UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

☒           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2023

OR

☐          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-18516

ARTESIAN RESOURCES CORPORATION

 (Exact name of registrant as specified in its charter)

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

664 Churchmans Road, Newark, Delaware 19702

Address of principal executive offices

(302) 453 – 6900

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

Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

□ Yes ☑ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

□ Yes ☑ No

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial report under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.  □

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b) ☐

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

  ☐ Yes þ No

The aggregate market value of the Class A Non-Voting Common Stock and Class B Common Stock held by non-affiliates of the registrant at June 30, 2023 was $426,719,824 and $14,196,292, respectively.  The aggregate market value of Class A Non-Voting Common Stock was computed by reference to the closing price of such class as reported on the Nasdaq Global Select Market on June 30, 2023, which trade date was June 30, 2023.  The aggregate market value of Class B Common Stock was computed by reference to the last reported trade of such class as reported on the OTC Bulletin Board as of June 30, 2023, which trade date was May 11, 2023.

As of March 12, 2024, 9,406,786 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.

ARTESIAN RESOURCES CORPORATION

TABLE OF CONTENTS

Item 1. – Business

Item 1A. – Risk Factors

Item 1B. – Unresolved Staff Comments

Item 2. – Properties

Item 3. – Legal Proceedings

Item 4. – Mine Safety Disclosures

Item 5. – Market for Registrant’s Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities

Item 6. – [Reserved]

Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. – Quantitative and Qualitative Disclosure About Market Risk

Item 8. – Financial Statements and Supplementary Data

Item 9. – Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Item 9A. – Controls and Procedures

Item 9B. – Other Information

Item 9C. – Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Item 10. – Directors, Executive Officers and Corporate Governance

Item 11. – Executive Compensation

Item 12. – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. – Certain Relationships and Related Transactions, and Director Independence

Item 14. – Principal Accountant Fees and Services

Item 15. – Exhibits and Financial Statement Schedules

Item 16. – Form 10-K Summary

Exhibit 21-Subsidiaries of the Company

Exhibit 23.1-Consent of BDO USA, P.C.

Exhibit 31.1-Certification of Chief Executive Officer

Exhibit 31.2-Certification of Chief Financial Officer

Exhibit 32-Certification of Chief Executive Officer and Chief Financial Officer

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FORWARD-LOOKING STATEMENTS

Statements in this Annual Report on Form 10-K which express our “belief,” “anticipation” or “expectation,” as well as other statements which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected.  Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “projects”, “forecasts”, “may”, “should”, variations of such words and similar expressions are intended to identify such forward-looking statements.  They include, but are not limited to, the statements below:

- general economic, employment and business conditions;

- material costs and availability;

- consumer and producer price inflation;

- the impact of recent acquisitions on our ability to expand and foster relationships;

- strategic plans for goals, priorities, growth and expansion;

- expectations for our water and wastewater subsidiaries and non-utility subsidiaries;

- customer base growth opportunities in Delaware and Cecil County, Maryland;

- our belief regarding our capacity to provide water services for the foreseeable future to our customers;

- our belief relating to our compliance and the cost to achieve compliance with relevant governmental regulations;

- our expectation of the timing of decisions by regulatory authorities;

- the impact of weather and climate change on our operations;

- the execution of our strategic initiatives;

- our expectation regarding the timing for construction on new projects;

- the adoption of recent accounting pronouncements from time to time;

- contract operations opportunities;

- legal proceedings;

- our properties;

- deferred tax assets;

- the adequacy of our available sources of financing;

- the expected recovery of expenses related to our long-term debt;

- our expectation to be in compliance with financial covenants in our debt instruments;

- our ability to refinance our debt as it comes due;

- our ability to adjust our debt level, interest rate, maturity schedule and structure;

- the timing and terms of renewals of our lines of credit;

- changes in interest rates;

- plans to increase our wastewater treatment operations, engineering services and other revenue streams less affected by weather;

- expected future contributions to our postretirement benefit plan;

- anticipated growth in our non-utility subsidiaries;

- anticipated investments in certain of our facilities and systems and the sources of funding for such investments;

- sufficiency of internally generated funds and credit facilities to provide working capital and our liquidity needs; and

- the specific and overall impacts of global pandemics on our financial condition and results of operations.

Certain factors, as discussed under Item 1A - Risk Factors, that could cause results to differ materially from those in the forward-looking statements include, but are not limited to:

- changes in weather and climate;

- changes in our contractual obligations;

- ability to sufficiently control certain operating expenses which are necessary to provide public utility services;

- changes in government policies;

- timely availability of materials and supplies for essential infrastructure projects and operations;

- the timing and results of our rate requests;

- failure to receive regulatory approvals;

- cyber-attacks;

- changes in economic and market conditions generally;

- effectiveness of internal control over financial reporting;

- unexpected events, restrictions and policies related to a public health crisis; and

- other matters discussed elsewhere in this Annual Report on Form 10-K.

While the Company may elect to update forward-looking statements, we specifically disclaim any obligation to do so, except as may be required under applicable securities laws, and you should not rely on any forward-looking statement as a representation of the Company’s views as of any date subsequent to the date of the filing of this Annual Report on Form 10-K.

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PART I

ITEM 1. BUSINESS

General Information

Artesian Resources Corporation, or Artesian Resources, is a Delaware corporation incorporated in 1927, that is the holding company of eight wholly-owned subsidiaries offering water, wastewater and other services in Delaware, Maryland and Pennsylvania.  The Company’s principal executive offices are located at 664 Churchmans Road, Newark, Delaware 19702.  Our principal subsidiary, Artesian Water Company, Inc., is the oldest and largest investor-owned public water utility on the Delmarva Peninsula and has been providing superior water service since 1905.  We distribute and sell water, including water for public and private fire protection, to residential, commercial, industrial, municipal and utility customers in the states of Delaware, Maryland and Pennsylvania.  We provide wastewater services to customers in Delaware. In addition, we provide contract water and wastewater operations, and water, sewer and internal Service Line Protection Plans.  Our Class A Non-Voting Common Stock is listed on the Nasdaq Global Select Market and trades under the symbol “ARTNA.”  Our Class B Common Stock trades on the Nasdaq’s OTC Bulletin Board under the symbol “ARTNB.”

Artesian Resources is the holding company of five regulated public utilities: Artesian Water Company, Inc., or Artesian Water, Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, Artesian Water Maryland, Inc., or Artesian Water Maryland, Artesian Wastewater Management, Inc., or Artesian Wastewater, and Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland; and three non-utility subsidiaries: Artesian Utility Development, Inc., or Artesian Utility, Artesian Development Corporation, or Artesian Development, and Artesian Storm Water Services, Inc., or Artesian Storm Water.  Effective January 14, 2022, Artesian Wastewater is the holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI, a regulated public utility.  The terms “we,” “our,” “Artesian,” and the “Company” as used herein refer to Artesian Resources and its subsidiaries.  The business activity conducted by each of our subsidiaries is discussed below under separate headings.

Our Market

Our current market area is the Delmarva Peninsula.  Our largest service area is in the State of Delaware.  Substantial portions of Delaware, particularly outside of northern New Castle County, are not served by a public water or wastewater system and represent potential opportunities for Artesian Water and Artesian Wastewater to obtain new exclusive franchised service areas.  We continue to focus resources on developing and serving existing service territories and obtaining new territories throughout Delaware.

We hold Certificates of Public Convenience and Necessity, or CPCNs, for approximately 308 square miles of exclusive water service territory, most of which is in Delaware with some territory being in Maryland and Pennsylvania.  Our largest connected regional water system, consisting of approximately 141 square miles and 79,300 metered customers, is located in northern New Castle County and portions of southern New Castle County, Delaware.  We hold CPCNs for approximately 59 square miles of wastewater service territory located in Sussex County, Delaware, of which approximately 23 square miles was added in January 2022 upon the closing of the acquisition of TESI.  A significant portion of our exclusive service territory is in Sussex County, Delaware and remains undeveloped, and if and when development occurs and there is population growth in these areas, we anticipate we will increase our customer base by providing water and/or wastewater service to the newly developed areas and new customers.

Subsidiaries

Artesian Water

Artesian Water, our principal subsidiary, 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 Water produced approximately 81% of our 2023 consolidated operating revenues.  In May 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware.  This purchase agreement is discussed further in the “Strategic Direction and Recent Developments” section.

We derive about 90% of our self-supplied groundwater from wells that pump groundwater from aquifers and other formations located in the Atlantic Coastal Plain.  The remaining 10% of our groundwater supply comes from wells in the Piedmont Province.  We use a variety of treatment methods, including aeration, pH adjustment, chlorination, fluoridation, ultra violet oxidation, arsenic removal, nitrate removal, radium removal, iron removal, and carbon adsorption to meet federal, state and local water quality standards.  Additionally, a corrosion inhibitor is added to our self-supplied groundwater and to supply from interconnections.  We have 62 different water treatment facilities in our Delaware systems.  All water supplies that we purchase from neighboring utilities are potable.  

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To supplement our groundwater supply, we purchase treated surface water through interconnections only in the northern service area of our New Castle County, Delaware system.  The treated surface water is blended with our groundwater supply for distribution to our customers.  Nearly 95% of the overall 8.7 billion gallons of water we distributed in all of our Delaware systems during 2023 came from our groundwater wells, while the remaining 5% came from interconnections with other utilities and municipalities.  In Delaware in 2023, we pumped an average of 23.1 million gallons per day, or mgd, from our groundwater wells and obtained an average of approximately 0.8 mgd from interconnections.  Our peak water supply capacity currently is approximately 57.7 mgd.  We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories.

Most of our New Castle County, Delaware water system is interconnected.  In the remainder of the State of Delaware, we have several satellite systems that have not yet been connected by transmission and distribution facilities.  We intend to join these systems into larger integrated regional systems through the construction of a transmission and distribution network as development continues and our expansion efforts provide us with contiguous exclusive service territories.

In Delaware, we have 24 interconnections with three neighboring water utilities and seven municipalities that provide us with the ability to purchase or sell water.  An interconnection agreement with Chester Water Authority, which is effective from January 1, 2022 through December 31, 2026, includes automatic five-year renewal terms, unless terminated by either party, and has a “take or pay” clause which required us to purchase water on a step-down schedule through July 5, 2022 and now requires us to purchase a minimum of 0.5 mgd. Artesian’s capital investments in self-sufficiency of water supply facilitated a reduction in the minimum amount of water required to be purchased under the current contract compared to previous contracted requirements.  The reduced purchased water minimum requirement has lowered purchased water utility operating costs.

As of December 31, 2023, we were serving customers through approximately 1,470 miles of transmission and distribution mains.  Mains range in diameter from two inches to twenty-four inches, and most of the mains are made of ductile iron or cast iron.

We have 36 storage tanks in Delaware, most of which are elevated, providing total system storage of approximately 45.0 million gallons. We have developed and are using an Aquifer Storage and Recovery, or ASR, system in New Castle County, Delaware.  Our ASR system provides approximately 130.0 million gallons of storage capacity, which can be withdrawn at an average rate of approximately 1.0 mgd.  At some locations, we rely on hydro-pneumatic tanks to maintain adequate system pressures.  Where possible, we combine our smaller satellite systems with systems having elevated storage facilities.

Artesian Water Maryland

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 Water Maryland owns and operates 10 public water systems.

The majority of the 0.1 billion gallons of water we distributed in all of our Maryland systems during 2023 came from our groundwater wells, while a portion came from treated surface water.  We have ten separate water treatment facilities in our Maryland systems.  We have one surface water treatment facility located in Cecil County, Maryland, with the current ability to treat up to 1.0 mgd from an intake in the Susquehanna River that is permitted a withdrawal of a maximum of 5.0 mgd and a daily average of 3.5 mgd.  Our total peak water supply capacity in Cecil County, Maryland currently is approximately 2.0 mgd.  We have 9 storage tanks capable of storing approximately 2.5 million gallons.  We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories.

In Maryland, we have one interconnection with the Artesian Water system in Delaware, one interconnection with a neighboring utility, and four interconnections with municipalities.  These interconnections are capable of providing over 3.0 mgd of water to our Maryland systems.

Artesian Water Pennsylvania

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

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Artesian Wastewater

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.

