UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

OR

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from  _____  to  _____

Commission file number 000-18516

 
graphic
 

ARTESIAN RESOURCES CORPORATION
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(Exact name of registrant as specified in its charter)

Delaware
51-0002090
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(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

664 Churchmans Road, Newark, Delaware 19702
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Address of principal executive offices

(302) 453 – 6900
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Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol (s)
Name of each exchange on which registered
Common Stock
ARTNA
The Nasdaq Stock Market


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes
No
 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes
No
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.


Large Accelerated Filer
Accelerated Filer 
Non-accelerated Filer 
Smaller Reporting Company
Emerging Growth Company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act ).

Yes
No
 

As of May 7, 2024, 9,404,311 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.




TABLE OF CONTENTS

ARTESIAN RESOURCES CORPORATION
FORM 10-Q

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24 - 30
         
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31
         
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31
         
      Part II
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31
         
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31
         
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31
         
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32
         
   
32
         
   
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32
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   Signatures
       





PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS

ARTESIAN RESOURCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands)

ASSETS
 
March 31, 2024
   
December 31, 2023
 
Utility plant, at original cost (less accumulated depreciation - 2024 - $188,782; 2023 - $185,170)
 
$
722,217
   
$
714,284
 
Current assets
               
Cash and cash equivalents
   
9,503
     
2,505
 
Accounts and other receivables (less provision for expected credit loss - 2024 - $340; 2023 - $328)
   
10,681
     
12,830
 
Income tax receivable
   
58
     
1,799
 
Unbilled operating revenues
   
1,728
     
1,934
 
Materials and supplies
   
4,853
     
5,983
 
Prepaid property taxes
   
1,136
     
2,269
 
Prepaid expenses and other
   
2,888
     
3,297
 
Total current assets
   
30,847
     
30,617
 
Other assets
               
Non-utility property (less accumulated depreciation - 2024 - $1,069; 2023 - $1,052)
   
3,637
     
3,693
 
Other deferred assets
   
9,055
     
8,504
 
Goodwill
   
1,939
     
1,939
 
   Operating lease right of use assets
   
504
     
506
 
Total other assets
   
15,135
     
14,642
 
Regulatory assets, net
   
7,212
     
7,289
 
Total Assets
 
$
775,411
   
$
766,832
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Stockholders’ equity
               
Common stock
 
$
10,288
   
$
10,285
 
Preferred stock
   
     
 
Additional paid-in capital
   
143,524
     
143,369
 
Retained earnings
   
78,174
     
76,743
 
Total stockholders’ equity
   
231,986
     
230,397
 
Long-term debt, net of current portion
   
178,333
     
178,307
 
     
410,319
     
408,704
 
Current liabilities
               
Lines of credit
   
     
 
Current portion of long-term debt
   
2,214
     
2,235
 
Accounts payable
   
7,878
     
9,697
 
Accrued expenses
   
4,336
     
3,519
 
Overdraft payable
   
53
     
9
 
Accrued interest
   
1,840
     
2,275
 
Income taxes payable
   
826
     
2
 
Customer and other deposits
   
2,932
     
2,983
 
Other
   
1,646
     
1,694
 
Total current liabilities
   
21,725
     
22,414
 
                 
Commitments and contingencies
   
     
 
                 
Deferred credits and other liabilities
               
Net advances for construction
   
2,774
     
2,797
 
Operating lease liabilities
   
501
     
503
 
Regulatory liabilities
   
26,166
     
25,676
 
Deferred investment tax credits
   
420
     
423
 
Deferred income taxes
   
58,275
     
58,381
 
Total deferred credits and other liabilities
   
88,136
     
87,780
 
                 
Net contributions in aid of construction
   
255,231
     
247,934
 
Total Liabilities and Stockholders’ Equity
 
$
775,411
   
$
766,832
 
See notes to the condensed consolidated financial statements.



ARTESIAN RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands, except per share amounts)

 
For the Three Months Ended March 31,
 
   
2024
   
2023
 
Operating revenues
           
Water sales
 
$
19,825
   
$
18,016
 
Other utility operating revenue
   
3,015
     
2,817
 
Non-utility operating revenue
   
1,704
     
1,662
 
Total Operating Revenues
   
24,544
     
22,495
 
                 
Operating expenses
               
Utility operating expenses
   
11,957
     
11,272
 
Non-utility operating expenses
   
1,116
     
1,085
 
Depreciation and amortization
   
3,465
     
3,224
 
State and federal income taxes
   
1,681
     
1,313
 
Property and other taxes
   
1,606
     
1,541
 
Total Operating Expenses
   
19,825
     
18,435
 
                 
Operating income
   
4,719
     
4,060
 
                 
Other income
               
   Allowance for funds used during construction (AFUDC)
   
285
     
459
 
   Miscellaneous income
   
1,574
     
1,603
 
                 
Income before interest charges
   
6,578
     
6,122
 
                 
Interest charges
   
2,167
     
2,417
 
                 
Net income applicable to common stock
 
$
4,411
   
$
3,705
 
                 
Net income per common share:
               
Basic
 
$
0.43
   
$
0.39
 
Diluted
 
$
0.43
   
$
0.39
 
                 
Weighted average common shares outstanding:
               
Basic
   
10,287
     
9,504
 
Diluted
   
10,291
     
9,510
 
                 
Cash dividends per share of common stock
 
$
0.2897
   
$
0.2784
 

See notes to the condensed consolidated financial statements.


