uncertain tax position represents our expected treatment of a tax position taken, or planned to be taken in the future, that has not been reflected in measuring income tax expense for financial reporting purposes. The Company establishes reserves for uncertain tax positions based upon management’s judgment as to the sustainability of these positions. These accounting estimates related to the uncertain tax position reserve require judgments to be made as to the sustainability of each uncertain tax position based on its technical merits. The Company believes its tax positions comply with applicable law and that it has adequately recorded reserves as required. However, to the extent the final tax outcome of these matters is different than the estimates recorded, the Company would then adjust its tax reserves or unrecognized tax benefits in the period that this information becomes known. The statute of limitations for the 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. During 2023, the Company has accrued approximately $ 12 ,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 2020 through 2023 . Investment tax credits were deferred through 1986 and are recognized as a reduction of deferred income tax expense over the estimated economic useful lives of the related assets. Stock Compensation Plans See Note 9 (Stock Compensation Plans) to our Consolidated Financial Statements for a full description of our stock compensation plans. 39 Table of Contents Revenue Recognition and Unbilled Revenues See Note 2 (Revenue Recognition) to our Consolidated Financial Statements for a full description of our revenue recognition . Leases The Company has agreements for land easements and office equipment under operating leases. Management makes certain estimates and assumptions regarding each lease agreement, renewal and amendment, including, but not limited to, discount rates and probable term, which can impact the escalations in payment that are taken into consideration when calculating the straight-line basis. The amount of rent expense and income reported could vary if different estimates and assumptions are used. Management also makes certain estimates and assumptions regarding the fair value of the leased property at lease commencement and the separation of lease and nonlease components. See Note 3 (Leases) to our Consolidated Financial Statements for a full description of our leases. Accounts Receivable Accounts receivable are recorded at the invoiced amounts. As set forth in a settlement agreement, Artesian Water will receive reimbursements from the Delaware Sand and Gravel Remedial Trust, or Trust, for Artesian Water’s past capital and operating costs, totaling approximately $ 10.0 million, related to the treatment costs associated with the release of contaminants from the Delaware Sand & Gravel Landfill Superfund Site, or Site, in groundwater that Artesian Water uses for public potable water supply. 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. 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 contaminants of concern and of emerging concern. A provision for expected credit loss is calculated as a percentage of total associated revenues based upon historical trends and adjusted for current and reasonable projections based upon expected economic 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 provision for expected credit loss was $ 0.3 million and $ 0.4 million at December 31, 2023 and December 31, 2022 , respectively. The corresponding expense for the years ended December 31, 2023 and 2022 was $ 0.1 million and $ 0.1 million, respectively, reported in Operating expenses – Utility and Non-utility operating expenses on the Company’s Consolidated Statements of Operations. The following table summarizes the changes in the Company’s accounts receivable balance: December 31, In thousands 2023 2022 2021 Customer accounts receivable – water $ 6,573 $ 5,981 $ 5,986 Customer accounts receivable – wastewater 513 482 1,326 Settlement agreement receivable – short term 2,747 2,532 — Miscellaneous accounts receivable 1,236 3,781 786 Developer receivable 2,089 1,151 698 13,158 13,927 8,796 Less provision for expected credit loss 328 416 429 Net accounts receivable $ 12,830 $ 13,511 $ 8,367 The activities in the provision for expected credit loss are as follows: December 31, In thousands 2023 2022 Beginning balance $ 416 $ 429 Provision adjustments 92 146 Recoveries 48 28 Write off of uncollectible accounts ( 228 ) ( 187 ) Ending balance $ 328 $ 416 40 Table of Contents Cash and Cash Equivalents For purposes of the Consolidated Statement of Cash Flows, Artesian Resources considers all temporary cash investments with an original maturity of three months or less to be cash equivalents. Artesian Resources and its subsidiaries utilize their bank’s zero balance account disbursement service to reduce the use of their lines of credit by funding checks as they are presented to the bank for payment rather than at issuance. If the checks currently outstanding, but not yet funded, exceed the cash balance on our books, the net liability is recorded as a current liability on the Consolidated Balance Sheet in the Overdraft Payable account. Inventories Inventories consist of materials and supplies related to water and wastewater utility plant. These materials and supplies are used for new construction and repairs and are recorded at the purchase cost. Usage costs are determined by the first-in, first-out method. The Company adjusts inventory value based on historical usage and forecasted demand. NOTE 2 – 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. 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. 41 Table of Contents Artesian generates fixed-fee revenue for water and wastewater services provided to customers once a customer requests service in our territory. Our wastewater territory is located in Sussex County, Delaware. We recognize revenue from these services on a ratable basis over time as the customer simultaneously receives and consumes all the benefits of the Company remaining ready to provide them water and wastewater service. These contract services are billed either in advance or arrears at tariff rates on a monthly, quarterly or semi-annual basis. For contract services billed in arrears, we record unbilled operating revenue (contract asset) for any services through the end of the accounting period that will be billed in the next monthly or quarterly cycle. For contract services billed in advance, we record deferred revenue (contract liability) and accounts receivable for any amounts for which we have a right to invoice but for which services have not been provided. This deferred revenue is netted with unbilled operating revenue on the 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. Artesian generates revenue from interim temporary rates. In Delaware, utilities are permitted by law to place rates into effect, under bond, on a temporary basis, pending resolution of an application for a base rate increase by the DEPSC. Temporary rate revenue is calculated as a percentage increase on tariff rates. We recognize this revenue based on the same guidelines as noted above depending on whether the additional rate was applied to consumption revenue or fixed-fee revenue. Until permanent rates are determined by the DEPSC, if it is probable that a refund of revenue associated with temporary rates will occur, a reserve would be recorded reducing revenue from temporary rates. As of December 31, 2023 and December 31, 2022, no such reserve or reduction to revenue was recorded. 