[Part I - Financial Information](index=3&type=section&id=Part%20I%20-%20Financial%20Information) This section details the company's financial statements, management's discussion and analysis, market risk disclosures, and internal controls [Item 1 - Financial Statements](index=3&type=section&id=Item%201%20-%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for Artesian Resources Corporation as of September 30, 2020, including balance sheets, statements of operations, cash flows, and changes in stockholders' equity, along with detailed notes on accounting policies [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows an increase in total assets to $587.4 million as of September 30, 2020, from $560.4 million at year-end 2019, primarily driven by utility plant assets, with total liabilities and stockholders' equity also increasing Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | **Total Assets** | **$587,431** | **$560,368** | **+4.8%** | | Net Utility Plant | $553,387 | $530,721 | +4.3% | | Total Current Assets | $17,852 | $14,207 | +25.7% | | **Total Liabilities** | **$421,577** | **$400,100** | **+5.4%** | | Lines of Credit | $20,078 | $7,500 | +167.7% | | Long-term Debt, net | $142,651 | $144,156 | -1.0% | | **Total Stockholders' Equity** | **$165,854** | **$160,268** | **+3.5%** | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For the nine months ended September 30, 2020, total operating revenues increased by 6.1% year-over-year to $66.4 million, driven by higher water sales, with net income applicable to common stock rising 15.9% to $13.7 million, resulting in a diluted EPS of $1.46 Statements of Operations Summary (in thousands, except per share amounts) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | YoY Change | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $66,390 | $62,586 | +6.1% | | Operating Income | $17,454 | $15,333 | +13.8% | | Net Income | $13,703 | $11,826 | +15.9% | | Diluted EPS | $1.46 | $1.27 | +15.0% | | Cash Dividends per Share | $0.7488 | $0.7341 | +2.0% | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2020, net cash from operating activities was $14.3 million, while $31.7 million was used in investing activities, and $17.0 million was provided by financing activities Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $14,298 | $13,103 | | Net Cash Used in Investing Activities | ($31,667) | ($27,240) | | Net Cash Provided by Financing Activities | $17,022 | $14,302 | | **Net (Decrease) Increase in Cash** | **($347)** | **$165** | - Key investing activities included **$26.0 million** in capital expenditures and **$5.7 million** for acquisitions. Key financing activities included **$12.6 million** in net borrowings under lines of credit and **$8.1 million** in net advances for construction, offset by **$7.0 million** in dividend payments[10](index=10&type=chunk) [Notes to the Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) The notes provide detailed explanations of the company's accounting policies and financial results, covering subsidiaries, revenue recognition, COVID-19 impact, business combinations, regulatory proceedings, debt, and equity - Due to the COVID-19 pandemic, the company anticipates a longer receivable cycle and increased reserves for bad debt. An adjustment of **$0.5 million** was made to increase the reserve for bad debt as of September 30, 2020[49](index=49&type=chunk)[117](index=117&type=chunk) - The company completed two acquisitions in 2020: the water system assets from the Town of Frankford for **$3.6 million** and from the City of Delaware City for **$2.1 million**. These acquisitions added approximately **1,160** new water customers[112](index=112&type=chunk)[114](index=114&type=chunk) Disaggregated Revenue for Nine Months Ended Sep 30 (in thousands) | Revenue Source | 2020 | 2019 | YoY Change | | :--- | :--- | :--- | :--- | | Consumption charges | $36,217 | $34,320 | +5.5% | | Fixed fees | $20,192 | $19,525 | +3.4% | | DSIC | $3,810 | $3,129 | +21.8% | | Industrial wastewater services | $866 | $14 | +6085.7% | | Service line protection plans | $3,267 | $3,117 | +4.8% | | **Total Operating Revenue** | **$66,390** | **$62,586** | **+6.1%** | [Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202%20-%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance, strategic direction, and liquidity, highlighting revenue growth from water consumption and customer additions, COVID-19 impacts, growth through acquisitions, and significant capital investments [Overview and Strategic Direction](index=28&type=section&id=Overview%20and%20Strategic%20Direction) The company's profitability is primarily driven by water sales, constituting 87.6% of revenues for the first nine months of 2020, with a core strategy to expand water, wastewater, and Service Line Protection Plan services across the Delmarva Peninsula through acquisitions and partnerships - The company's strategy focuses on expanding its water and wastewater services through strategic acquisitions, partnerships with local governments, and developing new service areas. Recent acquisitions include systems from High Point Associates (2019), the Town of Frankford (2020), and the City of Delaware City (2020)[130](index=130&type=chunk)[132](index=132&type=chunk)[134](index=134&type=chunk)[135](index=135&type=chunk) - As of September 30, 2020, the company served approximately **90,000** metered water customers in Delaware, an increase of **3,100** from the prior year. Wastewater customers in Delaware grew by **16.2%** to approximately **2,730**[126](index=126&type=chunk)[127](index=127&type=chunk) [COVID-19 Pandemic Impact](index=29&type=section&id=COVID-19%20Pandemic%20Impact) While the COVID-19 pandemic did not materially adversely affect financial results for the first nine months of 2020, management is actively monitoring its impact, as state-mandated moratoriums on service disconnections and late fees led to an anticipated longer receivable cycle and increased bad debt reserves - State government executive orders prohibiting service disconnections and late fees due to COVID-19 are expected to result in a longer receivable cycle and increased bad debt reserves[124](index=124&type=chunk) - The moratorium on service disconnections was lifted in Delaware in July 2020, with late fees and disconnections resuming in September and October 2020, respectively. Moratoriums in Maryland and Pennsylvania were lifted effective November 2020[124](index=124&type=chunk) [Results of Operations](index=31&type=section&id=Results%20of%20Operations) For the nine months ended September 30, 2020, revenues grew 6.1% to $66.4 million, and net income increased 15.9% to $13.7 million compared to the same period in 2019, driven by higher residential water consumption, customer growth, and increased industrial wastewater revenue, while operating expenses rose due to bad debt, payroll, and wastewater treatment costs Revenue Analysis - Nine Months Ended Sep 30, 2020 vs 2019 (in millions) | Revenue Category | Change (in millions) | Reason | | :--- | :--- | :--- | | Water Sales Revenue | +$3.0 | Increased residential consumption and customer growth. | | Other Utility Operating Revenue | +$0.9 | Increased industrial wastewater service revenue. | | **Total Operating Revenues** | **+$3.8** | **Overall growth across segments.** | - For the nine months ended Sep 30, 2020, utility operating expenses increased by **$0.7 million** (**2.3%**), primarily due to a **$0.6 million** increase in bad debt expense related to COVID-19 payment suspensions and a **$0.6 million** increase in payroll costs[158](index=158&type=chunk)[159](index=159&type=chunk) - Net income for the nine months ended Sep 30, 2020 increased by **$1.9 million** year-over-year, driven by a **$3.8 million** increase in operating revenues, which outpaced the **$1.7 million** increase in operating expenses and **$0.5 million** increase in interest expense[163](index=163&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) The company's primary liquidity sources were cash from operations ($14.3 million), borrowings on lines of credit ($12.6 million), and developer contributions ($8.1 million), with capital expenditures totaling $31.7 million focused on infrastructure and acquisitions, and $39.9 million available on lines of credit Capital Expenditures - First Nine Months of 2020 (in millions) | Category | Amount | | :--- | :--- | | Transmission & Distribution Main Rehabilitation | $8.6 | | Treatment Facility Enhancements | $5.5 | | Acquisitions (Frankford & Delaware City) | $5.7 | | Wastewater Projects | $2.4 | | Governmental Highway Relocations | $3.0 | | Other (Equipment, Meters, etc.) | $6.5 | | **Total Capital Expenditures** | **$31.7** | - As of September 30, 2020, the company had a **$40 million** line of credit with Citizens Bank and a **$20 million** line of credit with CoBank, with a total of **$20.1 million** drawn and **$39.9 million** available[168](index=168&type=chunk)[169](index=169&type=chunk) - On December 17, 2019, Artesian Water issued a **$30 million** First Mortgage Bond, Series V, due 2049, with an annual interest rate of **4.42%**. Proceeds were used to pay down outstanding lines of credit[173](index=173&type=chunk)[174](index=174&type=chunk) [Item 3 - Quantitative and Qualitative Disclosures about Market Risk](index=39&type=section&id=Item%203%20-%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is primarily exposed to interest rate risk on its $60 million variable-rate lines of credit, with $20.1 million outstanding, and manages commodity price risk through cost recovery mechanisms and multi-year fixed-price electricity contracts - The company has interest rate exposure on **$60 million** of variable-rate lines of credit. An increase in interest rates would increase borrowing costs on the **$20.1 million** outstanding as of September 30, 2020[183](index=183&type=chunk) - Commodity price risk is managed through rate recovery mechanisms and multi-year fixed-price contracts for electricity supply, with current contracts effective through May 2022[177](index=177&type=chunk)[183](index=183&type=chunk) [Item 4 - Controls and Procedures](index=39&type=section&id=Item%204%20-%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter, and no