Artesian Wastewater owns and operates three wastewater treatment facilities, which, combined, are permitted to treat and/or dispose of approximately 2.3 mgd.  Artesian Wastewater and Sussex County, a political subdivision of Delaware, provide reciprocal services to address the need of each for additional wastewater treatment and disposal capacity in certain service areas within Sussex County.  Artesian Wastewater also owns and operates a disposal facility that includes a 90-million gallon storage lagoon and spray irrigation to agricultural land.  This facility provides treated process wastewater disposal services for an industrial customer at a rate up to 1.5 mgd.  We began operating this facility in June 2021.

TESI

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.

TESI owns and operates seven wastewater treatment facilities, which, combined, are permitted to treat and/or dispose of approximately 713,000 gallons per day.

Artesian Wastewater Maryland

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.

Artesian Utility

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.

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 mgd.  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

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 approximately 7,000 square feet of warehouse space.

Artesian Storm Water

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.  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.

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Government Regulations

Overview

The Company is subject to federal, state and local laws and regulations in all of the jurisdictions in which it operates.

These regulations include state commission orders, environmental protection, securities and exchange activities, including financial reporting and internal controls processes, data protection and privacy, tax compliance, health and safety, labor and employment practices, and other general business activities.

State Regulatory Commission Matters

Our water and wastewater utility operations are subject to regulation by their respective state regulatory commissions, which have broad administrative power and authority to regulate rates charged for service, determine franchise areas and conditions of service, approve acquisitions, authorize the issuance of securities and the incurrence of indebtedness, and other matters.  The profitability of our utility operations is influenced, to a great extent, by the timeliness and adequacy of regulatory relief we are granted by the respective regulatory commissions or authorities in the states in which we operate.  See Notes to Consolidated Financial Statements – Note 13 – Regulatory Proceedings for a full description of recent regulatory proceedings.

Service Territory Expansion

In Delaware, a CPCN grants a water or wastewater company the exclusive right to serve all existing and new customers within a designated area.  The Delaware Public Service Commission, or DEPSC, has the authority to issue and revoke these CPCNs.  In this Form 10-K, we may refer to CPCNs as "franchises" or "service territories."

For a water company, the DEPSC may grant a CPCN under circumstances where there has been a determination that the water in the proposed service area does not meet the regulations governing drinking water standards of the Delaware Division of Public Health, or DPH, for human consumption or where the supply is insufficient to meet the projected demand.  For a wastewater company, the DEPSC has jurisdiction over non-governmental wastewater utilities having fifty or more customers in the aggregate.  A CPCN for water and wastewater utilities shall be granted by the DEPSC to applicants in possession of one of the following:

- a signed service agreement with the developer of a proposed subdivision or development, which subdivision or development has been duly approved by the respective county government;

- a petition requesting such service signed by a majority of the landowners of the proposed territory to be served; or

- a duly certified copy of a resolution from the governing body of a county or municipality requesting the applicant to provide service to the proposed territory to be served.

A water or wastewater utility that has a CPCN must obtain the approval of the DEPSC to abandon a service territory.  Once a CPCN is granted to a water or wastewater utility, it may not be suspended or terminated unless the DEPSC determines in accordance with its rules and regulations that good cause exists for any such suspension or termination.  Although we have been granted an exclusive franchise for each of our existing water and wastewater systems in Delaware, our ability to expand service areas can be affected by the DEPSC awarding franchises to other regulated water or wastewater utilities with whom we compete for such franchises.

In Maryland, the Company must obtain approval from the appropriate local government authority for the ability to serve a particular area and also ensure that the acquired area is in the county’s master water and sewer plan.  The authority to exercise a franchise must then be obtained from the Maryland Public Service Commission, or MDPSC.  Utilities that seek to develop a franchise by constructing new facilities must obtain appropriate approvals from the Maryland Department of the Environment, or MDE, the local government and the MDPSC.  The utility must also obtain approval for soil and erosion plans and easement agreements from appropriate parties.

Environmental Regulation

The United States Environmental Protection Agency, or the EPA, the Delaware Department of Natural Resources and Environmental Control, or DNREC, and DPH, regulate the water quality of our treatment and distribution systems in Delaware, as do the EPA and the MDE, with respect to our operations in Maryland.  The Chester Water Authority, which supplies water to Artesian Water through an interconnection in northern New Castle County, and Artesian Water Pennsylvania, which also supplies water to Artesian Water, are regulated by the Pennsylvania Department of Environmental Protection, or PADEP, as well as the EPA.  We believe that we are in material compliance with all current federal, state and local water quality standards, including regulations under the federal Safe Drinking Water Act.  However, if new water quality regulations are too costly, or if we fail to comply with such regulations, it could have a material adverse effect on our financial condition, results of operations and planned capital investments.

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The water industry is capital intensive, with one of the highest levels of capital investment in plant and equipment per dollar of revenue among all utilities.  Increasingly stringent drinking water regulations adopted to meet the requirements of the Safe Drinking Water Act have required the water industry to invest in more advanced treatment systems and processes, which require a heightened level of expertise.  We have made significant enhancements to existing facilities to effectively treat and remove compounds as required by government agencies, such as ultra violet oxidation treatment, ceramic membrane filtration and carbon filtration.  We are currently in full compliance with the requirements of the Safe Drinking Water Act.  Even though our water utility was founded in 1905, the majority of our investment in infrastructure occurred in the last 40 years.

As required by the Safe Drinking Water Act, the EPA has established maximum contaminant levels for various substances found in drinking water to ensure that the water is safe for human consumption.  These limits are known as Maximum Contaminant Levels and Maximum Residual Disinfection Levels.  The EPA also regulates how often public water systems monitor their water for contaminants and report the monitoring results to the individual state agencies or the EPA.  Generally, the larger the population served by a water system, the more frequent the monitoring and reporting requirements.  The Safe Drinking Water Act applies to all 50 states.  The EPA has recently proposed regulatory actions addressing per- and polyfluoroalkyl substances, or PFAS, including rules to confront PFAS contamination nationwide, with potentially significant implications.  The EPA issued a proposal to designate two of the most widely used PFAS as hazardous substances.  The EPA has also declared drinking water health advisory levels for PFAS.

The Lead and Copper Rule, or LCR, is a United States federal regulation that limits the concentration of lead and copper allowed in public drinking water at the consumer's tap, in addition to limiting the permissible amount of pipe corrosion occurring due to the water itself.  The EPA first issued the rule in 1991 pursuant to the Safe Drinking Water Act.  The EPA promulgated the regulations following studies that concluded that copper and lead adversely affect an individual’s physical and mental health.  The LCR therefore sought to  limit the levels of these metals in water by improving water treatment centers, determining copper and lead levels for customers who use lead plumbing parts, and eliminating the water source as a source of lead and copper.  If the lead and copper levels exceed the "action levels," water suppliers are required to educate their consumers on how to reduce exposure to lead.  The EPA published a revision to the LCR in 2021, with a compliance deadline of October 2024 for developing an inventory of lead service lines within a utility’s water system.  These revised requirements provide greater and more effective protection of public health by reducing exposure to lead and copper in drinking water. Implementation of the revised rule will identify locations of lead, improve the reliability of lead tap sampling results, strengthen corrosion control treatment requirements, expand consumer awareness and improve risk communication.  In addition, implementation of the revised rule will accelerate lead service line replacements by implementing timelines and strengthening replacement requirements.  We are fully compliant with the current LCR and on schedule to be in compliance with the revised LCR ahead of the October 2024 compliance date.

The DPH has set maximum contaminant levels for certain substances that are more restrictive than the maximum contaminant levels set by the EPA.  The DPH is the EPA's agent for enforcing the Safe Drinking Water Act in Delaware and, in that capacity, monitors the activities of Artesian Water and reviews the results of water quality tests performed by Artesian Water for adherence to applicable regulations.  Artesian Water is also subject to other laws regulating substances and contaminants in water, including rules for volatile organic compounds and the Total Coliform Rule.

A normal by-product of our iron removal treatment facilities is a solid consisting of the iron removed from untreated groundwater plus residue from chemicals used in the treatment process.  The solids produced at our facilities are either disposed directly into approved wastewater facilities or removed from our facilities by a licensed third-party vendor.  A normal by-product of our carbon adsorption filtration process is exhausted carbon media, which is disposed of by the contractor providing the media replacement.  Management believes that the costs of compliance with existing federal, state and local laws and regulations regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has had no material adverse effect upon the business and affairs of the Company, but there is no assurance that such compliance costs will continue to not have a material effect in the future.

Under Delaware state laws and regulations, we are required to file applications with DNREC for water allocation permits for each of our operating wells pumping greater than 50,000 gallons per day.  For any wells in the Delaware River Basin, we must also file allocation permits with the Delaware River Basin Commission, or DRBC.  We have 142 operating and 62 observation and monitoring wells in our Delaware systems.  At December 31, 2023, we had allocation permits for 116 wells and 25 wells that did not require a permit.

Our access to aquifers within our service territory is not exclusive.  Water allocation permits control the amount of water that can be drawn from water resources and are granted with specific restrictions on water level draw down limits, annual, monthly and daily pumpage limits, and well field allocation pumpage limits.  We are also subject to water allocation regulations that control the amount of water that we can draw from water sources.  As a result, if new or more restrictive water allocation regulations are imposed, they could have an adverse effect on our ability to supply the demands of our customers, and in turn, our water supply revenues and results of operations.  Our ability to supply the demands of our customers historically has not been affected by private usage of the aquifers by landowners or the limits imposed by the State of Delaware. Because of the extensive regulatory requirements relating to the withdrawal of any significant amounts of water from the aquifers, we believe that third-party usage of the aquifers within our service territory will not interfere with our ability to meet the present and future demands of our customers.

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The MDE ensures that water quality and quantity at all public water systems in Maryland meet the needs of the public and are in compliance with federal and state regulations.  The MDE also ensures that public drinking water systems provide safe and adequate water to all current and future users in Maryland and that appropriate usage, planning, and conservation policies are implemented for Maryland’s water resources. The MDE oversees the development of Source Water Assessments for water supplies and issues water appropriation permits for public drinking water systems.  In order to appropriate water for municipal, commercial, industrial or other non-domestic uses, a Water Appropriation Permit must be obtained.  Issuance of the permit involves evaluating the needs of the user and the potential impact of the withdrawal on neighboring users and the water source in order to maximize beneficial use of the water.  Permits for large appropriations often involve conducting pump tests to measure adequacy of an aquifer and safe yield of a well, or reviewing stream flow records to determine the adequacy of a surface water source.  Regulations require all new community water systems to have sufficient technical, managerial and financial capacity to provide safe drinking water to their consumers prior to being issued a construction permit.  Also, capacity management guidance contains capacity limiting factors that can include source capacity, treatment capacity and appropriation permit quantity.  The quantity of water withdrawn from the Port Deposit surface water intake is allocated by the Susquehanna River Basin Commission, or SRBC, and the MDE.  We have 14 operating wells and one surface water in-take in our Maryland systems.

The PADEP administers and oversees departmental programs involving surface and groundwater quantity and quality planning and water conservation in Pennsylvania.  The office also coordinates policies, procedures, and regulations which influence public water supply withdrawals and quality.  The DRBC administers and oversees programs involving water quality protection, water supply allocation, water conservation initiatives and watershed planning, regulatory review and permitting, and drought management in Pennsylvania.  We have one operating well in Pennsylvania within the DRBC’s jurisdiction.  This well is treated by a water treatment plant located in Delaware.

The Clean Water Act has established the foundation for wastewater discharge control in the United States.  The Clean Water Act established a control program for ensuring that communities have clean water by regulating the release of contaminants into waterways.  Permits that limit the amounts of pollutants discharged are required for all wastewater dischargers under the National Pollutant Discharge Elimination System, or the NPDES, permit program.  In accordance with the NPDES permit program, the implementing states set maximum discharge limits for wastewater effluents and overflows from wastewater collection systems. Discharges that exceed the limits specified under the NPDES permit program can lead to the imposition of penalties.  The Clean Water Act also requires that wastewater treatment plant discharges meet a minimum of secondary treatment.  The secondary treatment process can remove 90% to 99% of the organic matter in wastewater.  Our removal efficiency is generally 96% to 98%.

Under Delaware state laws and regulations, we are required to hold a permit from DNREC for the construction, operation, maintenance or repair of any on-site wastewater treatment and disposal systems with daily design flow rates of 2,500 gallons or greater.  A classification on the facility is performed in accordance with Regulations Licensing Operators of Wastewater Facilities.  The class of operator required for the facility is determined by the Board of Certification for Licensed Wastewater Operations in accordance with Regulations Licensing Operators of Wastewater Facilities.  We work to ensure that we operate environmentally friendly wastewater systems that meet federal, state and local laws.