ARTESIAN RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)

 
For the Three Months
Ended March 31,
 
   
2024
   
2023
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
 
$
4,411
   
$
3,705
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
3,465
     
3,224
 
Amortization of debt expense
   
89
     
89
 
Amortization of rate case expense
   
51
     
 
Provision for expected credit loss
   
46
     
43
 
Deferred income taxes, net
   
(109
)
   
(99
)
Stock compensation
   
68
     
56
 
AFUDC, equity portion
   
(188
)
   
(288
)
                 
Changes in assets and liabilities, net of acquisitions:
               
Accounts and other receivables
   
1,736
     
3,250
 
Income tax receivable
   
1,741
     
895
 
Unbilled operating revenues
   
206
     
290
 
Materials and supplies
   
1,130
     
(558
)
Income tax payable
   
824
     
612
 
Prepaid property taxes
   
1,133
     
1,101
 
Prepaid expenses and other
   
409
     
(20
)
Other deferred assets
   
(560
)
   
(529
)
Regulatory assets
   
(105
)
   
(83
)
Regulatory liabilities
   
(115
)
   
(116
)
Accounts payable
   
(581
)
   
(874
)
Accrued expenses
   
(580
)
   
(511
)
Accrued interest
   
(435
)
   
452
 
Customer deposits and other
   
(42
)
   
(131
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
12,594
     
10,508
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Capital expenditures (net of AFUDC, equity portion)
   
(8,922
)
   
(16,794
)
Proceeds from sale of assets
   
600
     
53
 
NET CASH USED IN INVESTING ACTIVITIES
   
(8,322
)
   
(16,741
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Repayments under lines of credit agreements
   
     
(1,600
)
Borrowings under lines of credit agreements
   
     
3,035
 
Increase in overdraft payable
   
44
     
167
 
Proceeds from contributions in aid of construction and advances
   
5,393
     
5,564
 
Payouts for contributions in aid of construction and advances
   
(193
)
   
(305
)
Net proceeds from issuance of common stock
   
90
     
93
 
Issuance of long-term debt
   
758
     
1,120
 
Dividends paid
   
(2,980
)
   
(2,646
)
Principal repayments of long-term debt
   
(386
)
   
(389
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
2,726
     
5,039
 
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
6,998
     
(1,194
)
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
2,505
     
1,309
 
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
9,503
   
$
115
 


ARTESIAN RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
Unaudited
(In thousands)

Non-cash Investing and Financing Activity:
           
Utility plant received as construction advances and contributions
 
$
3,167
   
$
545
 
Change in amounts included in accounts payable, accrued payables and other related to capital expenditures
   
102
     
(1,771
)
                 
Supplemental Disclosures of Cash Flow Information:
               
Interest paid
 
$
2,513
   
$
1,965
 
Income taxes paid
 
$
7
   
$
10
 
Income taxes refunded
 
$
701
   
$
 

See notes to the condensed consolidated financial statements.



ARTESIAN RESOURCES CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Unaudited
(In thousands)

 
 
Common Shares Outstanding Class A Non-Voting (1) (3) (4)
   
Common Shares Outstanding Class B Voting (2)
   
$1 Par Value Class A Non-Voting
   
$1 Par Value Class B Voting
   
Additional Paid-in Capital
   
Retained Earnings
   
Total
 
 
                                         
Balance as of December 31, 2022
   
8,621
     
881
   
$
8,621
   
$
881
   
$
107,143
   
$
71,286
   
$
187,931
 
Net income
   
     
     
     
     
     
3,705
     
3,705
 
Cash dividends declared
                                                       
Common stock
   
     
     
     
     
     
(2,646
)
   
(2,646
)
Issuance of common stock
                                                       
Dividend reinvestment plan
   
2
     
     
2
     
     
91
     
     
93
 
Employee stock options and awards(4)
   
     
     
     
     
56
     
     
56
 
Employee Retirement Plan(3)
   
     
     
     
     
     
     
 
Balance as of March 31, 2023
   
8,623
     
881
     
8,623
     
881
     
107,290
     
72,345
     
189,139
 

 
 
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, 2023
 
$
9,404
   
$
881
   
$
9,404
   
$
881
   
$
143,369
   
$
76,743
   
$
230,397
 
 
Net income
   
     
     
     
     
     
4,411
     
4,411
 
Cash dividends declared
                                                       
Common stock
   
     
     
     
     
     
(2,980
)
   
(2,980
)
Issuance of common stock
                                                       
Dividend reinvestment plan
   
3
     
     
3
     
     
87
     
     
90
 
Employee stock options and awards(4)
   
     
     
     
     
68
     
     
68
 
Employee Retirement Plan(3)
   
     
     
     
     
     
     
 
Balance as of March 31, 2024
 
$
9,407
   
$
881
   
$
9,407
   
$
881
   
$
143,524
   
$
78,174
   
$
231,986
 

(1)
At March 31, 2024, and March 31, 2023, Class A Stock had 15,000,000 shares authorized.  For the same periods, shares issued, inclusive of treasury shares, were 9,435,785 and 8,651,976, respectively.
(2)
At March 31, 2024, and March 31, 2023, 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, or the 2015 Plan, Artesian Resources Corporation authorized up to 331,500 shares of Class A Stock for issuance of grants in the form of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the 2015 Plan. Includes stock compensation expense for March 31, 2024 and March 31, 2023, See Note 8 - Stock Compensation Plans.

