ARTESIAN RESOURCES CORP [ARTNA] Filings

10-Q 1 form10q.htm ARTESIAN RESOURCES CORP FILE 10-Q

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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 September 30, 2023

☐ 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

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

□

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

□

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

☑

As of November 3, 2023, 9,395,545 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.

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TABLE OF CONTENTS

ARTESIAN RESOURCES CORPORATION

FORM 10-Q

Part I	-	Financial Information:

Item 1	-	Financial Statements	Page(s)

		Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (unaudited)	3

		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022 (unaudited)	4

		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (unaudited)	5 - 6

		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months periods ended September 30, 2023 and 2022 (unaudited)	7 - 8

		Notes to the Condensed Consolidated Financial Statements	9 - 26

Item 2	-	Management's Discussion and Analysis of Financial Condition and Results of Operations	26 - 35

Item 3	-	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4	-	Controls and Procedures	36

Part II	-	Other Information	36

Item 1	-	Legal Proceedings	36

Item 1A	-	Risk Factors	36

Item 2	-	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	37

Item 3		Defaults Upon Senior Securities	37

Item 4		Mine Safety Disclosures	37

Item 5		Other Information	37

Item 6	-	Exhibits	38
-
Signatures

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PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

ARTESIAN RESOURCES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(In thousands)

ASSETS	September 30, 2023		December 31, 2022
Utility plant, at original cost (less accumulated depreciation - 2023 - $181,235; 2022 - $172,954)	$	705,949	$	668,031
Current assets
Cash and cash equivalents		6,458		1,309
Accounts and other receivables (less provision for expected credit loss - 2023 - $356; 2022 - $416)		10,488		13,511
Income tax receivable		2,908		1,632
Unbilled operating revenues		1,946		1,586
Materials and supplies		5,487		4,702
Prepaid property taxes		3,374		2,186
Prepaid expenses and other		3,285		2,878
Total current assets		33,946		27,804
Other assets
Non-utility property (less accumulated depreciation - 2023 - $1,040; 2022 - $990)		3,708		3,740
Other deferred assets		8,506		10,536
Goodwill		1,939		1,939
Operating lease right of use assets		498		467
Total other assets		14,651		16,682
Regulatory assets, net		7,265		7,274
Total Assets	$	761,811	$	719,791

LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock	$	10,277	$	9,502
Preferred stock		—		—
Additional paid-in capital		143,076		107,143
Retained earnings		76,240		71,286
Total stockholders' equity		229,593		187,931
Long-term debt, net of current portion		175,875		175,619
		405,468		363,550
Current liabilities
Lines of credit		—		20,174
Current portion of long-term debt		2,219		2,003
Accounts payable		8,430		10,929
Accrued expenses		4,638		4,246
Overdraft payable		5,052		43
Accrued interest		1,833		989
Income taxes payable		25		6
Customer and other deposits		2,749		2,489
Other		2,230		3,190
Total current liabilities		27,176		44,069

Commitments and contingencies

Deferred credits and other liabilities
Net advances for construction		3,258		3,686
Operating lease liabilities		492		466
Regulatory liabilities		25,827		28,721
Deferred investment tax credits		427		439
Deferred income taxes		58,229		54,552
Total deferred credits and other liabilities		88,233		87,864

Net contributions in aid of construction		240,934		224,308
Total Liabilities and Stockholders’ Equity	$	761,811	$	719,791

See notes to the condensed consolidated financial statements.

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ARTESIAN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

(In thousands, except per share amounts)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2023			2022			2023		2022
Operating revenues
Water sales	$	21,642		$	21,702		$	60,294	$	59,567
Other utility operating revenue		3,235			2,841			9,083		8,281
Non-utility operating revenue		1,693			2,039			4,940		5,932
Total Operating Revenues		26,570			26,582			74,317		73,780

Operating expenses
Utility operating expenses		11,590			10,428			34,488		30,994
Non-utility operating expenses		1,122			1,570			3,328		4,418
Depreciation and amortization		3,444			3,210			9,882		9,350
State and federal income taxes		2,249			1,834			5,156		4,978
Property and other taxes		1,504			1,458			4,531		4,371
Total Operating Expenses		19,909			18,500			57,385		54,111