material impact from the COVID-19 pandemic - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[184](index=184&type=chunk)[185](index=185&type=chunk) - No material changes to internal control over financial reporting occurred during the third quarter of 2020[185](index=185&type=chunk) [Part II - Other Information](index=40&type=section&id=Part%20II%20-%20Other%20Information) This section covers legal proceedings, updated risk factors, and a list of exhibits filed with the report [Item 1 - Legal Proceedings](index=40&type=section&id=Item%201%20-%20Legal%20Proceedings) The company is periodically involved in litigation arising in the ordinary course of business but does not believe the ultimate resolution of these matters will materially affect its business, financial position, or results of operations - There are no legal proceedings mentioned that are expected to have a material impact on the company[186](index=186&type=chunk) [Item 1A - Risk Factors](index=40&type=section&id=Item%201A%20-%20Risk%20Factors) This section updates the company's risk factors to include the potential adverse effects of pandemics, specifically COVID-19, highlighting impacts on operations, receivable cycles, bad debt reserves, and financial market volatility - A new risk factor was added to address the potential adverse effects of pandemics like COVID-19 on the company's business, financial condition, cash flows, and stock price[187](index=187&type=chunk)[188](index=188&type=chunk) - Specific risks from COVID-19 include a longer receivable cycle and increased bad debt reserves due to government-mandated prohibitions on service disconnections and late fees, which have since been lifted[190](index=190&type=chunk) [Item 6 - Exhibits](index=42&type=section&id=Item%206%20-%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial statements formatted in Inline eXtensible Business Reporting Language (iXBRL) - Exhibits filed include certifications by the CEO and CFO as required by the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act[193](index=193&type=chunk)

[PART I – FINANCIAL INFORMATION](index=3&type=section&id=Part%20I%20%E2%80%93%20FINANCIAL%20INFORMATION) This section presents the company's financial performance and condition for the reported periods [ITEM 1 – FINANCIAL STATEMENTS](index=3&type=section&id=Item%201%20%E2%80%93%20FINANCIAL%20STATEMENTS) This section presents the unaudited condensed consolidated financial statements of Artesian Resources Corporation, including balance sheets, statements of operations, cash flows, and changes in stockholders' equity, along with detailed notes explaining accounting policies, revenue recognition, leases, stock compensation, regulatory assets/liabilities, and recent acquisitions for the periods ended June 30, 2020 and December 31, 2019 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific dates | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Total Assets | $575,899 | $560,368 | | Total Stockholders' Equity | $162,910 | $160,268 | | Long-term Debt, net | $143,183 | $144,156 | | Total Current Liabilities | $36,473 | $25,599 | - Total Assets increased by **$15.5 million** (**2.78%**) from December 31, 2019, to June 30, 2020, primarily driven by an increase in utility plant and other deferred assets[8](index=8&type=chunk) - Current liabilities saw a significant increase of **$10.874 million** (**42.48%**) from December 31, 2019, to June 30, 2020, mainly due to higher lines of credit and income taxes payable[8](index=8&type=chunk) [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section details the company's revenues, expenses, and net income over specific reporting periods | Metric (in thousands, except per share) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Operating Revenues | $21,752 | $20,652 | $41,653 | $40,037 | | Operating Income | $6,124 | $5,320 | $10,585 | $9,604 | | Net Income Applicable to Common Stock | $4,566 | $3,778 | $8,640 | $7,368 | | Basic EPS | $0.49 | $0.41 | $0.93 | $0.80 | | Diluted EPS | $0.49 | $0.41 | $0.92 | $0.79 | | Cash Dividends Per Share | $0.2496 | $0.2459 | $0.4992 | $0.4882 | - Total Operating Revenues increased by **5.3%** for the three months and **4.0%** for the six months ended June 30, 2020, compared to the same periods in 2019, primarily driven by water sales[11](index=11&type=chunk) - Net Income Applicable to Common Stock increased by **20.8%** for the three months and **17.3%** for the six months ended June 30, 2020, year-over-year[11](index=11&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section outlines the sources and uses of cash from operating, investing, and financing activities | Metric (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :----------------------------- | :----------------------------- | | Net Cash Provided by Operating Activities | $11,837 | $8,928 | | Net Cash Used in Investing Activities | $(20,550) | $(18,073) | | Net Cash Provided by Financing Activities | $8,490 | $9,037 | | Net Decrease in Cash and Cash Equivalents | $(223) | $(108) | | Cash and Cash Equivalents at End of Period | $373 | $185 | - Net cash provided by operating