Additional General Information

Seasonality

Substantially all of our water customers are metered, which allows us to measure and bill for our customers’ water consumption.  Demand for water during the warmer months is generally greater than during cooler months primarily due to additional customer requirements for water in connection with cooling systems, swimming pools, irrigation systems and other outside water use.  Throughout the year, and particularly during typically warmer months, demand for water will vary with temperature and rainfall.  In the event that temperatures during the typically warmer months are cooler than expected, or there is more rainfall than expected, the demand for water may decrease and our revenues may be adversely affected.

Competition

Our business in our franchised service areas is substantially free from direct competition with other public utilities, municipalities and other entities.  However, our ability to provide additional water and wastewater services is subject to competition from other public utilities, municipalities and other entities.  Even though our regulated subsidiaries have been granted an exclusive franchise for each of our existing community water and wastewater systems, our ability to expand service areas can be affected by the DEPSC, the MDPSC or the Pennsylvania Public Utility Commission, or PAPUC, awarding franchises to other regulated water or wastewater utilities with whom we compete for such franchises.

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Suppliers and Independent Contractors

We are dependent upon the ability of our suppliers and independent contractors to meet performance specifications, quality standards and delivery schedules at our anticipated costs.  While we maintain an extensive qualification and performance review system to control risk associated with such reliance on third parties, failure of suppliers or independent contractors to meet commitments could adversely affect construction and maintenance schedules.  We are also dependent on the availability of electricity and purchased water at affordable prices.  Our electric costs and purchased water costs are at a fixed price under contract.

Employees and Human Capital Resources

As of December 31, 2023, we employed 251 full-time employees.  Of these employees, 59 were officers and managers; 119 were employed as operations personnel, including engineers, technicians, draftsman, maintenance and repair persons, meter readers and utility personnel; and 38 were employed in accounting, budgeting, information systems, human resources, customer relations and public relations.  The remaining 35 employees were administrative personnel.  The Company has no collective bargaining agreements with any of its employees, and its work force is not union organized or union represented.  We believe that our relations with our employees are good. Through ongoing employee development, competitive compensation and benefits, and a focus on health, safety and employee wellbeing, we strive to help our employees in all aspects of their lives.

We believe the Company’s success depends on its ability to attract, develop and retain key personnel.  We provide our employees with resources that contribute to their professional development, including technical training and performance reviews.  A core principle of our company is to promote from within and offer advancement opportunities at all levels of employment, which helps us retain talented employees.  We believe our management team has the experience, talent and dedication necessary to effectively execute our business goals and growth strategy.  We recognize that the skills, experience, diversity, industry knowledge and dedication of our employees significantly benefit our operations and performance.

We set pay ranges based on market data. When considering compensation, we consider factors such as an employee’s role, experience, and his or her performance.  We regularly review our compensation practices, both in terms of our overall workforce and individual employees, to ensure our compensation is fair and equitable.

Health and safety in the workplace for our employees is one of the Company’s core values.  Hazards in the workplace are proactively identified and actions are taken to maintain workplace safety.  We sponsor a wellness program designed to enhance physical, financial, and mental wellbeing for all our employees.  Throughout the year, we encourage healthy behaviors through regular communications, educational sessions and other incentives.

We use outside consultants and independent contractors on an as needed basis for various services.  We rely on our independent contractors to manage their respective employee relations so that the services they are contractually obligated to perform for us satisfy our requirements.  Management believes that through our own employees, coupled with the services provided by our independent contractors and outside consultants, we have sufficient human capital to continue to operate our business successfully.

Available Information

We are a Delaware corporation with our principal executive offices located at 664 Churchmans Road, Newark, Delaware, 19702. Our telephone number is (302) 453-6900 and our website address is www.artesianwater.com.  We make available free of charge through our website our Code of Ethics, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, our Corporate Governance Guidelines, and our Board Committee Charters as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or the SEC. We include our website address in this Annual Report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our website.  Information contained on our website shall not be deemed incorporated into, or to be a part of, this report.

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ITEM 1A. RISK FACTORS

We are exposed to a variety of risks and uncertainties.  Most are general risks and uncertainties applicable to all water and wastewater utility companies.  We describe below some of the specific known risk factors that could negatively affect our business, financial condition or results of operations.  If one or more of these risks or uncertainties occur, actual results may vary materially from our projections.  

Risks Related to Our Operations

We are dependent upon the ability of our suppliers and independent contractors to meet performance specifications, quality standards and delivery schedules at our anticipated costs.

While we maintain an extensive qualification and performance review system to control risk associated with such reliance on third parties, failure of suppliers or independent contractors to meet commitments could adversely affect construction and maintenance schedules and our results of operations and financial condition.  We have been affected and could continue to be affected by supplier delays and increased costs, due to the impacts of inflation, which are outside of our control and could affect our results of operations.  We are also dependent on the availability of electricity and purchased water at affordable prices.  While our electricity costs and purchased water costs are at fixed prices under contracts, after the expiration of these contracts, we may be required to pay higher electricity costs and purchased water costs.

We are subject to risks associated with the collection, treatment and disposal of wastewater.

Wastewater collection, treatment and disposal involve various unique risks.  If collection or treatment systems fail, overflow, or do not operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to wildlife and economic damages, which may not be recoverable in fees.  This risk is most acute during periods of substantial rainfall or flooding, which are common causes of sewer overflow and system failure.  Liabilities resulting from such damages and injuries could materially and adversely affect our business, results of operations and financial condition.

Aging infrastructure may lead to service disruptions, property damage and increased capital expenditures and operation and management costs, all of which could negatively impact our financial results.

We have risks associated with aging infrastructure, including water and sewer mains, pumping stations and water and wastewater treatment facilities. Additionally, the nature of information available on buried and newly acquired assets may be limited, which may challenge our ability to conduct efficient asset management and maintenance practices. Assets that have aged beyond their expected useful lives may experience a higher rate of failure. Failure of aging infrastructure could result in increased capital expenditures and operation and management costs. In addition, failure of aging infrastructure may result in property damage, and in safety, environmental and public health impacts. To the extent that any increased costs or expenditures are not fully recovered in rates, our results of operations, liquidity and cash flows could be negatively impacted.

Potential terrorist attacks or sabotage may disrupt our operations and adversely affect our business, operating results and financial condition.

We are subject to possible sabotage of our water and wastewater systems, including vandalism causing an interruption in water supply and a reduction in water quality, and terrorism causing contamination of the water supply and a reduction in water quality.  We have security measures in place at our facilities to reduce the possibility of occurrences of sabotage, vandalism, or terrorism and to secure our water and wastewater systems.  These security measures address water collection, pretreatment, treatment, distribution, storage, wastewater disposal, electronic or automated systems, and the use, handling, delivery, and storage of all chemicals.  We also have programs in place to ensure employee awareness of potential threats.  We have and will continue to bear any increase in costs, most of which have been recoverable under state regulatory policies, for security precautions to protect our facilities, operations and supplies.  While the costs of increases in security, including capital expenditures, may be significant, we expect these costs to continue to be recoverable in water and wastewater rates.  Despite our security measures, we may not be in a position to control the outcome of terrorist events, sabotage or other attacks on our water systems, should they occur.

We depend on the availability of capital for expansion, construction and maintenance. Weaknesses in capital and credit markets or increased interest rates may limit our access to capital.

Our ability to continue our expansion efforts and fund our utility construction and maintenance program depends on the availability of adequate capital.  There is no guarantee that we will be able to obtain sufficient capital in the future on favorable terms and conditions, such as changes in market conditions and events beyond our control, most recently increases to interest rates, for expansion, construction and maintenance.  In the event our lines of credit are not extended or we are unable to refinance our first mortgage bonds when due and the borrowings are called for payment, we will have to seek alternative financing sources, although there can be no assurance that these alternative financing sources will be available on terms acceptable to us.  In the event we are unable to obtain sufficient capital, our expansion efforts could be curtailed, which may affect our growth and may affect our future results of operations.

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We may be adversely affected by global climate change or by regulatory, legal or market responses to such change.

The issue of climate variability is receiving increasing attention nationally and worldwide.  Climate change is an intrinsically complex global phenomenon with inherent residual risks across its physical and regulatory dimensions that cannot be mitigated given their wide-ranging, interdependent and largely unpredictable potential scope, nature, timing or duration.  Some climate researchers believe that there will be worsening of weather volatility in the future associated with climate variability, which presents several potential challenges to water and wastewater utilities.  Severe weather, climate variability patterns and natural or other events may cause weather volatility in the future and may impact water usage and related revenue, or may require additional expenditures, all of which may not be fully recoverable in rates or otherwise.

We may experience substantial negative impacts to our business if an unexpectedly severe weather event or natural disaster damages our facilities and/or operations or those of our suppliers or independent contractors in our service areas, or from the unintended consequences of regulatory changes that directly or indirectly impose substantial restrictions on our activities or adaptation requirements.  Potential climate variability challenges include the following: increased frequency and duration of droughts, increased precipitation and flooding, increased frequency and severity of storms and other weather events, potential degradation of water quality, unexpected changes in temperature, increases in ocean levels, disruptions in water or wastewater services to our customers, decreases in available water supply, extreme changes in water usage patterns, increases in expenditures to repair any damages, increases in costs to reduce risks associated with significant weather events or natural disasters, and increases in costs to improve the reliability of our water and wastewater systems and facilities.  Due to the uncertainty of weather volatility related to climate variability, we cannot predict its potential impact on our financial condition, results of operations, cash flows and liquidity.  Although some or all potential expenditures and costs with respect to our regulated businesses could be recovered through rates we charge to our customers, there can be no assurance that the applicable regulatory authority would authorize recovery of such costs, in whole or in part, for any of these impacts.

Furthermore, federal, state and local authorities and legislative bodies have issued, implemented or proposed regulations, penalties, standards and/or guidance intended to restrict, moderate or promote activities consistent with resource conservation, Greenhouse Gas, or GHG, emission reduction, environmental protection or other climate-related objectives.  Compliance with those directed at or otherwise affecting our business or our suppliers’ (or their suppliers’) operations, or services, could lead to increased environmental compliance expenditures, increased energy and raw materials costs and new and/or additional investment in designs and technologies.  We continually assess our compliance status and management of environmental matters to ensure our operations are in compliance with all applicable environmental laws and regulations.  It is reasonably possible that costs incurred related to the various physical and regulatory risks from climate change may affect our future results of operations, financial condition, cash flows or liquidity.  While we have health and safety protocols in place, we can provide no assurance that we or our suppliers or independent contractors can successfully operate in areas experiencing a significant weather event or natural disaster, and we or they may be more significantly impacted and take longer, and incur higher costs, to resume operations in an affected location, depending on the nature of the event or other circumstances.  Although some or all potential expenditures and costs with respect to our regulated businesses could be recovered through rates we charge to our customers, there can be no assurance that the applicable regulatory authority would authorize recovery of such costs, in whole or in part, for any of these impacts.

Though we have not as of the date of this report identified or experienced any particular material impact, whether singular or in combination, to our consolidated financial statements from climate change or the associated regulatory, physical, and other risks discussed above, we cannot provide any assurance that we have or can successfully prepare for, or are or will be able to reduce or manage any of them to the extent they may arise.  In addition, the SEC has proposed extensive climate-related disclosure rules, which, if adopted, would likely result in increased compliance costs and capital expenditures.

Risks Related to Governmental Laws and Regulations

We rely on governmental approvals in the States of Delaware and Maryland and the Commonwealth of Pennsylvania, as well as approvals from the Delaware River Basin Commission and Susquehanna River Basin Commission for applicable water allocation, water appropriation and water capacity permits.  In addition, we rely on governmental approvals in the State of Delaware for applicable wastewater collection, treatment and disposal permits for the operation of our wastewater facilities.

Our water and wastewater services are governed by various federal and state governmental agencies.  Pursuant to these regulations, we are required to obtain various permits for any additional systems and current systems to assist in our operations.  If any of those permit approvals are not received timely or at all, we may risk the loss of economic opportunity and our ability to create additional systems for the effective operation of our water business in Delaware, Maryland and Pennsylvania or our wastewater business in Delaware.  We can provide no assurances that we will receive all necessary permits to add systems or continue to operate facilities of our water or wastewater business.