Operating income		6,661			8,082			16,932		19,669

Other income, net
Allowance for funds used during construction (AFUDC)		647			393			1,693		898
Miscellaneous (expense) income		(35	)		(101	)		1,554		1,311

Income before interest charges		7,273			8,374			20,179		21,878

Interest charges		2,202			2,230			6,960		6,205

Net income applicable to common stock	$	5,071		$	6,144		$	13,219	$	15,673

Income per common share:
Basic	$	0.49		$	0.65		$	1.33	$	1.66
Diluted	$	0.49		$	0.65		$	1.33	$	1.65

Weighted average common shares outstanding:
Basic		10,276			9,477			9,929		9,451
Diluted		10,279			9,492			9,933		9,473

Cash dividends per share of common stock	$	0.2840		$	0.2729		$	0.8464	$	0.8133

See notes to the condensed consolidated financial statements.

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ARTESIAN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(In thousands)

	For the Nine Months Ended September 30,
	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	13,219		$	15,673
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,882			9,350
Deferred income taxes, net		3,665			1,582
Stock compensation		185			162
AFUDC, equity portion		(1,040	)		(612	)

Changes in assets and liabilities, net of acquisitions:
Accounts and other receivables, net of provision for expected credit loss		3,023			(3,402	)
Income tax receivable		(1,276	)		1,401
Unbilled operating revenues		(360	)		(547	)
Materials and supplies		(785	)		(572	)
Income tax payable		19			1,096
Prepaid property taxes		(1,188	)		(138	)
Prepaid expenses and other		(407	)		(62	)
Other deferred assets		2,004			(5,477	)
Regulatory assets		(76	)		280
Regulatory liabilities		(2,988	)		9,651
Accounts payable		(829	)		(4,086	)
Accrued expenses		156			(791	)
Accrued interest		844			445
Deposits and other		(688	)		1,097
NET CASH PROVIDED BY OPERATING ACTIVITIES		23,360			25,050

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (net of AFUDC, equity portion)		(48,838	)		(36,660	)
Investment in acquisitions, net of cash acquired		—			(6,341	)
Proceeds from sale of assets		76			49
NET CASH USED IN INVESTING ACTIVITIES		(48,762	)		(42,952	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) under lines of credit agreements		(20,174	)		(17,303	)
Increase in overdraft payable		5,009			99
Net advances and contributions in aid of construction		16,986			11,576
Net proceeds from issuance of common stock		36,840			1,705
Issuance of long-term debt		1,978			30,828
Equity issuance costs		(317	)		—
Dividends paid		(8,265	)		(7,677	)
Deferred debt issuance costs		—			(120	)
Principal repayments of long-term debt		(1,506	)		(1,190	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		30,551			17,918

NET INCREASE IN CASH AND CASH EQUIVALENTS		5,149			16

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		1,309			92

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	6,458		$	108

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ARTESIAN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED

Unaudited

(In thousands)

Non-cash Investing and Financing Activity:
Utility plant received as construction advances and contributions	$	2,307	$	4,407
Change in amounts included in accounts payable, accrued payables and other related to capital expenditures		1,451		1,574

Supplemental Disclosures of Cash Flow Information:
Interest paid	$	6,116	$	5,760
Income taxes paid	$	3,476	$	1,431


Purchase price allocation of investment in acquisitions:
Utility plant	$	—	$	34,234
Cash		—		280
Goodwill		—		2,983
Other assets		—		1,033
Total assets		—		38,530
Less:
Liabilities		—		3,852
Future contractual obligation payable to seller		—		1,569
Contributions in aid of construction		—		26,488
Cash paid for acquisitions		—		6,621
Cash received from acquisitions		—		280
Net cash paid for acquisitions	$	—	$	6,341

See notes to the condensed consolidated financial statements.