activities increased by **$2.909 million** (**32.58%**) for the six months ended June 30, 2020, compared to the same period in 2019, primarily due to higher net income and changes in working capital[12](index=12&type=chunk) - Net cash used in investing activities increased by **$2.477 million** (**13.71%**) due to higher capital expenditures and investments in acquisitions, including the Frankford Water System[12](index=12&type=chunk)[102](index=102&type=chunk) [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity) This section tracks changes in the company's equity, including retained earnings and capital contributions | Metric (in thousands) | December 31, 2019 | June 30, 2020 | | :-------------------- | :---------------- | :------------ | | Total Stockholders' Equity | $160,268 | $162,910 | | Retained Earnings | $49,165 | $50,831 | | Additional Paid-in Capital | $101,811 | $102,746 | - Total stockholders' equity increased by **$2.642 million** from December 31, 2019, to June 30, 2020, driven by net income and issuance of common stock through dividend reinvestment and employee plans, partially offset by cash dividends declared[19](index=19&type=chunk)[20](index=20&type=chunk) [Notes to the Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations of accounting policies, significant transactions, and financial statement line items [NOTE 1 – GENERAL (Company Overview and Subsidiaries)](index=11&type=section&id=NOTE%201%20%E2%80%93%20GENERAL) This note describes Artesian Resources Corporation's business, its wholly-owned subsidiaries, and their primary services - Artesian Resources Corporation operates through eight wholly-owned subsidiaries, primarily providing water and wastewater services in Delaware, Maryland, and Pennsylvania[21](index=21&type=chunk)[22](index=22&type=chunk)[24](index=24&type=chunk)[26](index=26&type=chunk)[27](index=27&type=chunk) - Key regulated subsidiaries include Artesian Water Company, Inc. (largest public water utility in Delaware), Artesian Wastewater Management, Inc., Artesian Water Maryland, Inc., and Artesian Water Pennsylvania, Inc[22](index=22&type=chunk)[23](index=23&type=chunk)[24](index=24&type=chunk)[26](index=26&type=chunk) - Non-regulated subsidiaries (Artesian Utility Development, Artesian Development Corporation, Artesian Storm Water Services) focus on infrastructure design/build, contract operations, real estate, and storm water management[27](index=27&type=chunk)[28](index=28&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) [NOTE 2 – BASIS OF PRESENTATION](index=12&type=section&id=NOTE%202%20%E2%80%93%20BASIS%20OF%20PRESENTATION) This note explains the accounting principles and management's estimates used in preparing the financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules for Form 10-Q, with certain information condensed or omitted compared to annual statements[33](index=33&type=chunk) - Management makes estimates and assumptions, particularly regarding lease agreements and the impact of the COVID-19 pandemic on credit losses and bad debt reserves due to executive orders prohibiting late fees and service disconnections[36](index=36&type=chunk)[37](index=37&type=chunk) [NOTE 3 – REVENUE RECOGNITION](index=13&type=section&id=NOTE%203%20%E2%80%93%20REVENUE%20RECOGNITION) This note details the company's revenue sources, recognition policies, and the impact of COVID-19 on receivables - Operating revenues are primarily from tariff-based contract services (water consumption, industrial wastewater, fixed fees, DSIC) approved by state Public Service Commissions[39](index=39&type=chunk) - Non-tariff revenues include Service Line Protection Plan (SLP Plan) fees, water/wastewater contract operations, and inspection fees[39](index=39&type=chunk)[47](index=47&type=chunk)[48](index=48&type=chunk)[49](index=49&type=chunk) | Revenue Type (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Tariff Revenue | $20,128 | $18,921 | $38,331 | $36,604 | | Total Non-Tariff Revenue | $1,300 | $1,420 | $2,706 | $2,821 | | Other Operating Revenue | $324 | $311 | $616 | $612 | | Total Operating Revenue | $21,752 | $20,652 | $41,653 | $40,037 | - Due to COVID-19, the Company anticipates a longer receivable cycle and increased bad debt reserves, as state executive orders prohibit service disconnections and late fees for non-payment[45](index=45&type=chunk)[103](index=103&type=chunk) [NOTE 4 – LEASES](index=17&type=section&id=NOTE%204%20%E2%80%93%20LEASES) This note outlines the company's operating lease agreements, associated assets, and liabilities - The Company leases land and office equipment under operating leases with terms ranging from **2** to **77 years**, some including automatic extension options[57](index=57&type=chunk) | Lease Metric | June 30, 2020 | | :---------------------------- | :------------ | | Operating lease right-of-use assets | $469 thousand | | Total operating lease liabilities | $460 thousand | | Weighted Average Remaining Lease Term | 58 years | | Weighted Average Discount Rate | 5.0% | - Total undiscounted operating lease payments amount to **$1.465 million**, with **$42 thousand** due in 2020 