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Our operating revenue is primarily from water sales.  The rates that we charge our customers are subject to the regulations of the public service commissions in the states in which we operate.   If a public service commission disapproves or is unable to timely approve our requests for rate increases or approves rate increases that are inadequate to cover our investments, deferred regulatory assets or increased costs, our profitability may suffer.

We file rate increase requests, from time to time, to recover our investments in utility plant, deferred regulatory assets and expenses, see Notes to Consolidated Financial Statements - Note 13 – Regulatory Proceedings.  Once a rate increase petition is filed with a public service commission, the ensuing administrative and hearing process may be lengthy and costly.  We can provide no assurances that any future rate increase request will be approved by the DEPSC, MDPSC or PAPUC, and if approved, we cannot guarantee that these rate increases will be granted in a timely manner and/or will be sufficient in amount to cover the investments, deferred regulatory assets and expenses for which we initially sought the rate increase.  To the extent we are able to pass through such costs to customers and a state public service commission subsequently determines that such costs should not have been paid by customers, we may be required to refund such costs, with interest, to customers.  Any such costs not recovered through rates, or any such refund, could adversely affect our results of operations, financial position or cash flows.

Our water and wastewater operations are subject to extensive federal and state laws and regulations.  In addition, our operating costs and capital expenditures could be significantly increased if new or stricter regulatory standards are imposed by federal or state environmental agencies.

We are subject to various federal, state, and local laws and regulations relating to environmental protection, including the discharge, treatment, storage, disposal and remediation of hazardous substances and wastes.  Our water and wastewater services are governed by various federal and state environmental protection and health and safety laws and regulations, including, among others, the federal Safe Drinking Water Act, the Clean Water Act, the LCR and other federal and state laws.  These federal and state regulations are issued by the EPA and state environmental regulatory agencies.  Pursuant to these laws and regulations, we are required to obtain various water allocation permits and environmental permits for our operations.  The water allocation permits control the amount of water that can be drawn from water resources.  New or stricter water allocation regulations can adversely affect our ability to meet the demands of our customers.  While we have budgeted for future capital and operating expenditures to maintain compliance with these laws and our permits, it is possible that new or stricter standards would be imposed that will raise our operating costs and capital expenditures.  Thus, we can provide no assurances that our costs of complying with, or discharging liability under, current and future environmental and health and safety laws will not adversely affect our business, results of operations or financial condition.

Risks Related to Our Financial Statements and Operating Results

Our business is subject to seasonal fluctuations, which could affect demand for our water service and our revenues.

Demand for water during warmer months is generally greater than during cooler months primarily due to additional customer requirements in irrigation systems, swimming pools, cooling systems and other outside water use.  In the event that temperatures during typically warmer months are cooler than normal, or rainfall is more than normal, the demand for our water may decrease and adversely affect our revenues.

Drought conditions and government-imposed water use restrictions may impact our ability to serve our current and future customers, and may impact our customers’ use of our water, which may adversely affect our financial condition and results of operations.

We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories.  However, severe drought conditions could interfere with our sources of water supply and could adversely affect our ability to supply water in sufficient quantities to our existing and future customers.  This may adversely affect our revenues and earnings.  Moreover, governmental restrictions on water usage during drought conditions may result in a decreased demand for water, which may adversely affect our revenue and earnings.

General economic conditions may materially and adversely affect our financial condition and results of operations.

The effects of adverse U.S. economic conditions may lead to a number of impacts on our business that may materially and adversely affect our financial condition and results of operations.  Such impacts may include a reduction in discretionary and recreational water use by our residential water customers, particularly during the summer months; a decline in usage by industrial and commercial customers as a result of decreased business activity and commerce in our customers’ businesses; an increased incidence of customers’ inability to pay their bills, bankruptcy or delay in paying their bills which may lead to higher bad debt expense and reduced cash flow; and a lower natural customer growth rate may result as compared to what had been experienced before due to a decline in new housing starts or a decline in the number of active customers due to housing vacancies or abandonments.

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We could be adversely impacted by inflation.

We have been affected and could continue to be affected by increased costs for items such as, among others, materials for capital expenditures, fuel, and treatment chemicals, due to the impacts of inflation.  If inflation increases significantly, we may seek to increase our rates charged to customers.  We can provide no assurances that any future rate increase request will be approved by the applicable regulatory authority, and if approved, we cannot guarantee that any rate increase will be granted in a timely manner and/or will be sufficient in amount to cover costs for which we initially sought the rate increase.  The impact of inflation could adversely affect our results of operations, financial position or cash flows.

We may be required to record impairments of goodwill, or otherwise change the fair value of certain assets, in the future that could have a material adverse effect on our financial condition and results of operations.

The Company records goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired as of the date of an acquisition.  The Company’s goodwill is associated with the January 2022 acquisition of Tidewater Environmental Services, Inc.  Goodwill is not amortized, but is evaluated for impairment at least annually, or more frequently, if impairment indicators are present that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  We may be required to recognize in the future an impairment of goodwill due to market conditions, or other factors related to our performance or the performance of an acquired business, or other circumstances that may impact the fair value of assets acquired.  Recognition of impairments of goodwill and changes in fair value of certain of our assets would result in a charge to income in the period in which the impairment or change occurred, which may negatively affect our financial condition, results of operations and total capitalization.

Risks Related to Our Business Strategy

We face competition from other water and wastewater utilities for the acquisition of new exclusive service territories.

We face competition from other water and wastewater utilities as we pursue the right to exclusively serve new territories in Delaware and Maryland.  We address this competition by entering into agreements with landowners, developers or municipalities and, under current law, then applying to the DEPSC or the MDPSC for a CPCN.  If we are unable to enter into agreements with landowners, developers or municipalities and secure CPCNs for the right to exclusively serve new territories in Delaware or Maryland, our ability to expand may be significantly impeded.

Any future acquisitions we undertake or other actions to further grow our water and wastewater business may involve risks.

An element of our growth strategy is the acquisition and integration of water and wastewater systems in order to broaden our current service areas and move into new ones.  It is our intent, when practical, to integrate any organizations we acquire with our existing operations.  The negotiation of potential acquisitions as well as the integration of acquired organizations could require us to incur significant costs and cause diversion of our management’s time and resources.  We may not be successful in the future in identifying organizations that meet our acquisition criteria.  The failure to identify such organizations may limit the rate of our growth.  In addition, future acquisitions or expansion of our service areas by us could result in:

- Dilutive issuance of our equity securities;

- Incurrence of debt and contingent liabilities;

- Difficulties in integrating the operations and personnel of the acquired organization;

- Diversion of our management’s attention from ongoing business concerns;

- Failure to have effective internal control over financial reporting;

- Overload of human capital resources; and

- Other acquisition-related expense.

Some or all of these items could have a material adverse effect on our business and our ability to finance our business and comply with regulatory requirements.  The organizations we acquire in the future may not achieve sales and profitability that would justify our investment.

We also may experience risks relating to the challenges and costs of closing a transaction and the risk that an announced transaction may not close.  Completion of certain acquisition transactions are conditioned upon, among other things, the receipt of approvals, including from certain state public utilities commissions.  The timeliness and outcome of those state public utilities commissions could hinder future acquisitions and any failure to complete a pending transaction would prevent us from realizing the anticipated benefits.  We would also remain liable for significant transaction costs, including legal and accounting fees, whether or not the transaction is completed.

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Risks Related to Legal Uncertainty

Contamination of our water supply or wastewater operational malfunctions may result in disruption in our services and could lead to litigation that may adversely affect our business, operating results and financial condition.

Our water supplies are subject to contamination from naturally-occurring compounds as well as pollution resulting from man-made sources.  Even though we monitor the quality of our water on an ongoing basis, any possible contamination could interrupt the use of our water supply until we are able to substitute it from an uncontaminated water source.  Additionally, treating the contaminated water source could involve significant costs and could adversely affect our business.  We could also be held liable for consequences arising out of human or environmental exposure to hazardous substances, if found, in our water supply.  If wastewater collection or treatment systems fail, overflow, or do not operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to wildlife and economic damages for which we could be held liable.  Any such occurrence could adversely affect our business, results of operations and financial condition.

We are subject to various laws and regulations that could expose us to governmental investigations or actions by other third parties.

We are subject to various federal and state laws and regulations, including environmental laws and regulations, violations of which can involve civil or criminal sanctions.

Our Company from time to time could be parties to or our operations targets of, lawsuits, claims, investigations and proceedings, including system failure, injury, contract, environmental, health and safety and employment matters, which are handled and defended in the ordinary course of business.  The results of any future litigation or settlement of such lawsuits and claims are inherently unpredictable, but such outcomes could also materially and adversely affect our business, financial position and results of operations.

Risk Related to Cybersecurity and Technology

We are dependent on the continuous and reliable operation of our information technology systems that require, potentially costly, maintenance and could become subject to cyberattacks disrupting our operations.

We rely on our information technology systems to manage operation of our business.  Specifically, our business relies on the following technology systems, among others: customer information system, financial reporting system, asset tracking system, remote monitoring system for some of our treatment, storage and pumping facilities, human resources management system, inventory management system, and accounts receivable collection management system.  Such systems require periodic modifications, upgrades or replacement that subject us to inherent costs and risks, including substantial capital expenditures, additional administration and operating expenses, and other risks and costs of delays in transitioning to new systems or of integrating new systems into our current systems.  Our computer and communications systems and operations could be damaged or interrupted by natural disasters, power loss, telecommunications failures or acts of war or terrorism, sabotage, theft or similar events or disruptions.  A loss of these systems or major problems with the operation of these systems could affect our operations and have a material adverse effect on our business and results of operations.

To date, there have been no risks identified from cybersecurity threats or previous cybersecurity incidents that have materially affected or are reasonably likely to materially affect the company.  Despite our efforts, a cyberattack, if it occurred, could cause water or wastewater system operational complications, disrupt service to our customers, compromise important data or systems or result in an unintended release of customer or other confidential information.  Possible impacts associated with a cyberattack could also include remediation costs related to lost, stolen, or compromised data, repairs to information technology and data processing systems, increased cyber security protection costs, adverse effects on our compliance with regulatory and environmental laws and regulations, including standards for water and wastewater utility providers, and litigation.  We feel we have adequate cybersecurity insurance coverage to mitigate the cost of any such cyberattack; however, a possible cyberattack could affect our operations and have a material adverse effect on our business and results of operations.  We have implemented, and will continue to internally monitor and manage, business processes to support our cybersecurity program.  For additional information concerning the Company’s cybersecurity program, see Item 1C - Cybersecurity.

Risk Associated with Management

Turnover in our management team could have an adverse impact on our business or the financial market’s perception of our ability to continue to grow.

Our success depends significantly on the continued contribution of our management team both individually and collectively. The loss of the services of any member of our management team or the inability to hire and retain experienced management personnel could harm our operating results.  In addition, turnover in our management team could adversely affect the financial market’s perception of our ability to continue to grow.

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Risks Related to Our Common Stock

There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.

Dividends on our common stock will only be paid if and when declared by our Board of Directors.  Our earnings, financial condition, capital requirements, applicable regulations and other factors, including the timeliness and adequacy of rate increases, will determine both our ability to pay dividends on common stock and the amount of the dividends declared by our Board of Directors.  There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.

Holders of Class A Non-Voting Common Stock have no voting rights.  As a result, holders of Class A Non-Voting Common Stock will not have any ability to influence stockholder decisions.

We have two classes of common stock, Class A Non-Voting Common Stock and Class B Common Stock. Under our Restated Certificate of Incorporation, the right to vote for the election of directors and other stockholder matters is exercised exclusively by the holders of Class B Common Stock. The holders of our Class A Non-Voting Common Stock do not have voting rights on any matters that are submitted to a vote of stockholders, including with respect to the election of directors and other matters voted upon by stockholders, except as required by the Delaware General Corporation Law.  The principal stockholders have significant control over the outcome of most fundamental corporate matters.

The price of our common stock may be volatile and may be affected by market conditions beyond our control.

The trading price of our common stock may fluctuate in the future based on a variety of factors, many of which are beyond our control and unrelated to our financial results.  Factors that could cause fluctuations in the trading price of our common stock include but are not limited to volatility of the general stock market or the utility stock index, regulatory developments, general economic conditions and trends, actual or anticipated changes or fluctuations in our results of operations, actual or anticipated changes in the expectations of investors or securities analysts, actual or anticipated developments in our competitors’ businesses or the competitive landscape generally, litigation involving us or our industry, major catastrophic events or sales of large blocks of our stock.  Furthermore, we believe that stockholders invest in public utility stocks in part because they seek reliable dividend payments.  If there is an oversupply of stock of public utilities in the market relative to demand by such investors, the trading price of our common stock may decrease.  Additionally, if interest rates rise above the dividend yield offered by our common stock, demand for our stock and its trading price may also decrease.