See notes to the condensed consolidated financial statements.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – GENERAL

Artesian Resources Corporation, or Artesian Resources, includes income from the earnings of all of our wholly owned subsidiaries. The terms “we”, “our”, “Artesian” and the “Company” as used herein refer to Artesian Resources and its subsidiaries.

DELAWARE REGULATED UTILITY SUBSIDIARIES

Artesian Water Company, Inc., or Artesian Water, distributes and sells water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware.  In addition, Artesian Water provides services to other water utilities, including operations and billing functions, and has contract operation agreements with private, municipal and state water providers.  Artesian Water also provides water for public and private fire protection to customers in our service territories.

Artesian Wastewater Management, Inc., or Artesian Wastewater, began providing wastewater services in July 2005.  Artesian Wastewater operates as the parent holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI.  TESI was incorporated in 2004.  Artesian Wastewater and TESI are regulated entities that own wastewater collection and treatment infrastructure and provide wastewater services to customers in Sussex County, Delaware as a regulated public wastewater service company.

MARYLAND REGULATED UTILITY SUBSIDIARIES

Artesian Water Maryland, Inc., or Artesian Water Maryland, began operations in August 2007. Artesian Water Maryland distributes and sells water to residential, commercial, industrial and municipal customers in Cecil County, Maryland.

Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland, was incorporated on June 3, 2008 and is authorized and able to provide regulated wastewater services to customers in the State of Maryland.  It is currently not providing these services.

PENNSYLVANIA REGULATED UTILITY SUBSIDIARY

Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, began operations in 2002.  It provides water service to a residential community in Chester County, Pennsylvania.

OTHER NON-UTILITY  SUBSIDIARIES

We have two other subsidiaries, neither of which are regulated. They are Artesian Utility Development, Inc., or Artesian Utility, and Artesian Development Corporation, or Artesian Development.

Artesian Utility designs and builds water and wastewater infrastructure and provides contract water and wastewater operation services on the Delmarva Peninsula to private, municipal and governmental institutions.  Artesian Utility also evaluates land parcels, provides recommendations to developers on the size of water or wastewater facilities and the type of technology that should be used for treatment at such facilities, and operates water and wastewater facilities in Delaware for municipal and governmental agencies.  Artesian Utility also contracts with developers and government agencies for design and construction of wastewater infrastructure throughout the Delmarva Peninsula.

Artesian Utility currently operates wastewater treatment facilities for the Town of Middletown, in southern New Castle County, Delaware, or Middletown, under a 20-year contract that expires in July 2039.  Artesian Utility currently operates three wastewater treatment systems with a combined capacity of up to approximately 3.8 million gallons per day. The wastewater treatment facilities in Middletown provide reclaimed wastewater for use in spray irrigation on public and agricultural lands in the area.

Artesian Utility also offers three protection plans to customers, the Water Service Line Protection Plan, or WSLP Plan, the Sewer Service Line Protection Plan, or SSLP Plan, and the Internal Service Line Protection Plan, or ISLP Plan (collectively, SLP Plans).  The WSLP Plan covers all parts, material and labor required to repair or replace participating customers’ leaking water service lines up to an annual limit. The SSLP Plan covers all parts, material and labor required to repair or replace participating customers’ leaking or clogged sewer lines up to an annual limit.  The ISLP Plan enhances available coverage to include water and wastewater lines within customers’ residences up to an annual limit.

Artesian Development is a real estate holding company that owns properties, including land approved for office buildings, a water treatment plant and wastewater facility, as well as property for current operations, including an office facility in Sussex County, Delaware.  The office facility consists of approximately 10,000 square feet of office space along with nearly 7,000 square feet of warehouse space.

NOTE 2 – BASIS OF PRESENTATION

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, for Form 10-Q.  Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.  Accordingly, these condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes in the Company’s annual report on Form 10-K for fiscal year 2023 as filed with the SEC on March 18, 2024.

The condensed consolidated financial statements include the accounts of Artesian Resources Corporation and its wholly owned subsidiaries, including its principal operating company, Artesian Water.  In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments (unless otherwise noted) necessary to present fairly the Company’s balance sheet position as of March 31, 2024, the results of its operations for the three-month periods ended March 31, 2024 and March 31, 2023, its cash flows for the three-month periods ended March 31, 2024 and March 31, 2023 and the changes in stockholders’ equity for the three-month periods ended March 31, 2024 and March 31, 2023.  The December 31, 2023 Condensed Consolidated Balance Sheet was derived from the Company’s December 31, 2023 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.

The results of operations for the interim periods presented are not necessarily indicative of the results for the full year or for future periods.