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ARTESIAN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Unaudited

(In thousands)

	Common Shares Outstanding Class A Non-Voting (1) (3) (4)		Common Shares Outstanding Class B Voting (2)		$1 Par Value Class A Non-Voting		$1 Par Value Class B Voting		Additional Paid-in Capital		Retained Earnings			Total

Balance as of December 31, 2021		8,532		881	$	8,532	$	881	$	104,989	$	63,607		$	178,009
Net income		—		—		—		—		—		4,483			4,483
Cash dividends declared
Common stock		—		—		—		—		—		(2,518	)		(2,518	)
Issuance of common stock
Dividend reinvestment plan		2		—		2		—		87		—			89
Employee stock options and awards(4)		23		—		23		—		475		—			498
Employee Retirement Plan(3)		—		—		—		—		—		—			—
Balance as of March 31, 2022		8,557		881		8,557		881		105,551		65,572			180,561
Net income		—		—		—		—		—		5,046			5,046
Cash dividends declared
Common stock		—		—		—		—		—		(5,159	)		(5,159	)
Issuance of common stock
Dividend reinvestment plan		2		—		2		—		97		—			99
Employee stock options and awards(4)		19		—		19		—		336		—			355
Employee Retirement Plan(3)		—		—		—		—		—		—			—
Balance as of June 30, 2022		8,578		881		8,578		881		105,984		65,459			180,902
Net income		—		—		—		—		—		6,144			6,144
Cash dividends declared
Common stock		—		—		—		—		—		—			—
Issuance of common stock
Dividend reinvestment plan		2		—		2		—		87		—			89
Employee stock options and awards(4)		30		—		30		—		708		—			738
Employee Retirement Plan(3)		—		—		—		—		—		—			—
Balance as of September 30, 2022		8,610		881		8,610		881		106,779		71,603			187,873

	Common Shares Outstanding Class A Non-Voting (1) (3) (4)		Common Shares Outstanding Class B Voting (2)		$1 Par Value Class A Non-Voting		$1 Par Value Class B Voting		Additional Paid-in Capital		Retained Earnings		Total

Balance as of December 31, 2022		8,621		881	$	8,621	$	881	$	107,143	$	71,286	$	187,931
Net income		—		—		—		—		—		3,705		3,705
Cash dividends declared
Common stock		—		—		—		—		—		(2,646)		(2,646)
Issuance of common stock
Dividend reinvestment plan		2		—		2		—		91		—		93
Employee stock options and awards(4)		—		—		—		—		56		—		56
Employee Retirement Plan(3)		—		—		—		—		—		—		—
Balance as of March 31, 2023		8,623		881		8,623		881		107,290		72,345		189,139
Net income		—		—		—		—		—		4,443		4,443
Cash dividends declared
Common stock		—		—		—		—		—		(2,700)		(2,700)
Issuance of common stock
Public offering, net of costs		764		—		764		—		35,467		—		36,231
Dividend reinvestment plan		2		—		2		—		98		—		100
Employee stock options and awards(4)		5		—		5		—		55		—		60
Employee Retirement Plan(3)		—		—		—		—		—		—		—
Balance as of June 30, 2023		9,394		881		9,394		881		142,910		74,088		227,273
Net income		—		—		—		—		—		5,071		5,071
Cash dividends declared
Common stock		—		—		—		—		—		(2,919)		(2,919)
Issuance of common stock
Dividend reinvestment plan		2		—		2		—		101		—		103
Employee stock options and awards(4)		—		—		—		—		65		—		65
Employee Retirement Plan(3)		—		—		—		—		—		—		—
Balance as of September 30, 2023		9,396		881		9,396		881		143,076		76,240		229,593

(1)	At September 30, 2023 and September 30, 2022, Class A Common Stock had 15,000,000 shares authorized. For the same periods, shares issued, inclusive of treasury shares, were 9,424,518 and 8,638,474, respectively.

(2)	At September 30, 2023 and September 30, 2022, Class B Common Stock had 1,040,000 shares authorized and 881,452 shares issued.

(3)	Artesian Resources Corporation registered 200,000 shares of Class A Common Stock, subsequently adjusted for stock splits, available for purchase through the Company’s 401(k) retirement plan.

(4)

Under the Equity Compensation Plan, effective December 9, 2015, or the 2015 Plan, Artesian Resources Corporation authorized up to 331,500 shares of Class A Common Stock for issuance of grants in the form of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the 2015 Plan. Includes stock compensation expense for September 30, 2023, and September 30, 2022, See Note 6-Stock Compensation Plans.

See notes to the condensed consolidated financial statements

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – GENERAL

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

DELAWARE REGULATED UTILITY SUBSIDIARIES

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

In May 2022, Artesian Water completed its purchase of substantially all the water operating assets from the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware. This purchase agreement is discussed further in the “Strategic Direction and Recent Developments” section of Management's Discussion and Analysis of Financial Condition and Results of Operations.