Risk Related to Pandemics

Our business, results of operations, financial condition, cash flows and stock price may be adversely affected by pandemics, epidemics or other public health emergencies.

Our business, results of operations, financial condition, cash flows and stock price may be adversely affected by pandemics, epidemics or other public health emergencies.  We are considered an essential utility service company, as defined by the U.S. Department of Homeland Security.  We believe we will continue to operate our business consistent with any federal guidelines or state and local orders, however, the outbreak of pandemics, epidemics or other public health emergencies and any preventive or protective actions taken by governmental authorities may have an adverse effect on our operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 1C. CYBERSECURITY

There have been an increasing number of cyberattacks on companies around the world, which have caused operational failures, compromised sensitive corporate or customer data, and/or resulted in significant financial damages.  These attacks have occurred over the internet, through malware, viruses or attachments to e-mails, or through inside actors with access to systems within the organization.

Risk Management and Strategy

We have implemented security measures and will continue to devote resources to address security vulnerabilities in an effort to prevent cyberattacks.  All employees receive cybersecurity training and other education regarding their use of computers, information technology, and sensitive data.  We utilize third parties to support our information technology, or IT, resources, including disaster recovery intended to safeguard our ability to access and use our IT resources during a disaster or cyber incident.  Our business continuity plans are evaluated against evolving security and service level standards, which includes evaluating those cybersecurity threats associated with our use of key third party service providers.

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Our cybersecurity management process consists of utilizing a combination of employee education, preventative controls, detective controls, and periodic third-party cybersecurity testing.  We have installed and utilize enterprise scale technology to support an appropriate cybersecurity posture including: endpoint detection and response, firewalls, security information and event management, email security, multifactor authentication, and vulnerability management.  We receive cybersecurity related alerts from our membership in a number of industry groups.  These alerts are evaluated and in the event an alert requires action within our environment, such actions are taken promptly. Our process and cybersecurity posture is refined based on the results of periodic third party cybersecurity assessments.  We engage with the Cybersecurity and Infrastructure Security Agency through their cyber hygiene service offerings.  Cybersecurity is addressed in IT’s reports to the Corporate Automation Steering Committee, which consists of all Officers and the Director of Customer Service, as well as in IT’s reports to the Board of Directors.  Should a cyber event occur, depending on the severity of an event, our cyber incident reporting process includes informing, as early as practicable, our senior corporate management.

Governance

The Audit Committee of the Board of Directors, as overseen by the full Board of Directors, is responsible for oversight of cybersecurity risk.  Our IT executives report on our cybersecurity practices and risks at each meeting of the Audit Committee of our Board of Directors.  In addition, our IT executives provide periodic updates on cybersecurity risks to our management at regularly held executive committee meetings.  Should any cybersecurity threat or incident be detected, our IT executives would timely report such threat or incident to the management executive committee and provide regular communications and updates to the executive committee throughout the incident and any subsequent investigation, in order that the impact, materiality, and reporting requirements of such incident are appropriately identified and assessed for further necessary or appropriate action to be taken.  Any incident identified by the management executive committee as having a material impact would be promptly escalated to all members of the Board of Directors.  Should there be an incident which does not rise to the level of being material, such incident would, at minimum, be included in the subsequent IT reports to both the management executive committee and the Board of Directors.

We believe we are appropriately staffed to support a healthy cybersecurity posture.  All IT personnel have a combination of professional experience, education, and/or certifications for their area of responsibility.  For IT leadership, our Chief Information Officer earned a Masters of Business Administration and also a Master of Science degree in Information Systems & Technology Management.  Our Vice President of Information Technology earned a Bachelor of Science in Computer Science and Business and a Bachelor of Science in Business and Economics.  The Vice President of Information Technology is also a Certified Public Accountant, a Certified Information Systems Auditor, and a Chartered Global Management Accountant.  Our Director of Cybersecurity earned an Associates Degree in Computer Network Engineering and is a Certified Information Systems Security Professional.

To date, there have been no risks identified from cybersecurity threats or previous cybersecurity incidents that have materially affected or are reasonably likely to materially affect the company.  However, despite all of the above aforementioned efforts, a cyberattack, if it occurred, could cause water or wastewater system operational problems, disrupt service to our customers, compromise important data or systems or result in an unintended release of customer or other confidential information.  See “Item 1A. Risk Factors—Risks Related to Cybersecurity and Technology” for additional discussion of cybersecurity risks impacting our Company.

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ITEM 2. PROPERTIES

Our corporate headquarters are located at 664 Churchmans Road, Newark, Delaware and are owned by Artesian Water.

The Company owns approximately six acres of land in New Castle County, Delaware zoned for office development and two nine-acre parcels of land in Sussex County, Delaware for water and wastewater treatment facilities and an elevated water storage.  The Company also owns an office facility located in Sussex County, Delaware.  The facility consists of approximately 10,000 square feet of office space along with approximately 10,000 square feet of warehouse space.

The Company owns land, rights-of-way, easements, transmission and distribution mains, collection mains, pump facilities, treatment plants, lift stations, treatment/disposal facilities, storage tanks, meters, vehicles and related equipment and facilities.  The following table indicates our utility plant as of December 31, 2023.

Utility plant comprises:
In thousands
	Estimated Useful Life (In Years)		December 31, 2023
Utility plant at original cost
Utility plant in service-Water
Intangible plant		---	$	140
Source of supply plant		45-85		29,960
Pumping and water treatment plant		8-62		130,337
Transmission and distribution plant
Mains		81		370,977
Services		39		60,818
Storage tanks		76		40,933
Meters		26		30,318
Hydrants		60		18,980
General plant		5-31		67,317
Utility plant in service-Wastewater
Intangible plant		---		116
Treatment and disposal plant		21-81		67,789
Collection mains and lift stations		81		51,539
General plant		5-31		2,478
Property held for future use		---		4,028
Construction work in progress		---		23,724
				899,454
Less – accumulated depreciation				185,170
			$	714,284

Substantially all of Artesian Water's utility plant, except the utility plant in the town of Townsend, Delaware, is pledged as security for our First Mortgage Bonds.  As of December 31, 2023, no other water utility plant has been pledged as security for loans.  Two parcels of land in Artesian Wastewater are pledged as security for a loan.

We believe that our properties are generally maintained in good condition and in accordance with current standards of good water and wastewater works industry practice.  We believe that all of our existing facilities adequately meet current necessary production capacities and current levels of utilization.

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ITEM 3. LEGAL PROCEEDINGS

For a discussion of our legal proceedings, refer to Notes to Consolidated Financial Statements – Note 17 – Legal Proceedings.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information for the Company’s Common Equity

Artesian Resources' Class A Non-Voting Common Stock, or Class A Non-Voting Stock, is listed on the Nasdaq Global Select Market and trades under the symbol "ARTNA."  On March 12, 2024, the last closing sale price as reported by the Nasdaq Global Select Market was $36.25 per share.  As of March 12, 2024 there were 506 holders of record of the Class A Non-Voting Stock. The stockholders of Class A Stock are entitled to receive dividends when they are declared by the Board of Directors.  The Company has a long history of paying regular quarterly dividends as approved by our Board of Directors using net cash from operating activities.  See the Consolidated Financial Statements for additional information regarding the Company’s dividend history.

The intraday high and low Nasdaq Global Select Market prices on the Class A Non-Voting Stock for each quarter during the past two years were:

	Stock Price
	High		Low
2023
First Quarter	$	63.00	$	51.30
Second Quarter	$	58.41	$	46.37
Third Quarter	$	49.73	$	41.26
Fourth Quarter	$	44.78	$	38.76
2022
First Quarter	$	50.88	$	43.02
Second Quarter	$	50.00	$	44.08
Third Quarter	$	60.36	$	47.96
Fourth Quarter	$	59.98	$	45.44

Our Class B Common Stock, or Class B Stock, is quoted on the OTC Bulletin Board under the symbol "ARTNB."  There has been a limited and sporadic public trading market for the Class B Stock.  As of March 4, 2024, the last reported trade of the Class B Stock on the OTC Bulletin Board was at a price of $36.00 per share on March 4, 2024.  As of March 12, 2024, there were 136 holders of record of the Class B Stock.  Shares of Class B Stock are paid the same dividend as the shares of the Class A Stock.

Recent Sales of Unregistered Securities

During the year ended December 31, 2023, we did not issue any unregistered shares of our Class A Non-Voting Stock or Class B Stock.

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The following graph compares the percentage change in cumulative shareholder return on the Company’s Class A Non-Voting Stock with the Standard & Poor’s 500 Stock Index and a Peer Group of water utility companies.  The graph covers the period from December 2018 (assuming a $100 investment on December 31, 2018, and the reinvestment of any dividends) through December 2023:

			INDEXED RETURNS
	Base Period		Years Ending December 31
Company Name / Index	2018		2019		2020		2021		2022		2023
Artesian Resources Corporation		100		109.66		112.37		144.07		186.27		134.81
S&P 500 Index		100		131.49		155.68		200.37		164.08		207.21
Peer Group		100		134.89		155.56		192.86		165.11		141.97

The Peer Group includes American States Water Company, American Water Works Company, Inc., Essential Utilities, Inc., California Water Service Group, Connecticut Water Service, Inc. (included through October 9, 2019 when it was acquired by SJW Group), Middlesex Water Company, SJW Group and York Water Company.

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ITEM 6. RESERVED

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our profitability is primarily attributable to the sale of water and wastewater services in our regulated utility business.  Our regulated utility segment comprised 93.1% of total operating revenues for the year ended December 31, 2023 and 90.7% for the year ended December 31, 2022.  Water sales are subject to seasonal fluctuations, particularly during summer when water demand may vary with rainfall and temperature.  In the event temperatures during the typically warmer months are cooler than expected or rainfall is greater than expected, the demand for water may decrease and our revenues may be adversely affected.  We believe these effects of weather are short term and do not materially affect the execution of our strategic initiatives.  Our wastewater services provide a revenue stream that is not affected by these changes in weather patterns.  We continue to seek growth opportunities to provide wastewater services in Delaware and the surrounding areas.

Our profitability is also attributed to other non-utility business, such as various contract operations, water, sewer and internal SLP Plans and other services we provide.  Our contract operations, SLP Plans and other services also provide a revenue stream that is not affected by changes in weather patterns.  We also continue to explore and develop relationships with developers and municipalities in order to increase revenues from contract water and wastewater operations, wastewater management services, and design, construction and engineering services.  We plan to continue developing and expanding our contract operations and other services in a manner that complements our growth in water service to new customers.  Our anticipated growth in these areas is subject to changes in residential and commercial construction, which may be affected by interest rates, inflation and general housing and economic market conditions.  We anticipate continued growth in our non-utility subsidiaries due to our water, sewer, and internal SLP Plans.

Inflation

We are affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand our service capability.  The cumulative effect of inflation results in significantly higher facility replacement costs as well as increased operating costs, which must be recovered from future cash flows.  Our ability to recover increases in investments in facilities and operating costs is dependent upon future rate increases, which are subject to approval by the applicable regulatory authority.  We can provide no assurances that any future rate increase request will be approved, and if approved, we cannot guarantee that any rate increase will be granted in a timely manner and/or will be sufficient in amount to cover costs for which we initially sought the rate increase.  The impact of inflation could adversely affect our results of operations, financial position or cash flows.

Regulated Water Subsidiaries

Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water service to residential, commercial, industrial, governmental, municipal and utility customers.  Increases in the number of customers contribute to increases, or help to offset any intermittent decreases, in our operating revenue.  As of December 31, 2023, the number of metered water customers in Delaware increased approximately 1.3% compared to December 31, 2022.  The number of metered water customers in Maryland increased approximately 1.3% compared to December 31, 2022.  The number of metered water customers in Pennsylvania remained consistent compared to December 31, 2022.  For the year ended December 31, 2023, approximately 8.7 billion gallons of water were distributed in our Delaware systems and approximately 105.5 million gallons of water were distributed in our Maryland systems.