Regulated Utility Accounting

The accounting records of Artesian Water, Artesian Wastewater, and, TESI, are maintained in accordance with the uniform system of accounts as prescribed by the Delaware Public Service Commission, or the DEPSC.  The accounting records of Artesian Water Pennsylvania are maintained in accordance with the uniform system of accounts as prescribed by the Pennsylvania Public Utility Commission, or the PAPUC.  The accounting records of Artesian Water Maryland and Artesian Wastewater Maryland are maintained in accordance with the uniform system of accounts as prescribed by the Maryland Public Service Commission, or the MDPSC.  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 17 - Business Segment Information to our Condensed Consolidated Financial Statements for a full description of our segment information.

Use of Estimates

The condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles in the U.S., which require management to make certain estimates and assumptions regarding the reported amounts of assets and liabilities including unbilled revenues, credit losses and reserves for bad debt, regulatory asset recovery, lease agreements, goodwill and contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from management’s estimates.


NOTE 3 – REVENUE RECOGNITION

Background

Artesian’s operating revenues are primarily attributable to contract services based upon regulated tariff rates approved by the DEPSC, the MDPSC, and the PAPUC.  Regulated tariff contract service revenues consist of water consumption, industrial wastewater services, fixed fees for water and wastewater services including customer and fire protection fees, service charges and Distribution System Improvement Charges, or DSIC, billed to customers at rates outlined in our tariffs that represent stand-alone selling prices.  Our non-tariff contract revenues, which are primarily non-utility revenues, consist of SLP Plan fees, water and wastewater contract operations, design and installation contract services, and wastewater inspection fees.  Other regulated operating revenue primarily consists of developer guarantee contributions for wastewater and rental income for antenna agreements, which are not considered in the scope of Accounting Standards Codification 606, Revenue from Contracts with Customers.

Tariff Contract Revenues

Artesian generates revenue from the sale of water to customers in Delaware, Cecil County, Maryland, and Southern Chester County, Pennsylvania once a customer requests service in our territory.  We recognize water consumption revenue at tariff rates on a cycle basis for the volume of water transferred to customers based upon meter readings for actual gallons of water consumed as well as unbilled amounts for estimated usage from the date of the last meter reading to the end of the accounting period.  As actual usage amounts are known based on recurring meter readings, adjustments are made to the unbilled estimates in the next billing cycle based on the actual results.  Estimates are made on an individual customer basis, based on one of three methods: the previous year’s consumption in the same period, the previous billing period’s consumption, or averaging. While actual usage for individual customers may differ materially from the estimate based on management judgments described above, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption.  The majority of our water customers are billed for water consumed on a monthly basis, while the remaining customers are billed on a quarterly basis.  As a result, we record unbilled operating revenue (contract asset) for any estimated usage through the end of the accounting period that will be billed in the next monthly or quarterly billing cycle.

Artesian generates revenue from industrial wastewater services provided to a customer in Sussex County, Delaware.  We recognize industrial wastewater service revenue at a contract rate on a monthly basis for the volume of wastewater transferred to Artesian’s wastewater facilities based upon meter readings for actual gallons of wastewater transferred.  These services are invoiced at the end of every month based on the actual meter readings for that month, and therefore there is no contract asset or liability associated with this revenue.  The contract also provides for a minimum required volume of wastewater flow to our facility.  At each year end, any shortfall of the actual volume from the required minimum volume is billed to the industrial customer and recorded as revenue.  Additionally, if during the course of the year it is probable that the actual volume will not meet the minimum required volume, estimated revenue amounts would be recorded for the pro rata minimum volume, constrained for potential flow capacity that could occur in the remainder of the year.  Any estimated revenue amounts are recorded as unbilled operating revenue (contract asset) through the end of the accounting period and will be billed at each year end for any shortfall of the actual volume from the required minimal volume.

Artesian generates revenue from metered wastewater services provided to certain customers in Sussex County, Delaware.  We recognize metered wastewater services at tariff rates on a cycle basis for the volume of wastewater transferred to Artesian’s wastewater facilities based upon meter readings for actual gallons of water transferred, as well as unbilled amounts for estimated volume from the date of the last meter reading to the end of the accounting period.  As actual volume amounts are known based on recurring meter readings, adjustments are made to the unbilled estimates in the next billing cycle based on the actual results.  Estimates are made on an individual customer basis, based on one of three methods: the previous year’s volume in the same period, the previous billing period’s volume, or averaging. While actual usage for individual customers may differ materially from the estimate based on management judgments described above, we believe the overall total estimate of volume and revenue for the fiscal period will not differ materially from actual billed consumption.  The majority of these wastewater customers are billed for the volume of water transferred on a quarterly basis.  As a result, we record unbilled operating revenue (contract asset) for any estimated volume through the end of the accounting period that will be billed in the next quarterly cycle.

Artesian generates fixed-fee revenue for water and wastewater services provided to customers once a customer requests service in our territory.  Our wastewater territory is located in Sussex County, Delaware.  We recognize revenue from these services on a ratable basis over time as the customer simultaneously receives and consumes all the benefits of the Company remaining ready to provide them water and wastewater service.  These contract services are billed either in advance or arrears at tariff rates on a monthly, quarterly or semi-annual basis.  For contract services billed in arrears, we record unbilled operating revenue (contract asset) for any services through the end of the accounting period that will be billed in the next monthly or quarterly cycle.  For contract services billed in advance, we record deferred revenue (contract liability) and accounts receivable for any amounts for which we have a right to invoice but for which services have not been provided.  This deferred revenue is netted with unbilled operating revenue on the Condensed Consolidated Balance Sheet.