and **$1.317 million** thereafter[63](index=63&type=chunk) [NOTE 5 – STOCK COMPENSATION PLANS](index=18&type=section&id=NOTE%205%20%E2%80%93%20STOCK%20COMPENSATION%20PLANS) This note describes the company's equity compensation plans, including stock options and restricted stock awards - The 2015 Equity Compensation Plan authorizes grants of incentive stock options, nonqualified stock options, stock units, stock awards, and dividend equivalents[64](index=64&type=chunk) - Compensation expense for restricted stock awards was **$45,000** for the three months and **$90,000** for the six months ended June 30, 2020[65](index=65&type=chunk) | Stock Compensation (June 30, 2020) | Options (Shares) | Restricted Stock Awards (Shares) | | :--------------------------------- | :--------------- | :------------------------------- | | Outstanding at January 1, 2020 | 153,250 | 5,000 | | Granted | — | 5,000 | | Exercised/Vested and Released | (25,000) | (5,000) | | Outstanding at June 30, 2020 | 128,250 | 5,000 | | Weighted Average Exercise Price (Options) | $20.73 | N/A | | Weighted Average Remaining Life (Options) | 2.438 years | N/A | | Aggregate Intrinsic Value (Options) | $1,995 thousand | N/A | | Unrecognized Expenses (Restricted Stock) | — | $148 thousand | [NOTE 6 – OTHER DEFERRED ASSETS](index=19&type=section&id=NOTE%206%20%E2%80%93%20OTHER%20DEFERRED%20ASSETS) This note details other deferred assets, including investments and goodwill from acquisitions - Other deferred assets include an investment in CoBank (**$4.374 million** at June 30, 2020) and goodwill (**$1.220 million** at June 30, 2020) resulting from the acquisition of water assets from the Town of Frankford[72](index=72&type=chunk)[73](index=73&type=chunk) [NOTE 7 - REGULATORY ASSETS](index=19&type=section&id=NOTE%207%20-%20REGULATORY%20ASSETS) This note explains regulatory assets, representing costs recoverable through future customer rates - Regulatory assets represent expenses recoverable through customer rates, deferred and amortized over future periods as permitted by regulatory agencies (DEPSC, MDPSC, PAPUC)[74](index=74&type=chunk) | Regulatory Asset (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------ | :------------ | :---------------- | | Postretirement benefit obligation | $51 | $51 | | Deferred income taxes | $378 | $386 | | Expense of rate case studies | $22 | $27 | | Debt related costs | $5,398 | $5,556 | | Goodwill | $284 | $288 | | Deferred acquisition and franchise costs | $564 | $583 | | Total Regulatory Assets, net | $6,697 | $6,891 | [NOTE 8 – REGULATORY LIABILITIES](index=20&type=section&id=NOTE%208%20%E2%80%93%20REGULATORY%20LIABILITIES) This note describes regulatory liabilities, representing amounts to be returned to customers through future rates - Regulatory liabilities represent excess cost recovery or other deferred items that are probable to be returned to customers through future regulated rates[80](index=80&type=chunk) - A significant portion of regulatory liabilities (**$21.777 million** at June 30, 2020) is related to deferred income taxes from the Tax Cuts and Jobs Act (TCJA), amortized over **49.5 years**[82](index=82&type=chunk)[84](index=84&type=chunk) | Regulatory Liability (in thousands) | June 30, 2020 | December 31, 2019 | | :---------------------------------- | :------------ | :---------------- | | Utility plant retirement cost obligation | $192 | $247 | | Deferred income taxes (related to TCJA) | $21,777 | $21,999 | | Total Regulatory Liabilities | $21,969 | $22,246 | [NOTE 9 - NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE](index=21&type=section&id=NOTE%209%20-%20NET%20INCOME%20PER%20COMMON%20SHARE%20AND%20EQUITY%20PER%20COMMON%20SHARE) This note provides details on basic and diluted earnings per share and equity per common share | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic Shares Outstanding | 9,326 | 9,276 | 9,311 | 9,267 | | Diluted Shares Outstanding | 9,367 | 9,324 | 9,357 | 9,319 | - Equity per common share was **$17.50** at June 30, 2020, up from **$17.28** at December 31, 2019[87](index=87&type=chunk) [NOTE 10 - REGULATORY PROCEEDINGS](index=21&type=section&id=NOTE%2010%20-%20REGULATORY%20PROCEEDINGS) This note outlines the regulatory environment and rate-setting mechanisms for the company's utility operations - The Company's utilities are regulated by the DEPSC, MDPSC, and PAPUC, which establish rates to cover operating and investment costs[88](index=88&type=chunk)[89](index=89&type=chunk) - Delaware law permits semi-annual increases for distribution system improvements through a DSIC, which generated **$1.3 million** and **$2.4 million** in revenue for the three and six months ended June 30, 2020, respectively[92](index=92&type=chunk)[93](index=93&type=chunk) | DSIC Application | 11/28/2018 | 05/29/2019 | 11/15/2019 | 05/29/2020 | | :--------------- | :--------- | :--------- | :--------- | :--------- | | DEPSC Approval Date | 12/20/2018 | 06/18/2019 | 12/12/2019 | 06/17/2020 | | Effective Date | 01/01/2019 | 07/01/2019 | 01/01/2020 | 07/01/2020 | | Cumulative DSIC Rate | 5.55% | 7.41% | 7.50% | 7.41% | [NOTE 11 – INCOME