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. 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. 42 Table of Contents Artesian generates design and installation revenue for services related to the design and construction of wastewater infrastructure for a state agency under contract. We recognize revenue from these services over time as services are performed using the percentage-of-completion method based on an input method of incurred costs (cost-to-cost). These services are invoiced at the end of every month based on incurred costs to date. As of December 31, 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: For the Year Ended December 31, (in thousands) 2023 2022 2021 Tariff Revenue Consumption charges $ 49,051 $ 47,809 $ 47,924 Fixed fees 33,074 31,431 27,977 Service charges 682 597 579 DSIC 4,727 5,085 5,093 Metered wastewater services 602 649 — Industrial wastewater services 1,851 1,853 675 Total Tariff Revenue $ 89,987 $ 87,424 $ 82,248 Non- Tariff Revenue Service line protection plans $ 5,632 $ 5,020 $ 4,594 Contract operations 1,046 931 884 Design and installation 181 3,315 562 Inspection fees 424 326 341 Total Non- Tariff Revenue $ 7,283 $ 9,592 $ 6,381 Other Operating Revenue $ 1,591 $ 1,881 $ 2,230 Total Operating Revenue $ 98,861 $ 98,897 $ 90,859 Contract Assets and Contract Liabilities Our contract assets and liabilities consist of the following: (in thousands) December 31, 2023 December 31, 2022 December 31, 2021 Contract Assets – Tariff $ 3,043 $ 2,618 $ 2,144 Deferred Revenue Deferred Revenue – Tariff $ 1,300 $ 1,231 $ 1,227 Deferred Revenue – Non-Tariff 539 438 287 Total Deferred Revenue $ 1,839 $ 1,669 $ 1,514 43 Table of Contents For the year ended December 31, 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. For the year ended December 31, 2022, the Company recognized revenue of $ 1.2 million from amounts that were included in Deferred Revenue – Tariff at the beginning of the year and revenue of $ 0.3 million from amounts that were included in Deferred Revenue – Non- Tariff at the beginning of the year. The 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 December 31, 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 December 31, 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 , approximately six years for the contract service revenue and one year for the SLP Plan revenue and inspection fee revenue, respectively. NOTE 3 – LEASES The Company leases land and office equipment under operating leases from non-related parties. Our leases have remaining lease terms of 4 years to 73 years , some of which include options to automatically extend the leases for up to 66 years and are included as part of the lease liability and right of use assets as we expect to exercise the options. Payments made under operating leases are recognized in the consolidated statement of operations on a straight-line basis over the period of the lease. The annual lease payments for the land operating leases increase each year either by the most recent increase in the Consumer Price Index or by 3 %, as applicable based on the lease agreements. Periodically, the annual lease payment for one operating land lease is determined based on the fair market value of the applicable parcel of land. None of the operating leases contain contingent rent provisions. The commencement date of all the operating leases is the earlier of the date we become legally obligated to make rent payments or the date we may exercise control over the use of the land or equipment. The Company currently does not have any financing leases and does not have any lessor leases that require disclosure. Management made certain assumptions related to the separation of lease and nonlease components and to the discount rate used when calculating the right of use asset and liability amounts for the operating leases. As our leases do not provide an implicit rate, we use our incremental borrowing rates for long-term and short-term agreements and apply the rates accordingly based on the term of the lease agreements to determine the present value of lease payments. In October 1997, Artesian Water entered into a 33-year operating lease for a parcel of land with improvements located in South Bethany, a municipality in Sussex County, Delaware. The annual lease payments increase each year by the most recent increase in the Consumer Price Index for Urban Workers, CPI-U, as published by the U.S. Department of Labor, Bureau of Labor Statistics. At each eleven th year of the lease term, the annual lease payment shall be determined based on the fair market value of the parcel of land. Rental payments for 2023, 2022 and 2021 were $ 19,000 , $ 19,000 , and $ 17,000 , respectively. The future minimum rental payment as disclosed in the following table is calculated using CPI-U from August 2023 as well as the adjustment for an appraisal conducted in 2019 to determine the fair market value of the parcel of land. In March 2023, Artesian Water entered into a 5-year operating lease for office equipment. The previous lease for office equipment expired in March 2022. The quarterly lease payments under both lease agreements remained fixed throughout the term of the lease. Payments pursuant to the lease agreements for 2023, 2022 and 2021 were $ 6,000 , $ 5,000 and $ 19,000 , respectively. Rent expense for all operating leases except those with terms of 12 months or less comprises: For the Twelve Months Ended December 31, (in thousands) 2023 2022 Minimum rentals $ 34 $ 32 Contingent rentals — — $ 34 $ 32 44 Table of Contents Supplemental cash flow information related to leases is as follows: (in thousands) Twelve Months Ended Twelve Months Ended December 31, December 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 34 $ 32 