Artesian Wastewater Management, Inc., or Artesian Wastewater, began providing wastewater services in Sussex County, Delaware in July 2005. Artesian Wastewater is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Delaware as a regulated public wastewater service company.

In January 2022, Artesian Wastewater acquired Tidewater Environmental Services, Inc. Artesian Wastewater operates as the parent holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI. TESI was incorporated in 2004 and is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Sussex County, Delaware as a regulated public wastewater service company. Artesian Wastewater purchased all of the stock of TESI from Middlesex Water Company, or Middlesex, for $6.4 million in cash and other consideration, including forgiveness of a $2.1 million note due from Middlesex. This acquisition more than doubled the number of wastewater customers served by Artesian’s Delaware wastewater subsidiaries in Sussex County, Delaware and included all residents within the Town of Milton, Delaware.

MARYLAND REGULATED UTILITY SUBSIDIARIES

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

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

PENNSYLVANIA REGULATED UTILITY SUBSIDIARY

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

OTHER NON-UTILITY SUBSIDIARIES

We have two other subsidiaries, neither of which are regulated. They are Artesian Utility Development, Inc., or Artesian Utility, and Artesian Development Corporation, or Artesian Development. We also had a third subsidiary, Artesian Storm Water Services, Inc., or Artesian Storm Water, which was dissolved effective June 20, 2023.

Artesian Utility was formed in 1996 and designs and builds water and wastewater infrastructure and provides contract water and wastewater operation services on the Delmarva Peninsula to private, municipal and governmental institutions. Artesian Utility also evaluates land parcels, provides recommendations to developers on the size of water or wastewater facilities and the type of technology that should be used for treatment at such facilities, and operates water and wastewater facilities in Delaware for municipal and governmental agencies. Artesian Utility also contracts with developers and government agencies for design and construction of wastewater infrastructure throughout the Delmarva Peninsula.

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

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

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

Artesian Storm Water, incorporated in 2017, was formed to provide design, installation, maintenance and repair services related to existing or proposed storm water management systems in Delaware and the surrounding areas. Artesian Storm Water elected to not seek new opportunities. In May 2023, the Board of Directors of Artesian Storm Water unanimously approved its dissolution. Also, in May 2023, the Board of Directors of Artesian Resources Corporation, the sole shareholder of Artesian Storm Water, unanimously approved the dissolution of Artesian Storm Water. The Company filed a Certificate of Dissolution with the Delaware Secretary of State, which became effective on June 20, 2023.

NOTE 2 – BASIS OF PRESENTATION

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, for Form 10-Q. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Accordingly, these condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes in the Company's annual report on Form 10-K for fiscal year 2022 as filed with the SEC on March 10, 2023.

The condensed consolidated financial statements include the accounts of Artesian Resources Corporation and its wholly owned subsidiaries, including its principal operating company, Artesian Water. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments (unless otherwise noted) necessary to present fairly the Company's balance sheet position as of September 30, 2023, the results of its operations for the three and nine-month periods ended September 30, 2023 and September 30, 2022, its cash flows for the nine-month periods ended September 30, 2023 and September 30, 2022 and the changes in stockholders’ equity for the three and nine-month periods ended September 30, 2023 and September 30, 2022. The December 31, 2022 Condensed Consolidated Balance Sheet was derived from the Company’s December 31, 2022 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.

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

Regulated Utility Accounting

The accounting records of Artesian Water, Artesian Wastewater, and, effective January 14, 2022, TESI are maintained in accordance with the uniform system of accounts as prescribed by the Delaware Public Service Commission, or the DEPSC. The accounting records of Artesian Water Pennsylvania are maintained in accordance with the uniform system of accounts as prescribed by the Pennsylvania Public Utility Commission, or the PAPUC. The accounting records of Artesian Water Maryland and Artesian Wastewater Maryland are maintained in accordance with the uniform system of accounts as prescribed by the Maryland Public Service Commission, or the MDPSC. Each of these subsidiaries follow the provisions of Financial Accounting Standards Board, or FASB, ASC Topic 980, which provide guidance for companies in regulated industries. These regulated subsidiaries account for the majority of our operating revenue. See Note 17 to our Condensed Consolidated Financial Statements for a full description of our segment information.