TAXES](index=22&type=section&id=NOTE%2011%20%E2%80%93%20INCOME%20TAXES) This note details the company's deferred income taxes and uncertain tax positions - Deferred income taxes are provided for temporary differences between tax basis and financial statement amounts, with rate-regulated utilities recognizing regulatory liabilities/assets for deferred taxes[94](index=94&type=chunk) - The Company accrued approximately **$10,100** in penalties and interest for uncertain tax positions for the six months ended June 30, 2020, and is subject to examination by federal and state authorities for tax years 2016-2019[95](index=95&type=chunk) [NOTE 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS](index=23&type=section&id=NOTE%2012%20%E2%80%93%20FAIR%20VALUE%20OF%20FINANCIAL%20INSTRUMENTS) This note discusses the fair value measurements of the company's financial instruments, particularly long-term debt - Current assets and liabilities approximate fair value due to their short maturity[98](index=98&type=chunk) | Long-term Debt (in thousands) | June 30, 2020 | December 31, 2019 | | :---------------------------- | :------------ | :---------------- | | Carrying amount | $144,982 | $145,862 | | Estimated fair value | $173,779 | $157,710 | - The fair value of long-term debt differs from carrying values due to differences between fixed interest rates and current market rates, classified as Level 2 measurements[98](index=98&type=chunk) [NOTE 13 – RELATED PARTY TRANSACTIONS](index=23&type=section&id=NOTE%2013%20%E2%80%93%20RELATED%20PARTY%20TRANSACTIONS) This note discloses transactions with related parties, including legal services from a director's firm - The Company utilized legal services from Morris Nichols Arsht & Tunnell (MNAT), where a director, Mr. Michael Houghton, is a Partner[99](index=99&type=chunk) | Payments to MNAT (in thousands) | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :------------------------------ | :------------------------------- | :----------------------------- | :------------------------------- | :----------------------------- | | Legal and director services | $109 | $228 | $97 | $123 | [NOTE 14 – BUSINESS COMBINATIONS](index=24&type=section&id=NOTE%2014%20%E2%80%93%20BUSINESS%20COMBINATIONS) This note details recent acquisitions of water system operating assets and their accounting treatment - On April 2, 2020, Artesian Water acquired the water system operating assets from the Town of Frankford for **$3.6 million**, serving approximately **360 customers**[102](index=102&type=chunk) - The acquisition was accounted for as a business combination, with the purchase price primarily attributed to utility plant assets, pending final valuation[102](index=102&type=chunk) [NOTE 15 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS](index=24&type=section&id=NOTE%2015%20-%20IMPACT%20OF%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) This note describes the impact of new accounting guidance on credit losses and bad debt reserves - New FASB guidance on credit losses (effective after December 15, 2019) is primarily applicable to accounts receivable[103](index=103&type=chunk) - An adjustment of **$0.3 million** was made to increase the reserve for bad debt as of June 30, 2020, due to COVID-19 related executive orders prohibiting service disconnections and late fees[103](index=103&type=chunk) [NOTE 16 - SUBSEQUENT EVENT](index=24&type=section&id=NOTE%2016%20-%20SUBSEQUENT%20EVENT) This note reports a significant event occurring after the reporting period, specifically a water system acquisition - On August 3, 2020, Artesian Water completed the purchase of water system operating assets from the City of Delaware City for **$2.1 million**, serving approximately **800 customers**[104](index=104&type=chunk) [ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=25&type=section&id=Item%202%20-%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides an overview of the Company's financial performance, strategic direction, and the impact of the COVID-19 pandemic. It details the results of operations for the three and six months ended June 30, 2020, compared to 2019, highlighting revenue and expense drivers, and discusses liquidity and capital resources [CAUTION REGARDING FORWARD-LOOKING STATEMENTS](index=25&type=section&id=CAUTION%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section warns about forward-looking statements and outlines key risks and uncertainties affecting future results - The report contains forward-looking statements regarding financial condition, operations, growth plans, regulatory decisions, and the impact of COVID-19, which involve risks and uncertainties[106](index=106&type=chunk) - Key risk factors include changes in weather, contractual obligations, government policies, regulatory approvals, economic conditions, and the ongoing impact of the COVID-19 pandemic[106](index=106&type=chunk) [RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2020](index=25&type=section&id=RESULTS%20OF%20OPERATIONS%20FOR%20THE%20PERIOD%20ENDED%20JUNE%2030%2C%202020) This section analyzes the company's operational performance for the