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 506 $ 467 Supplemental balance sheet information related to leases is as follows: (in thousands, except lease term and discount rate) December 31, 2023 December 31, 2022 Operating Leases: Operating lease right-of-use assets $ 506 $ 467 Other current liabilities $ 9 $ 2 Operating lease liabilities 503 466 Total operating lease liabilities $ 512 $ 468 Weighted Average Remaining Lease Term Operating leases 58 years 61 years Weighted Average Discount Rate Operating leases 5.0 % 5.0 % Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2023 are as follows: 45 Table of Contents (in thousands) Operating Leases Year 2024 $ 35 2025 35 2026 35 2027 35 2028 29 Thereafter 1,429 Total undiscounted lease payments $ 1,598 Less effects of discounting ( 1,086 ) Total lease liabilities recognized 512 As of December 31, 2023, we have not entered into finance leases that will commence at a future date. 46 Table of Contents NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. Current Assets and Liabilities For those current assets and liabilities that are considered financial instruments, the carrying amounts approximate fair value because of the short maturity of those instruments. Under the fair value hierarchy, the fair value of such financial instruments is classified as a Level 1. Long-term Financial Liabilities As of December 31, 2023 and December 31, 2022 , all of the Company’s outstanding long-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 December 31, 2023 2022 Carrying amount $ 180,542 $ 177,622 Estimated fair value 162,720 155,425 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 5 – INCOME TAXES Deferred income taxes are provided in accordance with FASB ASC Topic 740 on all differences between the tax basis of assets and liabilities and the amounts at which they are carried in the consolidated financial statements based on the enacted tax rates expected to be in effect when such temporary differences are expected to reverse. The Company’s rate regulated subsidiaries recognize regulatory liabilities, to the extent considered in ratemaking, for deferred taxes provided in excess of the current statutory tax rate and regulatory assets for deferred taxes provided at rates less than the current statutory rate. Such tax-related regulatory assets and liabilities are reported at the revenue requirement level and amortized to income as the related temporary differences reverse, generally over the lives of the related properties. As of December 31, 2023 , the Company has separate company state net operating loss carry-forwards aggregating approximately $ 15.7 million. Most of these net operating loss carry-forwards will not expire, with a negligible amount expiring in 2024. The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized in the future. The valuation allowance increased to approximately $ 906,000 in 2023 from approximately $ 600,000 in 2022 . Management believes that it is more likely than not that the Company will realize the benefit of these deferred tax assets, net of the valuation allowance. Components of Income Tax Expense In thousands For the Year Ended December 31, Federal income taxes 2023 2022 2021 Current $ 1,946 $ 2,912 $ 2,144 Deferred 1,968 930 1,601 Total federal income tax expense $ 3,914 $ 3,842 $ 3,745 For the Year Ended December 31, State income taxes 2023 2022 2021 Current $ 1,016 $ 1,373 $ 1,216 Deferred 1,418 663 776 Total state income tax expense $ 2,434 $ 2,036 $ 1,992 47 Table of Contents Reconciliation of effective tax rate: For the Year Ended December 31, In thousands 2023 2023 2022 2022 2021 2021 Amount Percent Amount Percent Amount Percent Reconciliation of effective tax rate Income before federal and state income taxes $ 23,047 100.0 % $ 23,876 100.0 % $ 22,564 100.0 % Amount computed at statutory rate 4,840 21.0 % 5,014 21.0 % 4,738 21.0 % Reconciling items State income tax-net of federal tax benefit 1,918 8.3 % 1,696 7.1 % 1,600 7.1 % Regulatory liability adjustment ( 449 ) ( 1.9 )% ( 450 ) ( 1.9 )% ( 451 ) ( 2.0 )% Other 39 0.2 % ( 382 ) ( 1.6 )% ( 150 ) ( 0.7 )% Total income tax expense and effective rate $ 6,348 27.6 % $ 5,878 24.6 % $ 5,737 25.4 % Deferred income taxes at December 31, 2023 and 2022 were comprised of the following: For the Year Ended December 31, In thousands 2023 2022 Deferred tax assets related to: State operating loss carry-forwards $ 1,037 $ 922 Less: valuation allowance ( 906 ) ( 600 ) Bad debt allowance 92 116 Stock options 47 47 Other 48 28 Total deferred tax assets $ 318 $ 513 Deferred tax liabilities related to: Property plant and equipment basis differences $ ( 56,012 ) $ ( 52,565 ) Bond retirement costs ( 982 ) ( 1,058 ) Property taxes ( 624 ) ( 609 ) Other ( 1,081 ) ( 833 ) Total deferred tax liabilities $ ( 58,699 ) $ ( 55,065 ) Net deferred tax liability $ ( 58,381 ) $ ( 54,552 ) Schedule of Valuation Allowance Balance at Beginning of Period Additions Charged to Costs and Expenses Deductions Balance at End of Period In thousands Classification For the Year Ended December 31, 2023 Valuation allowance for deferred tax assets $ 600 $ 312 $ 6 $ 906 For the Year Ended December 31, 2022 Valuation allowance for deferred tax assets $ 546 $ 54 $ — $ 600 For the Year Ended December 31, 2021 Valuation allowance for deferred tax assets $ 493 $ 53 $ — $ 546 48 Table of Contents Under FASB ASC Topic 740, the Company establishes reserves for uncertain tax positions based upon management’s judgment as to the sustainability of these positions. The Company reserved a liability related to the difference in the tax depreciation utilizing the half-year convention rather than the mid-quarter convention for 2018. The following table provides the changes in the Company’s uncertain tax position: For the years ended December 31, In thousands 2023 2022 Balance at beginning of year $ 146 $ 202 Additions based on tax positions related to the current year — 146 Additions based on tax positions related to prior years 12 10 Reductions for tax positions of prior years — — Lapses in statutes of limitations — ( 212 ) Balance at end of year $ 158 $ 146 NOTE 6 – PREFERRED STOCK As of December 31, 2023 and 2022, Artesian Resources had no preferred stock outstanding. Artesian Resources has 100,000 shares of $ 1.00 par value Series Preferred stock authorized but unissued. NOTE 7 – COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL The Class A Non-Voting Common Stock, or Class A Non-Voting Stock, of Artesian Resources trades on the Nasdaq Global Select Market under the symbol ARTNA. The Class B Common Stock, or Class B Stock, of Artesian Resources trades on the Nasdaq’s OTC Bulletin Board under the symbol ARTNB. The rights of the holders of the Class A Non-Voting Stock and the Class B Stock are identical, except with respect to voting. Under Artesian Resources’ dividend reinvestment plan, which allows for reinvestment of cash dividends and optional cash payments, stockholders were issued approximately 8,000 , 7,000 and 10,000 shares at fair market value for the investment of $ 381 ,000, $ 373 ,000 and $ 392 ,000 of their monies in the years 2023, 2022, and 2021, respectively. NOTE 8 – DEBT At December 31, 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 December 31, 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 . 