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% Distribution System Improvement Charge, or DSIC.  Since the DSIC rate is set to zero when temporary rates are placed into effect, customers would experience an incremental increase of 15.16%, the net of the overall 22.66% increase less the DSIC rate of 7.50% currently in effect, if the requested increase is granted in full by the DEPSC.  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 to reduce the 7.50% DSIC rate to zero, with such interim rates subject to refund, until permanent rates are determined by the DEPSC.  This is discussed further in our Notes to Consolidated Financial Statements – Note 13 – Regulatory Proceedings.

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Regulated Wastewater Subsidiaries

Artesian Wastewater and TESI own wastewater collection and treatment infrastructure and provide regulated wastewater services to customers in Sussex County, Delaware.  Artesian Wastewater Maryland is able to provide regulated wastewater services to customers in Maryland.  It is not currently providing these services in Maryland.  The majority of our residential and commercial wastewater customers are billed a flat monthly fee, and our large industrial wastewater customer is billed monthly based on wastewater flow, which contributes to providing a revenue stream unaffected by weather.  As of December 31, 2023, the number of Delaware wastewater customers increased approximately 6.3% compared to December 31, 2022.

Non-Utility Subsidiaries

Artesian Utility provides contract water and wastewater operation services to private, municipal, and governmental institutions.  Artesian Utility also offers three protection plans to customers: the WSLP Plan, the SSLP Plan, and the ISLP Plan.  SLP Plan customers are billed a flat monthly or quarterly rate, which contributes to providing a revenue stream unaffected by weather.  There has been consistent customer growth over the years.  As of December 31, 2023, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 2.3%, 3.5% and 12.4%, respectively, compared to December 31, 2022.  The non-utility customers enrolled in one of our three protections plans decreased 3.0%.

Strategic Direction and Recent Developments

Our strategy is to increase customer growth, revenues, earnings and dividends by expanding our water, wastewater and SLP Plan services across the Delmarva Peninsula.  We remain focused on providing superior service to our customers and continuously seek ways to improve our efficiency and performance.  Our strategy has included a focus on building strategic partnerships with county governments, municipalities and developers.  By providing water and wastewater services, we believe we are positioned as the primary resource for developers and communities throughout the Delmarva Peninsula seeking to fill both needs simultaneously.  We believe we have a proven ability to acquire and integrate high growth, reputable entities, through which we have captured additional service territories that will serve as a base for future revenue.  We believe this experience presents a strong platform for further expansion and that our success to date also produces positive relationships and credibility with regulators, municipalities, developers and customers in both existing and prospective service areas.

In our regulated water subsidiaries, our strategy is to focus on a wide spectrum of activities, which include strategic acquisitions of existing systems, expanding certificated service area, identifying new and dependable sources of supply, developing the wells, treatment plants and delivery systems to supply water to customers and educating customers on the wise use of water.  Our strategy includes focused efforts to expand in new regions surrounding our service territory through strategic acquisitions.  We plan to expand our regulated water service area in the Cecil County designated growth corridor and to expand our business through the design, construction, operation, management and acquisition of additional water systems.  The expansion of our exclusive franchise areas elsewhere in Maryland and the award of contracts will similarly enhance our operations within the state.

Our ability to develop partnerships with various county governments, municipalities and developers has provided a number of opportunities.  In the last four years, we completed four acquisitions including asset purchase agreements with municipal and developer/homeowner association operated systems.

We believe that Delaware's generally lower cost of living in the region and availability of development sites in relatively close proximity to the Atlantic Ocean in Sussex County have resulted, and will continue to result, in increases to our customer base.  Delaware’s lower property and income tax rate make it an attractive region for new home development and retirement communities.  Substantial portions of Delaware currently are not served by a public water system, which could also assist in an increase to our customer base as systems are added.

On May 26, 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Clayton Water System.  The total purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System.  This transfer of Clayton’s exclusive franchise territory was approved by the DEPSC on April 20, 2022.

In our regulated wastewater subsidiaries, we foresee significant growth opportunities and will continue to seek strategic partnerships and relationships with developers and governmental agencies to complement existing agreements for the provision of wastewater service on the Delmarva Peninsula. There are numerous locations in Sussex County where Artesian Wastewater’s and Sussex County’s facilities are connected or integrated to allow for the movement and disposal of wastewater generated by one or the other’s system in a manner that most efficiently and cost effectively manages wastewater transmission, treatment and disposal.  In addition, Artesian Wastewater plans to utilize our larger regional wastewater facilities to expand service areas to new customers while transitioning our smaller treatment facilities into regional pump stations in order to gain additional efficiencies in the treatment and disposal of wastewater. We believe this will reduce operational costs at the smaller treatment facilities in the future because they will be converted from treatment and disposal plants to pump stations to assist with transitioning the flow of wastewater from one regional facility to another.  In addition, since closing the transaction with TESI noted below, Artesian’s Delaware wastewater subsidiaries are the sole regional regulated wastewater utilities in Delaware, which we believe will enable us to increase efficiencies in the treatment and disposal of wastewater and provide additional opportunities to expand our wastewater operations.

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On January 14, 2022, Artesian Wastewater acquired TESI, a wholly-owned subsidiary of Middlesex Water Company, or Middlesex, that provides regulated wastewater services in Delaware.  Artesian Wastewater purchased all of the stock of TESI from Middlesex for $6.4 million in cash and other consideration, including, forgiveness of a $2.1 million note due from Middlesex.  This acquisition more than doubled the number of wastewater customers served by Artesian in Sussex County, Delaware and included all residents in the Town of Milton.

The general need for increased capital investment in our water and wastewater systems is due to a combination of population growth, more protective water quality standards, aging infrastructure and acquisitions.  Our planned and budgeted capital improvements over the next three years include projects for water infrastructure improvements and expansion in both Delaware and Maryland and wastewater infrastructure improvements and expansion in Delaware.  The DEPSC and MDPSC have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates for current customers and capacity charges for new customers.

In our non-utility subsidiaries, we continue pursuing opportunities to expand our contract operations.  Through Artesian Utility, we will seek to expand our contract design, engineering and construction services of water and wastewater facilities for developers, municipalities and other utilities.  We also anticipate continued growth due to our water, sewer and internal SLP Plans.  Artesian Development owns two nine-acre parcels of land, located in Sussex County, Delaware, which will allow for construction of a water treatment facility and wastewater treatment facility.

CRITICAL ACCOUNTING ESTIMATES

Critical accounting estimates are those we believe are most important to portraying the financial condition and results of operations and also require significant estimates, assumptions or other judgments by management.  Note 1 (Summary of Significant Accounting Policies) to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.  The following provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of the Company.  Changes in the estimates, assumptions or other judgments included within these accounting policies could result in a significant change to the financial statements in any quarterly or annual period.  We consider the following policies to be the most critical in understanding the judgment that is involved in preparing our Consolidated Financial Statements.  Senior management has discussed the selection and development of our critical accounting estimates with the Audit Committee of the Board of Directors.

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.  Cost includes direct labor, materials, Allowance for Funds Used during Construction, or AFUDC, (see description in Note 1-Utility Plant) and indirect charges for items such as transportation, supervision, pension, medical, and other fringe benefits related to employees engaged in construction activities.  When depreciable units of utility plant are retired, the historical costs of plant retired is charged to accumulated depreciation.  Any cost associated with retirement, less any salvage value or proceeds received, is charged to the regulated retirement liability.  Maintenance, repairs, and replacement of minor items of utility plant are charged to expense as incurred.

We record water service revenue, including amounts billed to customers, on a cycle basis and unbilled amounts based upon estimated usage from the date of the last meter reading to the end of the accounting period.  As actual usage amounts are received, 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, using 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, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption.

We record accounts receivable at the invoiced amounts.  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.  Account balances are written off against the allowance when it is probable the receivable will not be recovered.  

The Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party regulatory agency.  Our regulated subsidiaries record deferred regulatory assets under FASB ASC Topic 980, which are costs that may be recovered over various lengths of time as prescribed by the DEPSC, MDPSC and PAPUC.  As the utility incurs certain costs, such as expenses related to rate case applications, a deferred regulatory asset is created.  Adjustments to these deferred regulatory assets are made when the DEPSC, MDPSC or PAPUC determines whether the expense is recoverable in rates, the length of time over which an expense is recoverable, or, because of changes in circumstances, whether a remaining balance of deferred expense is recoverable in rates charged to customers.  In addition, our regulated subsidiaries record deferred and/or amortized regulatory liabilities under FASB ASC Topic 980, as determined by the DEPSC, the MDPSC, and the 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.  Adjustments to reflect changes in recoverability of certain deferred regulatory assets or certain deferred regulatory liabilities may have a significant effect on our financial results.

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Deferred income taxes are provided in accordance with FASB ASC Topic 740 on all differences between the tax basis of assets and liabilities and the amounts at which they are carried in the consolidated financial statements based on the enacted tax rates expected to be in effect when such temporary differences are expected to reverse. The Company’s rate regulated subsidiaries recognize regulatory liabilities, to the extent considered in ratemaking, for deferred taxes provided in excess of the current statutory tax rate and regulatory assets for deferred taxes provided at rates less than the current statutory rate.  Such tax-related regulatory assets and liabilities are reported at the revenue requirement level and amortized to income as the related temporary differences reverse, generally over the lives of the related properties.

Our long-lived assets consist primarily of utility plant in service and regulatory assets.  We review for impairment of our long-lived assets, including utility plant in service, in accordance with the requirements of FASB ASC Topic 360.  We review regulatory assets for the continued application of FASB ASC Topic 980.  Our review determines whether there have been changes in circumstances or events that have occurred that require adjustments to the carrying value of these assets.  Adjustments to the carrying value of these assets would be made in instances where changes in circumstances or events indicate the carrying value of the asset may not be recoverable in rates charged to customers.  The Company believes there are no impairments in the carrying amounts of its long-lived assets or regulatory assets at December 31, 2023.

In accordance with FASB ASC Topic 350, the accounting guidance for testing goodwill, the Company assesses goodwill for impairment annually or more frequently if we encounter events or changes in circumstances that would indicate that, more likely than not, the carrying value of goodwill has been impaired.  If the carrying value of the reporting unit exceeds its implied fair value, the Company will recognize an impairment charge for the difference up to the carrying value of the allocated goodwill.  There was no impairment of goodwill as of December 31, 2023.

Results of Operations

2023 Compared to 2022

Operating Revenues

Revenues totaled $98.9 million for each of the years ended December 31, 2023 and December 31, 2022.

Water sales revenue increased $1.7 million, or 2.2%, for the year ended December 31, 2023 from the corresponding period in 2022, primarily as a result of a temporary rate increase of net 7.50% of gross water sales placed into effect on November 28, 2023, as permitted under Delaware law, until permanent rates are determined by the DEPSC, and an increase in overall water consumption.  Since the DSIC rate is set to zero when temporary rates are placed into effect, the temporary rate increase is 15.0%, less the DSIC rate of 7.50% that was previously in effect.  In addition, fixed fee revenue increased related to added customers.  We realized 81.0% and 79.2% of our total operating revenue for the years ended December 31, 2023 and December 31, 2022, respectively, from the sale of water.

Other utility operating revenue increased approximately $0.7 million, or 6.0%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.  This increase is primarily due to an increase in wastewater revenue associated with customer growth and an increase in fee revenue related to inspections and service and finance charges.

Non-utility operating revenue decreased approximately $2.4 million, or 26.9%, for the year ended December 31, 2023 compared to the same period in 2022.  This decrease is primarily due to a decrease in contract service revenue related to a contract for the design and construction of wastewater infrastructure now nearing completion, partially offset by an increase in Service Line Protection Plan revenue.

Percentage of Operating Revenues
	2023			2022			2021
Water Sales
Residential		50.1	%		48.7	%		53.0	%
Commercial		17.9			17.6			19.4
Industrial		0.1			0.1			0.1
Government and Other		12.9			12.8			13.2
Other utility operating revenues		12.3			11.6			7.9
Non-utility operating revenues		6.7			9.2			6.4
Total		100.0	%		100.0	%		100.0	%

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Residential

Residential water service revenues in 2023 amounted to $49.6 million, an increase of $1.5 million, or 3.0%, above the $48.1 million recorded in 2022, primarily due to an increase in overall water consumption and a temporary rate increase placed into effect on November 28, 2023.  The volume of water sold to residential customers increased to 4,340 million gallons in 2023 compared to 4,209 million gallons in 2022, a 3.1% increase.  The number of residential customers served increased by approximately 1,300, or 1.4%, in 2023.