Artesian generates service charges primarily from non-payment fees, such as water shut-off and reconnection fees and finance charges.  These fees are billed and recognized as revenue at the point in time when our tariffs indicate the Company has the right to payment such as days past due have been reached or shut-offs and reconnections have been performed.  There is no contract asset or liability associated with these fees.

Artesian generates revenue from DSIC, which are surcharges applied to water customer tariff rates in Delaware related to specific types of water distribution system improvements.  This rate is calculated on a semi-annual basis based on an approved projected revenue requirement over the following six-month period.  This rate is adjusted up or down at the next DSIC filing to account for any differences between actual earned revenue and the projected revenue requirement.  Since DSIC revenue is a surcharge applied to tariff rates, we recognize DSIC revenue based on the same guidelines as noted above depending on whether the surcharge was applied to consumption revenue or fixed-fee revenue.

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 March 31, 2024 and March 31, 2023, 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.

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 March 31, 2024, there is no associated contract asset or liability.  There is no provision for expected credit loss or bad debt expense associated with this revenue.

Artesian generates inspection fee revenue for inspection services related to onsite wastewater collection systems installed by developers of new communities.  These fees are paid by developers in advance when a service is requested for a new phase of a development.  Inspection fee revenue is recognized on a per lot basis once the inspection of the infrastructure that serves each lot is completed.  As a result, we record deferred revenue (contract liability) for any amounts related to infrastructure not yet inspected.  There are no accounts receivable, provision for expected credit loss or bad debt expense associated with inspection fee contracts.

Sales Tax

The majority of Artesian’s revenues are earned within the State of Delaware, where there is no sales tax.  Revenues earned in the State of Maryland and the Commonwealth of Pennsylvania are related primarily to the sale of water by a public water utility and are exempt from sales tax.  Therefore, no sales tax is collected on revenues.

Disaggregated Revenues

The following table shows the Company’s revenues disaggregated by service type; all revenues are generated within a similar geographical location:

(in thousands)
 
Three months ended March 31, 2024
   
Three months ended March 31, 2023
 
Tariff Revenue
           
     Consumption charges
 
$
12,311
   
$
10,447
 
     Fixed fees
   
9,320
     
8,038
 
     Service charges
   
201
     
180
 
     DSIC
   
     
1,178
 
     Metered wastewater services
   
139
     
106
 
     Industrial wastewater services
   
398
     
446
 
Total Tariff Revenue
 
$
22,369
   
$
20,395
 
                 
Non-Tariff Revenue
               
     Service line protection plans
 
$
1,431
   
$
1,363
 
     Contract operations
   
267
     
244
 
     Design and installation
   
54
     
105
 
     Inspection fees
   
76
     
78
 
Total Non-Tariff Revenue
 
$
1,828
   
$
1,790
 
                 
 
    Other Operating Revenue
 
$
347
   
$
310
 
                 
Total Operating Revenue
 
$
24,544
   
$
22,495
 

Contract Assets and Contract Liabilities

Our contract assets and liabilities consist of the following:

(in thousands)
 
March 31, 2024
   
December 31, 2023
 
Contract Assets – Tariff
 
$
2,792
   
$
3,043
 
                 
Deferred Revenue
               
     Deferred Revenue – Tariff
 
$
1,571
   
$
1,300
 
     Deferred Revenue – Non-Tariff
   
798
     
539
 
Total Deferred Revenue
 
$
2,369
   
$
1,839
 

For the three months ended March 31, 2024, the Company recognized revenue of $1.3 million from amounts that were included in Deferred Revenue – Tariff at the beginning of the year and revenue of $0.4 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 March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023, 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 five years for the contract service revenue and one year for the SLP Plan revenue and inspection fee revenue, respectively.

NOTE 4 – ACCOUNTS RECEIVABLE

Accounts receivable are recorded at the invoiced amounts. As set forth in a settlement agreement, Artesian Water will receive reimbursements from the Delaware Sand and Gravel Remedial Trust, or Trust, for Artesian Water’s past capital and operating costs, totaling approximately $10.0 million, related to the treatment costs associated with the release of contaminants from the Delaware Sand & Gravel Landfill Superfund Site, or Site, in groundwater that Artesian Water uses for public potable water supply.  Two installments for approximately $2.5 million each were paid in August 2022 and July 2023.  The remaining $5.0 million is due in two equal installments no later than July of 2024 and 2025.  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 following table summarizes the changes in the Company’s accounts receivable balance:

 
March 31,
   
December 31,
 
(in thousands)
 
2024
   
2023
 
 
           
Customer accounts receivable – water
 
$
6,168
   
$
6,573
 
Customer accounts receivable – wastewater
   
525
     
513
 
Settlement agreement receivable – short term
   
2,517
     
2,747
 
Miscellaneous accounts receivable
   
1,039
     
1,236
 
Developer receivable
   
772
     
2,089
 
 
   
11,021
     
13,158
 
Less: provision for expected credit loss
   
340
     
328
 
Net accounts receivable
 
$
10,681
   
$
12,830
 

NOTE 5 – 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 condensed consolidated statement of operations on a straight-line basis over the period of the lease.  The annual lease payments for the land operating leases increase each year either by the most recent increase in the Consumer Price Index or by 3%, as applicable based on the lease agreements.  Periodically, the annual lease payment for one operating land lease is determined based on the fair market value of the applicable parcel of land.  None of the operating leases contain contingent rent provisions.  The commencement date of all the operating leases is the earlier of the date we become legally obligated to make rent payments or the date we may exercise control over the use of the land or equipment.  The Company currently does not have any financing leases and does not have any lessor leases that require disclosure.