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 1.10 % effective August 3, 2023. Term SOFR cannot be less than 0.00 % . This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time. The term of this line of credit expires on the earlier of May 20, 2024 or any date on which Citizens demands payment. The Company expects to renew this line of credit. At December 31, 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 December 31, 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 term of this line of credit expires on October 31, 2024 . Artesian Water expects to renew this line of credit. CoBank may make an annual patronage refund based on the average line of credit and loan volume outstanding in the prior year . The $ 20 million line of credit, the First Mortgage Bonds and the promissory note are with CoBank. Patronage refunds earned by Artesian in 2023 and 2022 were $ 1.6 million and $ 1.5 million, respectively. 49 Table of Contents The weighted average interest rate on the lines of credit discussed above paid by the Company was 6.27 % for the year ended December 31, 2023. These lines of credit, as well as the long-term debt obligations shown below, require us to abide by certain financial covenants and ratios. As of December 31, 2023, we were in compliance with these financial covenants. Long-term debt consists of: December 31, In thousands 2023 2022 First mortgage bonds Series R, 5.96 %, due December 31, 2028 $ 25,000 $ 25,000 Series S, 4.45 %, due December 31, 2033 6,000 6,600 Series T, 4.24 %, due December 20, 2036 40,000 40,000 Series U, 4.71 %, due January 31, 2038 25,000 25,000 Series V, 4.42 %, due October 31, 2049 30,000 30,000 Series W, 4.43 %, due April 30, 2047 30,000 30,000 156,000 156,600 State revolving fund loans 3.57 %, due September 1, 2023 — 102 3.64 %, due May 1, 2025 228 373 3.41 %, due February 1, 2031 1,415 1,577 3.40 %, due July 1, 2032 1,445 1,590 1.187 %, due November 1, 2041 588 617 1.187 %, due November 1, 2041 690 724 1.187 %, due November 1, 2041 1,075 1,128 2.00 %, due February 1, 2043 828 846 2.00 %, due February 1, 2043 1,143 974 2.00 %, due June 1, 2043 1,002 1,044 2.00 %, due June 1, 2043 1,022 — 2.00 %, due February 1, 2044 2,696 — 2.00 %, due January 1, 2043 1,000 — 13,132 8,975 Notes Payable Promissory Note, 5.12 %, due December 30, 2028 $ 10,155 $ 10,478 Asset Purchase, 2.00 %, due May 26, 2027 1,255 1,569 11,410 12,047 Sub-total 180,542 177,622 Less: current maturities (principal amount) 2,235 2,003 Total long-term debt $ 178,307 $ 175,619 Payments of principal amounts due during the next five years and thereafter: In thousands 2024 2025 2026 2027 2028 Thereafter First Mortgage bonds $ 600 $ 600 $ 600 $ 600 $ 25,600 $ 128,000 State revolving fund loans 756 852 794 813 834 9,083 Asset Purchase-Contractual Obligation 314 314 314 313 — — Promissory note 565 480 505 532 559 7,514 Total payments $ 2,235 $ 2,246 $ 2,213 $ 2,258 $ 26,993 $ 144,597 Substantially all of Artesian Water’s utility plant is pledged as security for our First Mortgage Bonds. As of December 31, 2023, no other water utility plant has been pledged as security for loans. Two parcels of land in Artesian Wastewater are pledged as security for the promissory note. 50 Table of Contents NOTE 9 – STOCK COMPENSATION PLANS On December 9, 2015, the Company’s stockholders approved the 2015 Equity Compensation Plan, or the 2015 Plan, that replaced the 2005 Equity Compensation Plan, or the 2005 Plan, which expired on May 24, 2015. The 2015 Plan provides that grants may be in any of the following forms: incentive stock options, nonqualified stock options, stock units, stock awards, dividend equivalents and other stock-based awards. The 2015 Plan is administered and interpreted by the Compensation Committee of the Board of Directors, or the Committee. The Committee has the authority to determine the individuals to whom grants will be made under the 2015 Plan, determine the type, size and terms of the grants, determine the time when grants will be made and the duration of any applicable exercise or restriction period (subject to the limitations of the 2015 Plan) and deal with any other matters arising under the 2015 Plan. The Committee presently consists of three directors, each of whom is a non-employee director of the Company. All of the employees of the Company and its subsidiaries are eligible for grants under the 2015 Plan. Non-employee directors of the Company are also eligible to receive grants under the 2015 Plan. The Company accounts for stock options issued after January 1, 2006 under FASB ASC Topic 718. Compensation expenses for restricted stock awards were $ 254,000 , $ 152,000 and $ 193,000 in 2023, 2022 and 2021, respectively. Costs were determined based on the fair value on the dates of the awards and those costs were charged to income over the service periods associated with the awards. As of December 31, 2023, there was $ 97,000 of unrecognized expense related to non-vested awards of restricted shares granted under the 2015 Plan. There was no stock compensation cost capitalized as part of an asset. The following summary reflects changes in the shares of Class A Non-Voting Stock under option: 2023 Shares 2023 Weighted Average Exercise Price 2022 Shares 2022 Weighted Average Exercise Price 2021 Shares 2021 Weighted Average Exercise Price Plan options Outstanding at beginning of year 6,750 $ 21.86 83,000 $ 21.65 116,347 $ 20.90 Granted — — — — — — Exercised ( 6,750 ) 21.86 ( 76,250 ) 21.63 ( 33,347 ) 19.04 Expired — — — — — — Outstanding at end of year — $ — 6,750 $ 21.86 83,000 $ 21.65 Options exercisable at year end — $ — 6,750 $ 21.86 83,000 $ 21.65 The total intrinsic value of options exercised during 2023, 2022 and 2021 were $ 137,000 , $ 2,226,000 and $ 736,000 , respectively. During 2023, we received $ 148,000 in cash from the exercise of options, with a $ 410,000 tax benefit realized for those options. The following table summarizes information about employee and director stock options outstanding and exercisable at December 