reported period, detailing revenue and expense drivers [OVERVIEW](index=25&type=section&id=OVERVIEW) This overview highlights the primary drivers of profitability and strategic growth areas for the company - Profitability is primarily driven by water sales, which constituted **88.3%** of total operating revenues for the six months ended June 30, 2020[107](index=107&type=chunk) - The Company seeks growth in wastewater services and non-regulated contract operations (water/wastewater operations, SLP Plans, design/construction/engineering services) to diversify revenue streams and mitigate weather-related fluctuations[107](index=107&type=chunk)[108](index=108&type=chunk) [COVID-19 Pandemic](index=26&type=section&id=COVID-19%20Pandemic) This section assesses the impact of the COVID-19 pandemic on financial results and future operational considerations - The COVID-19 pandemic did not materially adversely affect financial results for the six months ended June 30, 2020, but its full impact remains uncertain and could affect future quarters[110](index=110&type=chunk)[112](index=112&type=chunk) - State executive orders prohibiting service disconnections and late fees are expected to lead to a longer receivable cycle and increased bad debt reserves, with potential changes in revenue mix between commercial and residential customers[111](index=111&type=chunk) - DEPSC and MDPSC authorized deferred regulatory treatment for incremental COVID-19 related costs[111](index=111&type=chunk) [Water Division](index=26&type=section&id=Water%20Division) This section provides key metrics and operational details for the company's water utility services - Metered water customers in Delaware increased by approximately **2,350** to **88,900 customers** as of June 30, 2020, compared to June 30, 2019[114](index=114&type=chunk) - Approximately **3.9 billion gallons** of water were distributed in Delaware systems and **63.1 million gallons** in Maryland systems for the six months ended June 30, 2020[114](index=114&type=chunk) [Wastewater Division](index=26&type=section&id=Wastewater%20Division) This section details the growth and operational developments within the company's wastewater services - Delaware wastewater customers increased by approximately **380** (**16.7%**) to **2,650 customers** as of June 30, 2020, compared to June 30, 2019[115](index=115&type=chunk) - Artesian Wastewater received an operations permit in March 2020 for a disposal facility to provide treated process wastewater disposal services for an industrial customer (Allen Harim) at **1.5 mgd**, anticipated to be operational in Q3 2020[23](index=23&type=chunk)[126](index=126&type=chunk) [Non-Regulated Division](index=26&type=section&id=Non-Regulated%20Division) This section describes the activities and customer enrollment in the company's non-regulated services - The non-regulated division, primarily Artesian Utility, provides contract water/wastewater operations and Service Line Protection (SLP) Plans[116](index=116&type=chunk) | SLP Plan Enrollment (June 30, 2020) | Number of Customers | % of Eligible Water Customers | | :---------------------------------- | :------------------ | :---------------------------- | | WSLP Plan | 20,600 | 24.2% | | SSLP Plan | 16,000 | 18.9% | | ISLP Plan | 7,300 | 8.6% | [Strategic Direction](index=27&type=section&id=Strategic%20Direction) This section outlines the company's growth strategy, including customer expansion and recent acquisitions - The Company's strategy focuses on increasing customer growth, revenues, earnings, and dividends by expanding water, wastewater, and SLP Plan services across the Delmarva Peninsula through strategic acquisitions and partnerships[117](index=117&type=chunk)[118](index=118&type=chunk) - Recent acquisitions include utility assets from High Point Associates (Oct 2019), the Frankford Water System (April 2020 for **$3.6 million**), and the Delaware City Water System (Aug 2020 for **$2.1 million**)[120](index=120&type=chunk)[121](index=121&type=chunk)[122](index=122&type=chunk) - Significant growth opportunities are foreseen in the regulated wastewater division, with plans to expand service areas using larger regional facilities and convert smaller treatment facilities into pump stations for efficiency[124](index=124&type=chunk) [Results of Operations – Analysis of the Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019.](index=29&type=section&id=Results%20of%20Operations%20%E2%80%93%20Analysis%20of%20the%20Three%20Months%20Ended%20June%2030%2C%202020%20Compared%20to%20the%20Three%20Months%20Ended%20June%2030%2C%202019.) This section analyzes the financial performance for the three-month period, detailing revenue and expense changes - Operating revenues increased by **$1.1 million** (**5.3%**) to **$21.8 million**, primarily due to a **$1.2 million** (**6.8%**) increase in water sales revenue from residential consumption and higher DSIC and fixed fee revenues[130](index=130&type=chunk) - Operating expenses (excluding depreciation and income taxes) increased by **$0.1 million** (**1.0%**), driven by a **$0.3 million** increase in bad debt expense due to