Management made certain assumptions related to the separation of lease and nonlease components and to the discount rate used when calculating the right of use asset and liability amounts for the operating leases.  As our leases do not provide an implicit rate, we use our incremental borrowing rates for long term and short term agreements and apply the rates accordingly based on the term of the lease agreements to determine the present value of lease payments.

Rent expense for all operating leases, except those with terms of 12 months or less comprises:

(in thousands)
 
 
Three Months Ended
 
Three Months Ended
 
 
March 31, 2024
 
March 31, 2023
 
 
           
Minimum rentals
 
$
4
   
$
2
 
Contingent rentals
   
     
 
                 
   
$
4
   
$
2
 

Supplemental cash flow information related to leases is as follows:

 
(in thousands)
 
 
Three Months Ended
   
Three Months Ended
 
 
March 31, 2024
   
March 31, 2023
 
 
           
Cash paid for amounts included in the measurement of lease liabilities:
           
     Operating cash flows from operating leases
 
$
4
   
$
2
 
Right-of-use assets obtained in exchange for lease obligations:
               
     Operating leases
 
$
504
   
$
502
 

Supplemental balance sheet information related to leases is as follows:

 
 
(in thousands,
except lease term and discount rate)
 
 
 
March 31, 2024
   
December 31, 2023
 
 
           
Operating Leases:
           
     Operating lease right-of-use assets
 
$
504
   
$
506
 
                 
     Other current liabilities
 
$
9
     
9
 
     Operating lease liabilities
   
501
     
503
 
Total operating lease liabilities
 
$
510
   
$
512
 
                 
                 
Weighted Average Remaining Lease Term
               
     Operating leases
 
57 years
   
58 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 March 31, 2024 are as follows:

 
 
(in thousands)
 
 
 
Operating Leases
 
Year
     
2024
 
$
35
 
2025
   
35
 
2026
   
35
 
2027
   
35
 
2028
   
27
 
Thereafter
   
1,427
 
Total undiscounted lease payments
 
$
1,594
 
Less effects of discounting
   
(1,084
)
Total lease liabilities recognized
 
$
510
 

As of March 31, 2024, we have not entered into operating or finance leases that will commence at a future date.

NOTE 6 – 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 March 31, 2024 and December 31, 2023, 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)
     
   
March 31, 2024
   
December 31, 2023
 
Carrying amount
 
$
180,547
   
$
180,542
 
Estimated fair value
 
$
158,083
   
$
162,720
 

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 7 – 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 condensed 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.  For the full year 2023, the Company accrued approximately $12,000 in penalties and interest related to positions taken on the 2022 corporate income tax return.  For the three months ended March 31, 2024, the Company has accrued approximately $4,000 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.

NOTE 8 – 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. 

On May 9, 2023, 5,000 shares of Class A Common Stock, or Class A Stock, were granted as restricted stock awards.  The fair value per share was $54.88, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 9, 2023.  These restricted stock awards will be fully vested and released one year after the grant date and, prior to their vesting date, are subject to forfeiture in the event of the recipient’s termination of service.

Compensation expense of $68,000, related to the May 2023 issue of restricted stock awards, was recorded for the three months ended March 31, 2024. Compensation expense of $56,000 was recorded for the three months ended March 31, 2023 for restricted stock awards issued in May 2022.  Costs were determined based on the fair value on the dates of the awards and those costs were charged to income over the service periods associated with the awards.

There was no stock compensation cost capitalized as part of an asset.

The following summary reflects changes in the shares of Class A Stock underlying options and restricted stock awards for the three months ended March 31, 2024:

 
Options
   
Restricted Awards
 
   
Option Shares
   
Weighted Average Exercise Price
   
Weighted Average Remaining Life (Yrs.)
   
Aggregate Intrinsic Value (in thousands)
   
Outstanding Restricted Stock Awards
   
Weighted Average
Grant Date
FairValue
 
Plan options/restricted stock awards
                                   
Outstanding at January 1, 2024
   
   
$
         
$
     
5,000
   
$
54.88
 
Granted
   
     
           
     
0
     
0
 
Exercised/vested and released
   
     
           
     
0
     
0
 
Expired/cancelled
   
     
           
     
     
 
Outstanding at March 31, 2024
   
0
   
$
0
     
0
   
$
0
     
5,000
   
$
54.88
 
                                                 
Exercisable/vested at March 31, 2024
   
0
   
$
0
     
0
   
$
0
     
     
 


There were no options exercised during the three months ended March 31, 2024.

There were no unvested option shares outstanding under the 2015 Plan during the three months ended March 31, 2024.

As of March 31, 2024, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan.  

As of March 31, 2024, there was $28,000 total unrecognized expenses related to non-vested awards of restricted shares awarded under the 2015 Plan.  The cost will be recognized over 0.10 years, the remaining vesting period for the restricted stock awards.