Commercial

Water service revenues from commercial customers in 2023 increased by 0.9%, to $17.6 million in 2023 from $17.5 million in 2022, primarily due to a temporary rate increase placed into effect on November 28, 2023.  The volume of water sold to commercial customers decreased to 2,231 million gallons in 2023 compared to 2,232 million gallons sold in 2022, a decrease of 0.1%.

Industrial

Water service revenues from industrial customers increased to $84,000 in 2023 from $79,000 in 2022.  The volume of water sold to industrial customers increased to 10.3 million gallons in 2023 from 9.6 million gallons in 2022.

Government and Other

Government and other water service revenues in 2023 increased by 0.8%, to $12.7 million in 2023 from $12.6 million in 2022, primarily due to a temporary rate increase placed into effect on November 28, 2023.  The volume of water sold to government and other customers decreased to 1,250 million gallons in 2023 compared to 1,337 million gallons in 2022, a decrease of 6.5%.

Other Utility Operating Revenue

Other utility operating revenue, derived from regulated wastewater services, contract operations, antenna leases on water tanks, finance/service charges, wastewater customer service revenues and industrial wastewater service revenues, increased 6.0%, to $12.2 million in 2023 from $11.5 million in 2022.  This increase is primarily due to an increase in wastewater revenue associated with customer growth and an increase in fee revenue related to inspections and service and finance charges.

Non-Utility Operating Revenue

Non-utility operating revenue, derived from non-regulated water and wastewater operations, decreased by 26.9%, to $6.6 million in 2023 from $9.1 million in 2022.  This decrease is primarily due to a decrease in contract service revenue related to a contract for the design and construction of wastewater infrastructure now nearing completion, partially offset by an increase in Service Line Protection Plan revenue.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $0.2 million, or 0.4%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.  The components of the change in operating expenses primarily include an increase in utility operating expenses of $2.4 million, a decrease in non-utility operating expenses of $2.4 million and an increase in property and other taxes of $0.2 million.

Utility operating expenses increased $2.4 million, or 5.6%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.  The net increase is primarily related to the following.

—   Payroll and employee benefit costs increased $1.0 million, primarily related to an increase in medical premium costs, employee merit increases, and a decrease in capitalized payroll related to a 2022 software upgrade, partially offset by a decrease in bonuses compared to 2022.

—  Administrative costs increased $0.7 million, primarily due to increases in computer system maintenance costs, and customer billing costs.

—  Supply and treatment costs increased $0.7 million, primarily due to an increase in the cost and volume of chemicals used, an increase in wastewater treatment costs, a one-time acquisition adjustment related to TESI in 2022 and a reimbursement from the Delaware Sand and Gravel Remedial Trust, or DS&G Trust, in 2022 for Artesian Water’s operating costs related to certain 2021 treatment costs pursuant to a settlement agreement.  These increases are partially offset by a decrease in filter media replacement costs related to varying replacement schedules.

—  Transmission, distribution and collection costs increased $0.3 million, primarily associated with tank painting costs and maintenance and repair of transmission mains.

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

—  Purchased water costs decreased $0.5 million, primarily related to a decrease of water purchased under contract, in which the minimum amount of water required to be purchased was reduced in July 2022.

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Non-utility operating expenses decreased $2.4 million, or 35.4%, primarily due to a decrease in costs associated with a wastewater infrastructure design and construction contract.

Property and other taxes increased $0.2 million, or 3.9%, primarily due to an increase in utility plant subject to taxation and an increase in payroll taxes, related to increased payroll related expenses.  Property taxes are assessed on land, buildings and certain utility plant, which include the footage and size of pipe, hydrants and wells.

Percentage of Operating and Maintenance Expenses
	2023			2022			2021
Payroll and Associated Expenses		49.5	%		47.5	%		49.2	%
Administrative		16.9			15.3			15.7
Supply and Treatment		11.9			10.8			9.4
Purchased Power		5.7			5.2			4.8
Transmission, Distribution and Collection		4.6			4.1			2.7
Purchased Water		2.7			3.6			9.5
Non-utility Operating		8.7			13.5			8.7
Total		100.0	%		100.0	%		100.0	%

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 57.4% for the year ended December 31, 2023, compared to 57.1% for the year ended December 31, 2022.

Depreciation and amortization expense increased $0.7 million, or 5.7%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.

Federal and state income tax expense increased $0.5 million, or 8.2%, primarily due to the recognition of additional valuation allowances on deferred tax assets related to state net operating losses and stock options exercised in the year of 2022, with no similar activity in 2023, partially offset by lower pre-tax income in 2023 compared to 2022.

Other Income

Other income increased $0.8 million, primarily due to a $0.7 million increase in AFUDC, as a result of higher long-term construction activity subject to AFUDC for the year ended December 31, 2023 compared to the same period in 2022.  Miscellaneous income increased $0.1 million related to an increase in the annual patronage refund from CoBank, ACB.

Interest Charges

Total interest charges increased $0.7 million, or 7.7%.  Long-term debt interest expense increased $0.5 million, primarily related to an increase in long-term debt interest associated with the Series W First Mortgage Bond issued on April 29, 2022 and an increase in the level of State Revolving Fund Loans.  Short-term debt interest expense increased $0.1 million, primarily related to higher interest rates.  The average short-term interest rate for the twelve months ended December 31, 2023 was 6.27% compared to 3.04% for the same period in 2022.

Net Income

Our net income applicable to common stock decreased $1.3 million, or 7.2%.  Water sales and other operating revenue increased $2.4 million and other income increased $0.8 million, offset by a $2.4 million decrease in non-utility operating revenue, a $1.4 million increase in total operating expenses and $0.7 million increase in interest charges.

Part I, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report on Form 10-K includes a comparative discussion of the years ended December 31, 2022 and 2021 and is incorporated herein by reference.   

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Liquidity and Capital Resources

Overview

The Company’s primary sources of liquidity for the year ended December 31, 2023 were $37.1 million in net proceeds from the issuance of Class A Non-Voting Stock, $31.9 million of cash provided by operating activities and $22.5 million in net contributions and advances from developers.  Funds from these liquidity sources were used to invest $62.2 million in capital expenditures and to pay dividends of approximately $11.2 million.

We depend on the availability of capital for expansion, construction and maintenance.  We rely on our sources of liquidity for investments in our utility plant and to meet our various payment obligations.  We expect that our net investments in utility plant in 2024 will be approximately $51.6 million.  Our total obligations related to interest and principal payments on indebtedness, rental payments, elevated storage tank agreements and water service interconnection agreements for 2024 are anticipated to be approximately $12.0 million.  

Operating Activities

One of our primary sources of liquidity for the year ended December 31, 2023 was $31.9 million provided by cash flow from operating activities, compared to $24.3 million for the year ended December 31, 2022.  The increase in cash flows from operating activities primarily resulted from lower accounts payable and accrued expenses related to increased capital investments and lower accounts receivable balances.  Cash flow from operating activities is primarily provided by our utility operations and is impacted by the timeliness and adequacy of rate increases and changes in water consumption as a result of year-to-year variations in weather conditions, particularly during the summer.  A significant part of our ability to maintain and meet our financial objectives is to ensure that our investments in utility plant and equipment are recovered in the rates charged to customers.  As such, from time to time, we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment.  See our Notes to Consolidated Financial Statements - Note 13 – Regulatory Proceedings.  We will continue to borrow on available lines of credit in order to satisfy current liquidity needs.  In addition, the Company has a long history of paying regular quarterly dividends as approved by our Board of Directors using net cash from operating activities.

Investment Activities

The primary focus of our investment in 2023 was to continue to provide high quality, reliable service to our growing service territory.  Capital expenditures during 2023 were $62.2 million compared to $48.5 million invested during the same period in 2022.  During 2023, we invested in our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains, installation of new mains, enhancing or improving existing treatment facilities, construction of new water storage tanks, and replacing aging wells and pumping equipment to better serve our customers.  We also continue to invest in wastewater treatment and distribution facilities.  Developers contributed $8.3 million of the total investment during the year ended 2023.

The following chart summarizes our investment in plant and systems over the past three fiscal years

In thousands	2023			2022			2021
Source of supply, treatment and pumping	$	20,327		$	14,158		$	9,681
Transmission and distribution		26,886			17,712			20,951
General plant		4,553			3,856			1,739
Developer financed utility plant		8,301			8,038			6,866
Wastewater facilities		3,353			5,613			2,133
Allowance for Funds Used During Construction, AFUDC, equity portion		(1,243	)		(894	)		(556	)
Total	$	62,177		$	48,483		$	40,814

Of the $55.6 million gross investment expected in 2024, approximately $16.4 million will be invested in upgraded PFAS treatment equipment, the rehabilitation and upgrading of two elevated storage tanks, booster station improvements, and equipment and wells throughout Delaware, Maryland, and Pennsylvania to identify, develop, treat, and protect sources of water supply to assure uninterrupted service to our customers.  Approximately $8.8 million will be invested in the relocations of facilities as a result of government mandates.  Approximately $7.2 million will be invested into the ongoing construction of a regional wastewater treatment plant along with improvements to existing wastewater treatment plants and wastewater pumping stations.  Approximately $6.2 million will be invested in renewals associated with the rehabilitation of aging infrastructure.  Approximately $6.6 million will be invested in the construction of force mains used for the transmission of wastewater to plants.    Approximately $5.8 million will be invested in general plant, which includes vehicles and other heavy duty operations related equipment, replacement computer hardware and software, equipment upgrades, new corporate automation, station security upgrades, radio communication upgrades and building renovations.  Approximately $4.0 million will be for extending transmission and distribution facilities to address service needs in growth areas of our service territory. Additionally, we will refund $0.6 million to customers, real estate developers and builders related to previous advances for construction they provided to Artesian for distribution facilities on their properties.

27

Our projected capital expenditures and other investments are subject to periodic review, and revision to reflect changes in economic conditions and other factors.  The Company's investment for 2024 is expected to be offset by developer contributions of $4.0 million for a net investment of $51.6 million in 2024.  The Company believes the net investment in utility plant will continue to be recovered through rates charged to customers.

Financing Activities

For the year ended December 31, 2023, cash flows provided by financing activities were $31.3 million, compared to $31.7 million for the year ended December 31, 2022.  The cash flows provided by financing activities decreased due to increased repayments of lines of credit, lower issuance of long-term debt and higher stock dividend payments, mostly offset by higher proceeds from the issuance of common stock and an increase in net advances and contributions from developers.  We have several sources of liquidity to finance our investment in utility plant and other fixed assets.  Our primary source of liquidity from financing activities for the year ended December 31, 2023 was $37.1 million in net proceeds from the issuance of Class A Non-Voting Stock.  On May 23, 2023 and June 16, 2023, the Company completed the sale of 695,650 shares and 67,689 shares of its Class A Non-Voting Stock, respectively.  Other sources of liquidity include $22.5 million in net contributions and advances from developers, which includes $3.8 million of grant funds from the State of Delaware and $5.6 million from the issuance of long-term debt.  We estimate that future investments will be financed by our operations and external sources.  We expect to fund our activities for the next twelve months using our projected cash generated from operations, bank credit lines, state revolving fund loans, government grants, and other capital market financing as needed to provide sufficient working capital to maintain normal operations, to meet our financing requirements and to expand through strategic acquisitions.  We believe that our cash on hand and future cash generated from the foregoing activities will provide adequate resources to fund our short-term and long-term capital, operating and financing needs. However, there is no assurance that we will be able to secure funding on terms acceptable to us, or at all.  Our cash flows from operations are primarily derived from water sales revenues and may be materially affected by changes in water sales due to weather and the timing and extent of increases in rates approved by state public service commissions.

Material Cash Requirements

Lines of Credit and Long-Term Debt

At December 31, 2023, Artesian Resources had a $40 million line of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources.  As of December 31, 2023, there was $40.0 million of available funds under this line of credit.  The previous interest rate for borrowings under this line was the London Interbank Offered Rate, or LIBOR, plus 1.00%.  The LIBOR rate for USD currency was discontinued as of June 30, 2023.  As a result, effective May 20, 2022, this line of credit agreement was amended to replace LIBOR with the Daily Secured Overnight Financing Rate, or SOFR.  The interest rate is a one-month SOFR plus 10 basis points, or Term SOFR, plus an applicable margin of 0.85%, which was increased to 1.10% effective August 3, 2023.  Term SOFR cannot be less than 0.00%.  This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time.  The term of this line of credit expires on the earlier of May 20, 2024 or any date on which Citizens demands payment. The Company expects to renew this line of credit.