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Use of Estimates

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

All additions to utility plant are recorded at cost. Business combinations pursuant to ASC Topic 805 may result in a purchase price allocation and the acquired assets are required to be evaluated by the applicable regulatory agency. Artesian Wastewater acquired TESI in January 2022 and Artesian Water purchased substantially all of the water operating assets from the Town of Clayton in May 2022. On December 31, 2022, the fair value determinations for TESI and the water operating assets acquired from the Town of Clayton were finalized. A third-party valuation specialist assisted with the valuation of the assets acquired.

NOTE 3 – REVENUE RECOGNITION

Background

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

Tariff Contract Revenues

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

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

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

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

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

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

Accounts receivable related to tariff contract revenues are typically due within 25 days of invoicing. A provision for expected credit loss is calculated as a percentage of total associated revenues based upon historical trends and adjusted for current conditions. We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related provision for expected credit loss and associated bad debt expense has not been significant.

Non-tariff Contract Revenues

Artesian generates SLP Plan revenue once a customer requests service to cover all parts, materials and labor required to repair or replace leaking water service lines, leaking or clogged sewer lines, or water and wastewater lines within the customer’s residence, up to an annual limit. We recognize revenue from these services on a ratable basis over time as the customer simultaneously receives and consumes all the benefits of having service line protection services. These contract services are billed in advance on a monthly or quarterly basis. As a result, we record deferred revenue (contract liability) and accounts receivable for any amounts for which we have a right to invoice but for which services have not been provided. Accounts receivable from SLP Plan customers are typically due within 25 days of invoicing. A provision for expected credit loss is calculated as a percentage of total SLP Plan contract revenue. We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related provision for expected credit loss and associated bad debt expense has not been significant.

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Artesian generates contract operation revenue from water and wastewater operation services provided to customers. We recognize revenue from these operation contracts, which consist primarily of monthly operation and maintenance services, over time as customers receive and consume the benefits of such services performed. The majority of these services are invoiced in advance at the beginning of every month and are typically due within 30 days, and therefore there is no contract asset or liability associated with most of these revenues. We have one operation contract that was paid in advance resulting in a contract liability for services that have not yet been provided. A provision for expected credit loss is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers’ creditworthiness. The related provision for expected credit loss and associated bad debt expense has not been significant.

Artesian generates design and installation revenue for services related to the design and construction of wastewater infrastructure for a state agency under contract. We recognize revenue from these services over time as services are performed using the percentage-of-completion method based on an input method of incurred costs (cost-to-cost). These services are invoiced at the end of every month based on incurred costs to date. As of September 30, 2023, there is no associated contract asset or liability. There is no provision for expected credit loss or bad debt expense associated with this revenue.

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

Sales Tax

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

Disaggregated Revenues

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

(in thousands)	Three months ended September 30, 2023		Three months ended September 30, 2022		Nine months ended September 30, 2023		Nine months ended September 30, 2022
Tariff Revenue
Consumption charges	$	13,681	$	13,927	$	37,064	$	36,676
Fixed fees		8,299		7,924		24,365		23,452
Service charges		169		156		523		449
DSIC		1,403		1,406		3,922		3,870
Metered wastewater services		183		193		435		462
Industrial wastewater services		537		467		1,384		1,295
Total Tariff Revenue	$	24,272	$	24,073	$	67,693	$	66,204

Non-Tariff Revenue
Service line protection plans	$	1,441	$	1,224	$	4,176	$	3,662
Contract operations		272		238		793		691
Design and installation		28		621		150		1,723
Inspection fees		138		127		325		234
Total Non-Tariff Revenue	$	1,879	$	2,210	$	5,444	$	6,310
Other Operating Revenue	$	419	$	299	$	1,180	$	1,266
Total Operating Revenue	$	26,570	$	26,582	$	74,317	$	73,780

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Contract Assets and Contract Liabilities

Our contract assets and liabilities consist of the following:

(in thousands)	September 30, 2023		December 31, 2022		December 31, 2021

Contract Assets – Tariff	$	3,025	$	2,618	$	2,144

Deferred Revenue
Deferred Revenue – Tariff	$	1,297	$	1,231	$	1,227
Deferred Revenue – Non-Tariff		605		438		287
Total Deferred Revenue	$

ARTESIAN RESOURCES CORP [ARTNA] Filings

ARTESIAN RESOURCES CORP [ARTNB] Filings