NOTE 9  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 March 31, 2024, Artesian Water was serving approximately 96,200 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.  As of March 31, 2024, Artesian Wastewater and TESI were serving approximately 8,200 customers combined, including one large industrial customer.

NOTE 10 – OTHER DEFERRED ASSETS

The investment in CoBank, ACB, or CoBank, which is a cooperative bank, is related to certain outstanding First Mortgage Bonds and is a required investment in the bank based on the underlying long-term debt agreements. The settlement agreement receivable is related to the long-term portion of reimbursements due in years 2024 and 2025 as further discussed in Note 4 - Accounts Receivable.

(in thousands)
 
March 31, 2024
   
December 31, 2023
 
 
           
Investment in CoBank
 
$
6,425
   
$
5,882
 
Settlement agreement receivable-long term
   
2,496
     
2,496
 
Other deferred assets
   
134
     
126
 
 
 
$
9,055
   
$
8,504
 

NOTE 11 REGULATORY ASSETS

The FASB ASC Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party regulatory agency. Certain expenses are recoverable through rates charged to our customers, without a return on investment, and are deferred and amortized during future periods using various methods as permitted by the DEPSC, MDPSC, and PAPUC.

The deferred income taxes will be amortized over future years as the tax effects of temporary differences that previously flowed through to our customers are reversed.

Debt related costs include debt issuance costs and other debt related expense.  The DEPSC has approved deferred regulatory accounting treatment for issuance costs associated with Artesian Water’s First Mortgage bonds. Debt issuance costs and other debt related expenses are reviewed during Artesian Water’s rate applications as part of its cost of capital calculations.

Affiliated interest agreement deferred costs relate to the regulatory and administrative costs resulting from efforts necessary to secure water allocations in Artesian Water Pennsylvania’s territory for the provision of service to the surrounding area and interconnection to Artesian Water Pennsylvania’s affiliate regulated water utility Artesian Water.  These costs were specifically included for cost recovery pursuant to an Affiliated Interest Agreement between Artesian Water and Artesian Water Pennsylvania and were approved for recovery by the PAPUC and were reclassed from deferred costs to a regulatory asset in 2022. Amortization of these deferred costs 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)
 
   
March 31, 2024
   
December 31, 2023
 
             
Deferred contract costs and other
 
$
192
   
$
209
 
Rate case studies
   
129
     
136
 
Rate proceedings
   
450
     
385
 
Deferred income taxes
   
439
     
444
 
Debt related costs
   
4,234
     
4,322
 
Deferred costs affiliated interest agreement
   
1,096
     
1,110
 
Goodwill
   
256
     
258
 
Deferred acquisition and franchise costs
   
416
     
425
 
   
$
7,212
   
$
7,289
 

NOTE 12 – REGULATORY LIABILITIES

FASB ASC Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party regulatory agency.  Certain obligations are deferred and/or amortized as determined by the DEPSC, MDPSC, and PAPUC.  Regulatory liabilities represent excess recovery of cost or other items that have been deferred because it is probable such amounts will be returned to customers through future regulated rates.

Utility plant retirement cost obligation consists of estimated costs related to the potential removal and replacement of facilities and equipment on the Company’s water and wastewater properties.  As authorized by the DEPSC, when depreciable units of utility plant are retired, any cost associated with retirement, less any salvage value or proceeds received, is charged to a regulated retirement liability.  The annual amortization currently authorized by the DEPSC could be adjusted in future rate applications.

Deferred settlement refunds consist of reimbursements from the Delaware Sand and Gravel Remedial Trust for Artesian Water’s past capital and operating costs, totaling approximately $10.0 million, related to the treatment costs associated with the release of contaminants from the Delaware Sand & Gravel Landfill Superfund Site in groundwater that Artesian Water uses for public potable water supply, pursuant to the Settlement Agreement.  Two installments for approximately $2.5 million each were paid in August 2022 and July 2023.  The remaining $5.0 million is due in two equal installments no later than July of 2024 and 2025. Artesian Water received approval from the DEPSC in October 2022 to refund to its customers these reimbursements for past capital and operating costs.  The refund for the reimbursements will be applied to current and future customer bills in annual installments. The first two refunds occurred in October 2022 and August 2023. Future customer refunds will occur no later than August 2024 and August 2025.  The amount of the credit will be calculated by dividing the amount of the reimbursement by the number of eligible customers.  Beginning in 2022, Artesian Water began recording 2022 and future recovery of capital expenditures as Contributions in Aid of Construction and began recording expense recovery as an offset to operations and maintenance expense, with the intention that those recoveries will be available for inclusion and consideration in any future rate applications.

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.

Regulatory liabilities comprise:
 
 
 
(in thousands)
 
 
 
March 31, 2024
   
December 31, 2023
 
 
           
Utility plant retirement cost obligation
 
$
487
   
$
 
Deferred settlement refunds
   
4,991
     
4,991
 
Deferred income taxes (related to TCJA)
   
20,688
     
20,685
 
   
$
26,166
   
$
25,676
 

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% then 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 required 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 March 31, 2024, 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.

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 any 12-month period.