31, 2023: Options Outstanding and Exercisable Range of Exercise Price Shares Outstanding at December 31, 2023 Weighted Average Remaining Life Weighted Average Exercise Price Aggregate Intrinsic Value $ 00.00 0 0 Years $ 0 0.00 $ 0 As of December 31, 2023, there were no outstanding option shares. The following summary reflects changes in the shares of Class A Non-Voting Stock Restricted Stock Awards (RSA): 2023 Shares 2023 Weighted Average Grant Date Fair Value 2022 Shares 2022 Weighted Average Grant Date Fair Value 2021 Shares 2021 Weighted Average Exercise Price Plan RSA’s Outstanding at beginning of year 5,000 $ 45.58 5,000 $ 40.11 5,000 $ 35.01 Granted 5,000 54.88 5,000 45.58 5,000 40.11 Vested/Released ( 5,000 ) 45.58 ( 5,000 ) 40.11 ( 5,000 ) 35.01 Cancelled — — — — — — Unvested Outstanding at end of year 5,000 $ 54.88 5,000 $ 45.58 5,000 $ 40.11 51 Table of Contents Stock Options No options were granted in 2023, 2022 or 2021. Shares of Class A Non-Voting Stock have been reserved for future issuance under the 2015 Plan. Stock Awards On May 9, 2023, 5,000 shares of Class A Non-Voting Common Stock, or Class A Non-Voting Stock, were granted as restricted stock awards. The fair value per share was $ 54.88 , the closing price of the Class A Non-Voting 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 Non-Voting Stock, were granted as restricted stock awards. The fair value per share was $ 45.58 , the closing price of the Class A Non-Voting Stock as recorded on the Nasdaq Global Select Market on May 3, 2022. These shares were fully vested and released one year after the grant date. On May 4, 2021, 5,000 shares of Class A Non-Voting Stock were granted as restricted stock awards. The fair value per share was $ 40.11 , the closing price of the Class A Non-Voting Stock as recorded on the Nasdaq Global Select Market on May 4, 2021. These shares were fully vested and released one year after the grant date. As of December 31, 2023, there was $ 97,000 of total unrecognized expense related to non-vested awards of restricted shares awarded under the 2015 Plan. The cost will be recognized over 0.35 years, the remaining vesting period for the restricted stock awards. The total intrinsic value of awards released during 2023 was approximately $ 272,600 . NOTE 10 – EMPLOYEE BENEFIT PLANS 401(k) Plan Artesian Resources has a defined contribution 401(k) Salary Reduction Plan, or the 401(k) Plan, which covers substantially all employees. Under the terms of the 401(k) Plan, Artesian Resources contributed 2 % of eligible salaries and wages and matched employee contributions up to 6 % of gross pay at a rate of 50 % . The 401(k) Plan also provides additional retirement benefits to full-time employees hired prior to April 26, 1994, allowing them to save for future retiree medical costs that will be paid by employees by providing additional cash resources to those employees upon a termination of employment or retirement to meet the cost of future medical expenses. These eligible employees receive an additional contribution of 6 % of eligible salaries and wages. The 401(k) Plan expenses, which include Company contributions and administrative fees, for the years 2023 , 2022 and 2021 , were approximately $ 1.4 million, $ 1.3 million and $ 1.2 million, respectively. NOTE 11 – COMMITMENTS AND CONTINGENCIE S Leases The Company’s leases are disclosed in Note 3 – Leases . Easements During 2003, Artesian Water Pennsylvania entered into a 40-year easement agreement to acquire an easement to access, operate, maintain, repair, improve, replace and connect Artesian’s water system to a well, including a parcel of land around the well. Management made certain estimates and assumptions regarding the separation of lease and non-lease components related to this easement agreement. It was determined that the majority of this easement agreement contains non-lease components. Easement payments, including both lease and non-lease components, for 2023, 2022 and 2021 were $ 45,000 , $ 43,000 and $ 42,000 , respectively. 52 Table of Contents Artesian Wastewater entered into a perpetual agreement for the use of approximately 460 acres of land in Sussex County, Delaware for wastewater disposal. Beginning November 2016, Artesian Wastewater was required to pay a minimum of $ 40,000 per year for the use of this land. Once operations began in 2021, the monthly fee is based on the volume of wastewater disposed on the properties charged at a rate per one thousand gallons of wastewater, providing for a minimum monthly payment. Payments for 2023, 2022 and 2021 were $ 126,000 , $ 113,000 , $ 65,000 , respectively. The agreement can be terminated by giving 180-day notice prior to the termination date. Future minimum annual payments related to the easement agreements noted above for the years subsequent to 2023 are as follows: In thousands 2024 $ 67 2025 47 2026 49 2027 50 2028 52 2029 through 2043 868 $ 1,133 Interconnections Artesian Water has one water service interconnection agreement with a neighboring utility, Chester Water Authority. The agreement is effective from January 1, 2022 through December 31, 2026, includes automatic five-year renewal terms, unless terminated by either party, and has a “take or pay” clause which required us to purchase water on a step down schedule through July 5, 2022, and now requires us to purchase a minimum of 0.5 million gallons per day. Rates charged under this agreement are subject to change with notice. Artesian Water Maryland has one interconnection agreement with the Town of North East that has a “take or pay” clause requiring us to purchase a minimum of 35,000 gallons per day. The agreement extends through June 2024. The agreement includes two automatic 5-year renewal terms, unless terminated by either party. The minimum annual purchase commitments for all interconnection agreements for 2024 through 2028, calculated at the noticed rates, are as follows: In thousands 2024 $ 870 2025 881 2026 881 2027 57 2028 57 $ 2,746 Expenses for purchased water were $ 1.3 million, $ 1.8 million and $ 4.3 million for 2023, 2022 and 2021, respectively. Other Commitments In April 2021, Artesian Water entered into a 3-year agreement with Worldwide Industries Corporation effective July 1, 2021 to paint elevated water storage tanks. Pursuant to the agreement, the total expenditure for the three years was $ 1.2 million. In September 2022, this agreement was amended to paint an additional elevated water storage tank and to extend the term of the agreement for an additional year. Pursuant to the amended agreement, the total expenditure for the four years is $ 2.2 million. Tank painting expense for 2023 , 2022 and 2021 was $ 689,000 , $ 531,000 , and $ 222,000 , respectively. Budgeted mandatory utility plant expenditures, due to planned governmental highway projects, which require the relocation of Artesian Water’s water service mains, expected to be incurred in 2024 through 2026 are as follows: In thousands 2024 $ 8,200 2025 8,500 2026 8,550 $ 25,250 The exact timing and extent of these relocation projects is controlled primarily by the Delaware Department of Transportation. 