At December 31, 2023, Artesian Water had a $20 million line of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 million of this line available for the operations of Artesian Water Maryland.  As of December 31, 2023, there was $20.0 million of available funds under this line of credit.  The previous interest rate for borrowings under this line allowed the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company historically used the weekly variable interest rate.  In October 2022, this line of credit was amended to replace the previous interest rate options with a daily SOFR rate plus 1.45% option or a term SOFR rate plus 1.45% option that is locked in for either one or three months.  The term of this line of credit expires on October 31, 2024.  Artesian Water expects to renew this line of credit.

The Company’s material cash requirements include the following lines of credit commitments and contractual obligations:

Material Cash Requirements	Payments Due by Period
In thousands	Less than 1 Year		1-3 Years		4-5 Years		After 5 Years		Total
First mortgage bonds (principal and interest)	$	7,902	$	15,714	$	40,610	$	204,564	$	268,790
State revolving fund loans (principal and interest)		979		2,147		2,068		10,287		15,481
Promissory note (principal and interest)		1,200		1,923		1,924		9,652		14,699
Asset purchase contractual obligation (principal and interest)		339		659		320		---		1,318
Lines of credit		---		---		---		---		---
Operating leases		35		70		64		1,429		1,598
Operating agreements		76		112		109		749		1,046
Unconditional purchase obligations		870		1,762		114		312		3,058
Tank painting contractual obligation		626		313		---		---		939
Total contractual cash obligations	$	12,027	$	22,700	$	45,209	$	226,993	$	306,929

Artesian’s long-term debt agreements and revolving lines of credit contain customary affirmative and negative covenants that are binding on us (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on our ability to make certain loans and investments, guarantee certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions, transfer certain assets or change our business.  As of December 31, 2023, we were in compliance with these covenants.

Long-term debt obligations reflect the maturities of certain series of our first mortgage bonds, which we intend to refinance when due if not refinanced earlier.  One first mortgage bond is subject to redemption in a principal amount equal to $150,000 plus interest per calendar quarter.  The state revolving fund loan obligation and promissory note obligation have an amortizing mortgage payment payable over a 20-year period.  The first mortgage bonds, the state revolving fund loan and the promissory note have certain financial covenant provisions, the violation of which could result in default and require the obligation to be immediately repaid, including all interest.  We have not experienced conditions that would result in our default under these agreements.

The asset purchase contractual obligation is related to the purchase of substantially all of the water operating assets from the Town of Clayton, or Clayton, in May 2022, by Artesian Water.  The total purchase price was $5.0 million.  At closing, Artesian Water paid approximately $3.4 million.  The remaining $1.6 million is payable in equal annual installments on the anniversary date of the closing date.  Each annual installment is payable with interest at an annual rate of 2.0%.

In order to control purchased power cost, in February 2021, Artesian Water entered into an electric supply contract with MidAmerican that is effective from May 2021 to May 2025.  The fixed rate was lowered 5.6% starting in May 2021.  In February 2022, Artesian Water Maryland entered into an electric supply agreement with Constellation NewEnergy, Inc., effective from May 2022 through November 2025.  In January 2022, following the acquisition of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI, assumed an electricity supply contract with WGL Energy that is effective through December 2024.  These fixed rate electric supply contracts are for normal purchases and are not derivative instruments.

Payments for unconditional purchase obligations reflect minimum water purchase obligations based on rates that are subject to change under an interconnection agreement with the Chester Water Authority.  The agreement is effective from January 1, 2022 through December 31, 2026, includes automatic five-year renewal terms, unless terminated by either party, and has a “take or pay” clause which required us to purchase water on a step-down schedule through July 5, 2022 and now requires us to purchase a minimum of 0.5 million gallons per day.  In addition, payments for unconditional purchase obligations reflect minimum water purchase obligations based on a contract rate under our interconnection agreement with the Town of North East, which expires June 26, 2024.  The agreement includes two automatic five-year renewal terms, unless terminated by either party.

In April 2021, Artesian Water entered into a 3-year agreement with Worldwide Industries Corporation effective July 1, 2021 to paint elevated water storage tanks.  Pursuant to the agreement, the total expenditure for the three years was $1.2 million.  In September 2022, this agreement was amended to paint an additional elevated water storage tank and to extend the term of the agreement for an additional year.  Pursuant to the amended agreement, the total expenditure for the four years is $2.2 million.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 19 (Impact of Recent Accounting Pronouncements) to our Consolidated Financial Statements for a full description of the impact of recent accounting pronouncements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company’s business operations give rise to market risk exposure due to changes in interest rates and commodity prices.  To manage such risks effectively, the Chief Financial Officer, with support from the Executive Officers, Audit Committee and Board of Directors, evaluates strategies to mitigate these risks by limiting variable rate exposure and by monitoring the effects of market changes in interest rates.  The Company’s financial risk management evaluations are designed to protect against risk arising from extreme adverse market movements on our key exposures.

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The Company is subject to the risk of fluctuating interest rates in the normal course of business.  Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt.  The Company's exposure to interest rate risk related to existing fixed rate, long-term debt is due to the term of the majority of our First Mortgage Bonds and the term of the promissory note, which have final maturity dates ranging from 2028 to 2049 and interest rates ranging from 4.24% to 5.96%, which exposes the Company to interest rate risk as interest rates may drop below the existing fixed rate of the long-term debt prior to such debt’s maturity.  In addition, the Company has interest rate exposure on $60 million of variable rate lines of credit, with two banks.  As of December 31, 2023 there were not any outstanding balances on the lines of credit.  An increase in the variable interest rates has resulted and is expected to continue to result in an increase in the cost of borrowing on these variable rate lines of credit.  Also, changes in SOFR could affect our operating results and liquidity.  We are also exposed to market risk associated with changes in commodity prices.  Our risks associated with price increases in chemicals, electricity and other commodities are mitigated by our ability to recover our costs through rate increases to our customers.  We have also sought to mitigate future significant electric price increases by signing multi-year supply contracts at fixed prices.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS

In thousands

	For the Year Ended
ASSETS	December 31, 2023		December 31, 2022
Utility plant, at original cost less accumulated depreciation	$	714,284	$	668,031
Current assets
Cash and cash equivalents		2,505		1,309
Accounts and other receivables (less provision for expected credit loss 2023 - $328; 2022 - $416)		12,830		13,511
Income tax receivable		1,799		1,632
Unbilled operating revenues		1,934		1,586
Materials and supplies		5,983		4,702
Prepaid property taxes		2,269		2,186
Prepaid expenses and other		3,297		2,878
Total current assets		30,617		27,804
Other assets
Non-utility property (less accumulated depreciation 2023 - $1,052; 2022 - $990)		3,693		3,740
Other deferred assets		8,504		10,536
Goodwill		1,939		1,939
Operating lease right of use assets		506		467
Total other assets		14,642		16,682
Regulatory assets, net		7,289		7,274
Total Assets	$	766,832	$	719,791
LIABILITIES AND STOCKHOLDERS’ EQUITY
Stockholders’ equity
Common stock	$	10,285	$	9,502
Preferred stock		—		—
Additional paid-in capital		143,369		107,142
Retained earnings		76,743		71,286
Total stockholders’ equity		230,397		187,930
Long-term debt, net of current portion		178,307		175,619
		408,704		363,549
Current liabilities
Lines of credit		—		20,174
Current portion of long-term debt		2,235		2,003
Accounts payable		9,697		10,929
Accrued expenses		3,519		4,246
Overdraft payable		9		43
Accrued interest		2,275		989
Income taxes payable		2		6
Customer and other deposits		2,983		2,489
Other		1,694		3,191
Total current liabilities	$	22,414	$	44,070
Commitments and contingencies (Note 11)		—		—
Deferred credits and other liabilities
Net advances for construction	$	2,797	$	3,686
Operating lease liabilities		503		466
Regulatory liabilities		25,676		28,721
Deferred investment tax credits		423		439
Deferred income taxes		58,381		54,552
Total deferred credits and other liabilities	$	87,780	$	87,864
Net contributions in aid of construction		247,934		224,308
Total Liabilities and Stockholders’ Equity	$	766,832	$	719,791

The notes are an integral part of the consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS

In thousands, except per share amounts

	For the Year Ended December 31,
	2023		2022		2021
Operating revenues
Water sales	$	80,033	$	78,318	$	77,821
Other utility operating revenue		12,195		11,506		7,195
Non-utility operating revenue		6,633		9,073		5,843
Total Operating Revenues		98,861		98,897		90,859
Operating expenses
Utility operating expenses		46,205		43,772		41,414
Non-utility operating expenses		4,428		6,850		3,942
Depreciation and amortization		13,335		12,620		11,885
Taxes
State and federal income tax expense (benefit)
Current		2,962		4,285		3,360
Deferred		3,386		1,593		2,377
Property and other taxes		6,099		5,871		5,587
Total Operating Expenses		76,415		74,991		68,565
Operating income		22,446		23,906		22,294
Other income, net
Allowance for funds used during construction (AFUDC)		2,002		1,329		823
Miscellaneous		1,407		1,265		1,302
		3,409		2,594		2,125
Income before interest charges		25,855		26,500		24,419
Interest charges		9,156		8,502		7,592
Net income applicable to common stock	$	16,699	$	17,998	$	16,827
Net income per common share:
Basic	$	1.67	$	1.90	$	1.79
Diluted	$	1.67	$	1.90	$	1.79
Weighted average common shares outstanding:
Basic		10,018		9,462		9,394
Diluted		10,022		9,481		9,426
Cash dividends per share of common stock	$	1.14	$	1.09	$	1.05

The notes are an integral part of the consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands

	For the Year Ended December 31,
	2023			2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	16,699		$	17,998		$	16,827
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		13,335			12,620			11,885
Amortization of debt expense		355			354			351
Provision for bad debt expense		92			68			(224	)
Deferred income taxes, net		3,813			2,282			2,803
Stock compensation		254			152			193
AFUDC, equity portion		(1,243	)		(894	)		(556	)
Changes in assets and liabilities, net of acquisitions:
Accounts and other receivables		807			(3,847	)		318
Income tax receivable		(167	)		602			(1,605	)
Unbilled operating revenues		(348	)		(141	)		86
Materials and supplies		(1,281	)		(2,769	)		(398	)
Income taxes payable		(4	)		6			(28	)
Prepaid property taxes		(83	)		697			(415	)
Prepaid expenses and other		(419	)		(216	)		(444	)
Other deferred assets		1,998			(5,473	)		(445	)
Regulatory assets		(497	)		(37	)		(236	)
Regulatory liabilities		(3,168	)		6,799			(535	)
Accounts payable		284			(3,989	)		3,547
Accrued expenses		614			(564	)		(71	)
Accrued interest		1,286			72			(13	)
Revenue reserved for refund		—			—			—
Customer deposits and other		(476	)		545			270
NET CASH PROVIDED BY OPERATING ACTIVITIES		31,851			24,265			31,310
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (net of AFUDC, equity portion)		(62,177	)		(48,483	)		(40,814	)
Investment in acquisitions, net of cash acquired		—			(6,341	)		—
Proceeds from sale of assets		99			65			90
NET CASH USED IN INVESTING ACTIVITIES		(62,078	)		(54,759	)		(40,724	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments under lines of credit agreements		(23,477	)		(41,038	)		(10,797	)
Borrowings under lines of credit agreements		3,303			34,509			10,687
(Decrease) increase in overdraft payable		(34	)		13			(75	)
Proceeds from contributions in aid of construction and advances		24,747			17,494			17,059
Payouts for contributions in aid of construction and advances		(2,228	)		(1,063	)		(1,242	)
Net proceeds from issuance of common stock		37,073			2,090			1,390
Equity issuance cost		(317	)		—			—
Issuance of long-term debt		5,608			31,803			4,126
Dividends paid		(11,242	)		(10,319	)		(9,826	)
Debt issuance costs		—			(135	)		(19	)
Principal repayments of long-term debt		(2,010	)		(1,643	)		(1,825	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		31,423			31,711			9,478
NET INCREASE  IN CASH AND CASH EQUIVALENTS		1,196			1,217			64
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		1,309			92			28
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	2,505		$	1,309		$	92
Non-cash Investing and Financing Activity:
Utility plant received as construction advances and contributions in aid of construction	$	3,492		$	8,416		$	3,538
Contractual amounts of contributions in aid of construction due from developers included in accounts receivable	$	1,695		$