The following table summarizes (1) Artesian Water’s last application with the DEPSC to collect DSIC rates and (2) the rate upon which eligible plant improvements was based:

Application Date
11/20/20
DEPSC Approval Date
12/14/20
Effective Date
01/01/21
Cumulative DSIC Rate
7.50%
Net Eligible Plant Improvements – Cumulative Dollars (in millions)
$43.1
Eligible Plant Improvements – Installed Beginning Date
10/01/2014
Eligible Plant Improvements – Installed Ending Date
04/30/2019

The rate reflected 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 three months ended March 31, 2023, we earned approximately $1.2 million in DSIC revenue.

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 Three Months Ended March 31,
 
   
2024
   
2023
 
   
(in thousands)
 
             
Weighted average common shares outstanding during the period for basic computation
   
10,287
     
9,504
 
Dilutive effect of employee stock options and awards
   
4
     
6
 
                 
Weighted average common shares outstanding during the period for diluted computation
   
10,291
     
9,510
 

For the three months ended March 31, 2024 and 2023, no shares of restricted stock awards were excluded from the calculations of diluted net income per share.  For the three months ended March 31, 2024 and 2023, 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 March 31, 2024, 9,406,808 shares of Class A Non-Voting Stock and 881,452 shares of Class B Stock were issued and outstanding. As of March 31, 2023, 8,622,999 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.

Equity per common share was $22.55 and $23.00 at March 31, 2024 and December 31, 2023, respectively. These amounts were computed by dividing common stockholders’ equity by the number of weighted average shares of common stock outstanding on March 31, 2024 and December 31, 2023, respectively.

NOTE 15 – COMMON STOCK OFFERING

On May 23, 2023, the Company completed the sale of 695,650 shares of its Class A Stock, par value $1.00 per share, at a price to the public of $50 per share.  The net proceeds to the Company from the offering, after deducting the underwriting discounts and commissions and other offering costs, were approximately $33.0 million.  The Company  also granted the underwriter a 30-day option to purchase up to an additional 104,348 shares of Class A Stock at the public offering price, less the underwriting discount. On June 16, 2023, the underwriter exercised its over-allotment option, to purchase 67,689 shares of Class A Stock at the public offering price.  The net proceeds to the Company resulting from the exercise of the over-allotment option, after deducting the underwriting discounts and commissions and other offering costs, were approximately $3.2 million. All of the shares of Class A Stock sold in the offering were offered by the Company.

The proceeds from both the initial offering and the over-allotment option were used to repay short-term borrowings, including borrowings incurred under our lines of credit with Citizens Bank and CoBank, incurred primarily to finance capital expenditures, including investment in utility plant and equipment, and other general corporate purposes.

NOTE 16 – 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 per - and polyfluoroalkyl substances, or  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”).  The DuPont settlement is effective, and the phase one settlement claims forms are due by June 17, 2024. The 3M settlement is not effective yet, and the phase one settlement claims forms will be due sixty days after the effective date, which has not yet been established. 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.


NOTE 17 – BUSINESS SEGMENT INFORMATION

The Company’s operating segments are comprised of its businesses which generate revenues and incur expenses, for which separate operational financial information is available and is regularly evaluated by management for the purpose of making operating decisions, assessing performance, and allocating resources.  The Company operates its businesses primarily through one reportable segment, the Regulated Utility segment.  The Regulated Utility segment is the largest component of the Company’s business and includes an aggregation of our five regulated utility subsidiaries that are in the business of providing regulated water and wastewater services on the Delmarva Peninsula.  Our regulated water utility services include treating, distributing, and selling water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware and in Cecil County, Maryland and to a residential community in Chester County, Pennsylvania.  Our regulated wastewater utility services include the treatment and disposal of wastewater for customers in Sussex County, Delaware.  The Company is subject to regulations as to its rates, services, and other matters by the states of Delaware, Maryland and Pennsylvania with respect to utility service within these states.

The Company also operates other non-utility businesses, primarily comprised of: Service Line Protection Plan services for water, sewer and internal plumbing; design, construction and engineering services; and contract services for the operation and maintenance of water and wastewater systems in Delaware and Maryland.  These non-utility businesses do not individually or in the aggregate meet the criteria for disclosure of a reportable segment in accordance with generally accepted accounting principles and are collectively presented throughout this Quarterly Report on Form 10-Q within “Other” or “Non-utility”, which is consistent with how management assesses the results of these businesses.

The accounting policies of the operating segments are the same as those described in Note 2 – Basis of Presentation.  The Regulated Utility segment includes inter-segment costs related to leased office space provided by one non-utility business, calculated on the lower of cost or market method, which are eliminated to reconcile to the  Condensed 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 condensed consolidated amounts as of March 31, 2024 and March 31, 2023.
 
(in thousands)
     
   
Three Months Ended
March 31,
 
   
2024
   
2023
 
Revenues:
           
Regulated Utility
 
$
22,840
   
$
20,832
 
Other (non-utility)
   
1,763
     
1,716
 
Inter-segment elimination
   
(59
)
   
(53
)
Condensed Consolidated Revenues
 
$
24,544
   
$
22,495
 
                 
Operating Income:
               
Regulated Utility
 
$
4,357
   
$
3,705
 
Other (non-utility)
   
362
     
355
 
Condensed Consolidated Operating Income
 
$
4,719
   
$
4,060
 
                 
Income Taxes:
               
Regulated Utility
 
$
1,425
   
$
1,066
 
Other (non-utility)
   
256