53 Table of Contents NOTE 12 – GEOGRAPHIC CONCENTRATION OF CUSTOMERS Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide regulated water utility service to customers within their established service territory in all three counties of Delaware and in portions of Maryland and Pennsylvania, pursuant to rates filed with and approved by the DEPSC, the MDPSC and the PAPUC. As of December 31, 2023, Artesian Water was serving approximately 95,900 customers, Artesian Water Maryland was serving approximately 2,600 customers and Artesian Water Pennsylvania was serving approximately 40 customers. Artesian Wastewater and TESI provide regulated wastewater utility service to customers within their established service territory in Sussex County, Delaware pursuant to rates filed with and approved by the DEPSC. The number of wastewater customers served more than doubled following the acquisition of TESI in January 2022. As of December 31, 2023, Artesian Wastewater and TESI were serving approximately 8,100 customers combined including one large industrial customer. NOTE 13 – REGULATORY PROCEEDINGS Our water and wastewater utilities generate operating revenue from customers based on rates that are established by state public service commissions through a rate-setting process that may include public hearings, evidentiary hearings and the submission of evidence and testimony in support of the Company’s requested level of rates. We are subject to regulation by the following state regulatory commissions: • The DEPSC regulates Artesian Water, Artesian Wastewater, and TESI. • The MDPSC regulates both Artesian Water Maryland and Artesian Wastewater Maryland. • The PAPUC regulates Artesian Water Pennsylvania. Our water and wastewater utility operations are also subject to regulation under the federal Safe Drinking Water Act of 1974, or Safe Drinking Water Act, the Clean Water Act of 1972, or the Clean Water Act, and related state laws, and under federal and state regulations issued under these laws. These laws and regulations establish criteria and standards for drinking water and for wastewater discharges. Capital expenditures and operating costs required as a result of water quality standards and environmental requirements have been traditionally recognized by state regulatory commissions as appropriate for inclusion in establishing rates. 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. Artesian Water filed an initial request with the DEPSC on April 28, 2023, further supplemented with a request filed on November 30, 2023, to implement new rates to meet a requested increase in revenue of 22.66 %, or approximately $ 16.7 million, on an annualized basis. The actual effective increase is less than 22.66 % 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 15.16 %, the net of the overall 22.66 % 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 had DSIC surcharges in excess of the allowable temporary increase and imposing the temporary increase would have require DSIC to be reset to zero, Artesian Water elected not to request the initial temporary rate increase. However, since the application was not resolved within the seven-month statutory timeframe, in accordance with applicable Delaware law, Artesian Water is permitted a temporary base rate increase of up to 15 % of gross water sales on an annual basis. Artesian Water filed an interim rates application, which was approved, to place into effect on November 28, 2023 a temporary base rate increase of 15 % of gross water sales on an annual basis and reducing the 7.5 % DSIC rate to zero, with such interim rates subject to refund, until permanent rates are determined by the DEPSC. As of December 31, 2023, no amounts were held in reserve related to the temporary base rate increase. Artesian Water’s last comprehensive application for an increase in base rate charges was filed in April 2014. 54 Table of Contents 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 11/20/2020 DEPSC Approval Date 12/14/2020 Effective Date 01/01/2021 Cumulative DSIC Rate 7.50 % Net Eligible Plant Improvements – Cumulative Dollars (in millions) $ 43.1 Eligible Plant Improvements – Installed Beginning Date 10/01/2014 Eligible Plant Improvements – Installed Ending Date 04/30/2019 The rate reflects the eligible plant improvements installed through April 30, 2019. The January 1, 2021 rate was reset to zero when temporary rates were placed into effect on November 28, 2023 and is subject to periodic audit by the DEPSC. For the years ended December 31, 2023 , December 31, 2022 and December 31, 2021 , we earned approximately $ 4.7 million, $ 5.1 million and $ 5.1 million in DSIC revenue, respectively. NOTE 14 – NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share is based on the weighted average number of common shares outstanding, the potentially dilutive effect of employee stock options and restricted stock awards. The following table summarizes the shares used in computing basic and diluted net income per share: For the Year Ended December 31, 2023 2022 2021 (in thousands) Weighted average common shares outstanding during the period for basic computation $ 10,018 $ 9,462 $ 9,394 Dilutive effect of employee stock options 4 19 32 Weighted average common shares outstanding during the period for diluted computation $ 10,022 $ 9,481 $ 9,426 For the years ended 2023, 2022 and 2021 no shares of restricted stock awards were excluded from the calculations of diluted net income per share. Due to unrecognized compensation costs, the hypothetical repurchase of shares exceeded the number of restricted shares expected to vest during the period, creating an anti-dilutive effect. For the years ended 2023, 2022 and 2021, no stock options were excluded from the calculations of diluted net income per share. The Company has 15,000,000 authorized shares of Class A Non-Voting Stock, and 1,040,000 authorized shares of Class B Stock. As of December 31, 2023 , 9,404,311 shares of Class A Non-Voting Stock and 881,452 shares of Class B Stock were issued and outstanding. As of December 31, 2022 , 8,621,415 shares of Class A Non-Voting Stock and 881,452 shares of Class B Stock were issued and outstanding. As of December 31, 2021 , 8,532,795 shares of Class A Non-Voting Stock and 881,452 shares of Class B Stock were issued and outstanding. The par value for both classes is $ 1.00 per share. 55 Table of Contents Equity per common share was $ 23.00 , $ 19.86 , and $ 18.94 at December 31, 2023, December 31, 2022, and December 31, 2021, respectively. These amounts were computed by dividing common stockholders’ equity by the number of weighted average shares of common stock outstanding on December 31, 2023, December 31, 2022, and December 31, 2021, respectively. NOTE 15 – COMMON STOCK OFFERING On May 23, 2023, the Company completed the sale of 695,650 shares of its Class A Non-Voting 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 Non-Voting 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 Non-Voting 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 Non-Voting Stock sold in the offering were offered by the Company. The proceeds from both the initial offering and the over-allotment option were used to repay short-term borrowings through 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 16 – BUSINESS COMBINATIONS As part of the Company’s growth strategy, on January 14, 2022 Artesian Wastewater completed its agreement to acquire TESI, which provides regulated wastewater services in Delaware. Artesian Wastewater purchased all of the stock of TESI from Middlesex Water Company for $ 6.4 million in cash and other consideration, including forgiveness of a $ 2.1 million note due from Middlesex, consisting of $ 3.1 million paid at closing. This acquisition more than doubled the number of wastewater customers served by Artesian in Sussex County, Delaware. The acquisition is being accounted for as a business combination under ASC Topic 805, “Business Combinations.” The purchase price allocation is primarily attributed to intangible assets and utility plant assets acquired and liabilities assumed based on their respective estimated fair values. The acquisition method of accounting requires, among other things, that assets acquired, and liabilities assumed in a business purchase combination be recognized at their fair values as of the acquisition date. 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 years ended December 31, 2023 and December 31, 2022 related to the business acquired are included in the Company’s 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 56 Table of Contents 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. 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 17 – LEGAL PROCEEDINGS Periodically, we are involved in other proceedings or litigation arising in the ordinary course of business. We do not believe that the ultimate resolution of these matters will materially affect our business, financial position or results of operations. However, we cannot ensure that we will prevail in any litigation and, regardless of the outcome, may incur significant litigation expense and may have significant diversion of management attention. Several of the water systems of Artesian Resources’ subsidiaries are eligible claimants in two multi-district litigation, or MDL, class action settlements designed to resolve Claims for PFAS contamination in Public Water Systems’ Drinking Water, as those terms are defined in the respective Agreements (the “Settlements”), which are with two groups of settling defendants on behalf of: (1) the 3M company (“3M”); and (2) E.I. Du Pont de Nemours and Company (n/k/a Eidp, Inc.), Dupont de Nemours Inc., The Chemours Company, The Chemours Company FC, LLC, and Corteva, Inc. (collectively, “Dupont”). Both of these Settlements are designed to resolve Claims for PFAS contamination in Public Water Systems’ Drinking Water, as those terms are defined in the respective Agreements. Both of the proposed Settlements are still subject to final approval by the MDL Judge, the honorable Richard M. Gergel of the United States District Court for the District of South Carolina. Artesian Resources’ eligible systems have remained in the multi-district litigation class action settlements with 3M and DuPont, having elected not to opt out in advance of the opt-out deadline. The amount of any recovery, if any, by Artesian Resources’ subsidiaries is uncertain. 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. 57 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 18 – BUSINESS SEGMENT INFORMATION The Company’s operating segments are comprised of its businesses which generate revenues and incur expenses, for which separate operational financial information is available and is regularly evaluated by management for the purpose of making operating decisions, assessing performance, and allocating resources. The Company operates its businesses primarily through one reportable segment, the Regulated Utility segment. The Regulated Utility segment is the largest component of the Company’s business and includes an aggregation of our five regulated utility subsidiaries that are in the business of providing regulated water and wastewater services on the Delmarva Peninsula. Our regulated water utility services include treating, distributing, and selling water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware and in Cecil County, Maryland and to a residential community in Chester County, Pennsylvania. Our regulated wastewater utility services include the treatment and disposal of wastewater for customers in Sussex County, Delaware. The Company is subject to regulations as to its rates, services, and other matters by the states of Delaware, Maryland and Pennsylvania with respect to utility service within these states. The Company also operates other non-utility businesses, primarily comprised of: Service Line Protection Plan services for water, sewer and internal plumbing; design, construction and engineering services; and contract services for the operation and maintenance of water and wastewater systems in Delaware and Maryland. These non-utility businesses do not individually or in the aggregate meet the criteria for disclosure of a reportable segment in accordance with generally accepted accounting principles and are collectively presented throughout this Annual Report on Form 10-K within “Other” or “Non-utility”, which is consistent with how management assesses the results of these businesses. The accounting policies of the operating segments are the same as those described in Note 1-Summary of Significant Accounting Policies. The Regulated Utility segment includes inter-segment costs related to leased office space provided by one non-utility business, calculated on the lower of cost or market method, which are eliminated to reconcile to the Consolidated Statements of Operations. The Regulated Utility segment also allocates certain corporate costs to the non-utility businesses. The measurement of depreciation, interest, and capital expenditures are predominately related to our Regulated Utility segment. These amounts in our non-utility business are negligible and account for approximately less than 1% of consolidated amounts as of December 31, 2023, December 31, 2022, and December 31, 2021. In thousands Years Ended December 31, 2023 2022 2021 Revenues: Regulated Utility $ 92,228 $ 89,818 $ 85,016 Other (non-utility) 6,877 9,248 5,996 Inter-segment elimination ( 244 ) ( 169 ) ( 153 ) Consolidated Revenues $ 98,861 $ 98,897 $ 90,859 Operating Income: Regulated Utility $ 21,246 $ 22,411 $ 20,950 Other (non-utility) 1,200 1,495 1,344 Consolidated Operating Income $ 22,446 $ 23,906 $ 22,294 Income Taxes: Regulated Utility $ 5,216 $ 5,091 $ 5,146 Other (non-utility) 1,132 787 591 Consolidated Income Taxes $ 6,348 $ 5,878 $ 5,737 Assets: Regulated Utility $ 760,339 $ 713,113 Other (non-utility) 6,493 6,678 Consolidated Assets $ 766,832 $ 719,791 58 Table of Contents NOTE 19 – IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS In November 2023, the FASB issued amended guidance for improvements to reportable segment disclosures. The amendments in this update require the Company to disclose significant segment expenses that are regularly provided to the chief operating decision makers, or CODM’s, and are included within each reported measure of segment operating results. The standard also requires the Company to disclose the total amount of any other items included in segment operating results which were not deemed to be significant expenses for separate disclosure, along with a qualitative description of the composition of these other items. In addition, the standard also requires disclosure of the CODM’s, title and position, as well as detail on how the CODM uses the reported measure of segment operating results to evaluate segment performance and allocate resources. The standard also aligns interim segment reporting disclosure requirements with annual segment reporting disclosure requirements. The Company will adopt the standard effective with our December 31, 2024 year end reporting and the standard will be effective for interim reporting periods in fiscal years beginning after December 15, 2024, with early adoption permitted. The standard requires retrospective application to all prior periods presented. While the standard requires additional disclosures related to the Company’s reportable segments, management does not expect the standard to have an impact on the Company’s results of operations or cash flows due to the adoption of this guidance. In December 2023, FASB issued amended guidance on Income Taxes: Improvements to Income Tax. The amendments require the Company to provide further disaggregated income tax disclosures for specific categories on the effective tax rate reconciliation, as well as additional information about federal, state/local and foreign income taxes. The standard also requires the Company to annually disclose its income taxes paid (net of refunds received), disaggregated by jurisdiction. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The standard is to be applied on a prospective basis, although optional retrospective application is permitted. While the standard will require additional disclosures related to the Company’s income taxes, management does not expect the adoptions of this guidance to have an impact on the Company’s results of operations or cash flows due to the adoption of this guidance. In March 2024, the SEC passed rule changes that will require registrants to provide certain climate-related information in their registration statements and annual reports. The new rules enhance and standardize climate-related disclosures in an effort to provide investors with more consistent, comparable and reliable information about the impact of climate-related risks on registrants. The rules require disclosure of greenhouse gas (GHG) emissions in annual reports and registration statements Additionally, all registrants would be required to provide numerous climate-related disclosures within their financial statements and elsewhere in their filings. The Company is currently evaluating the impact of the rule changes. 59 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Artesian Resources Corporation Newark, Delaware Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Artesian Resources Corporation (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, cash flows and changes in stockholders’ equity for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 , in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Revenue recognition – Water Sales As indicated in Note 2 to the consolidated financial statements, water sales revenue consists of tariff contract revenues from the sale of water, fixed fees for water services, and Distribution System Improvement Charges, or DSIC, billed to customers at rates outlined in the Company's tariffs. The Company recognizes revenues from the sale of water, and fixed fees for water services over time as water is consumed and as the customers simultaneously receive and consume the benefits of the Company remaining ready to provide them water services, respectively. DSIC revenue is a surcharge applied to tariff rates, and the Company recognizes DSIC revenue depending on whether the surcharge was applied to water consumption revenue or fixed-fee revenue. As indicated in the consolidated statements of operations, the Company recorded $80 million of water sales revenue for the year ended December 31, 2023. We identified the recognition of water sales as a critical audit matter due to the large volume of customers and transactions. The principal consideration for our determination is the increased extent of auditor effort involved in performing procedures and evaluating audit evidence related to the Company’s water sales revenue recognition. The primary procedures we performed to address this critical audit matter included: • Testing a sample of revenue transactions by obtaining and inspecting source documents such as invoices, cash receipts, approved tariff rates and recalculating the revenue recognized. • Testing a sample of revenue transactions to verify that the customer’s property is located within the Company’s approved service territory. • Performing analytical procedures to reconcile cash received from customers to revenue recognized. / s/ BDO USA, P.C. We have served as the Company’s auditor since 2005. Wilmington, Delaware March 18, 2024 60 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None .