COVID-19 related non-payment prohibitions[132](index=132&type=chunk)[134](index=134&type=chunk) - Net income applicable to common stock increased by **$0.8 million**, reflecting higher operating revenues and other income, partially offset by increased operating and interest expenses[137](index=137&type=chunk) [Results of Operations – Analysis of the Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019.](index=30&type=section&id=Results%20of%20Operations%20%E2%80%93%20Analysis%20of%20the%20Six%20Months%20Ended%20June%2030%2C%202020%20Compared%20to%20the%20Six%20Months%20Ended%20June%2030%2C%202019.) This section analyzes the financial performance for the six-month period, detailing revenue and expense changes - Operating revenues increased by **$1.6 million** (**4.0%**) to **$41.7 million**, mainly from a **$1.7 million** (**4.8%**) increase in water sales revenue due to residential consumption and higher DSIC and fixed fee revenues[137](index=137&type=chunk) - Operating expenses (excluding depreciation and income taxes) increased by **$0.2 million** (**1.0%**), with a **$0.3 million** increase in bad debt expense and **$0.3 million** in payroll/employee benefits, partially offset by decreases in general administration and purchased water expenses[140](index=140&type=chunk)[141](index=141&type=chunk)[142](index=142&type=chunk) - Net income applicable to common stock increased by **$1.3 million**, driven by higher operating revenues and other income, partially offset by increased operating and interest expenses[147](index=147&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=32&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) This section discusses the company's cash flow, funding sources, capital expenditures, and debt obligations - Primary liquidity sources for the six months ended June 30, 2020, included **$11.8 million** from operating activities, **$5.7 million** from contributions/advances, **$7.2 million** from lines of credit, and **$0.9 million** from common stock issuance[148](index=148&type=chunk) - Capital expenditures were **$20.6 million** for the first six months of 2020, up from **$18.2 million** in 2019, focusing on transmission/distribution, treatment facilities, and the Frankford acquisition[149](index=149&type=chunk) | Contractual Obligations (in thousands) | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | Total | | :------------------------------------- | :--------------- | :-------- | :-------- | :------------ | :---- | | First mortgage bonds (principal and interest) | $6,650 | $13,218 | $13,115 | $194,734 | $227,717 | | State revolving fund loans (principal and interest) | $1,002 | $838 | $674 | $3,963 | $6,477 | | Promissory note (principal and interest) | $960 | $1,921 | $1,921 | $13,018 | $17,820 | | Operating leases | $42 | $60 | $46 | $1,317 | $1,465 | | Operating agreements | $72 | $85 | $78 | $890 | $1,125 | | Unconditional purchase obligations | $3,881 | $2,042 | $57 | — | $5,980 | | Total contractual cash obligations | $12,607 | $18,164 | $15,891 | $213,922 | $260,584 | - The Company had **$40 million** and **$20 million** lines of credit with Citizens Bank and CoBank, respectively, with **$32.8 million** and **$12.5 million** available as of June 30, 2020, and expects to renew them[151](index=151&type=chunk)[152](index=152&type=chunk) [ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=31&type=section&id=Item%203%20-%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The Company is exposed to market risks primarily from fluctuating interest rates on its debt and changes in commodity prices. It manages interest rate risk through fixed-rate long-term debt and mitigates commodity price risk by recovering costs through rate increases and multi-year fixed-price supply contracts for electricity - The Company is exposed to interest rate risk on its **$60 million** variable rate lines of credit, with **$14.7 million** outstanding at June 30, 2020[164](index=164&type=chunk) - Commodity price risks (chemicals, electricity) are mitigated by the ability to recover costs through customer rate increases and multi-year fixed-price electric supply contracts[158](index=158&type=chunk)[164](index=164&type=chunk) [ITEM 4 – CONTROLS AND PROCEDURES](index=35&type=section&id=Item%204%20-%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2020, concluding they were effective. No material changes to internal control over financial reporting occurred during the quarter, and the COVID-19 pandemic had no impact on these controls - Disclosure controls and procedures were evaluated as effective, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[166](index=166&type=chunk) - No material changes to internal control over financial reporting occurred during the quarter, and the COVID-19 pandemic had no impact on these controls[167](index=167&type=chunk) [PART II – OTHER INFORMATION](index=32&type=section&id=Part%20II%20-%20Other%20Information) This section provides additional information not covered in the financial statements, including legal matters and risk factors [ITEM 1 – LEGAL PROCEEDINGS](index=35&type=section&id=Item%201%20%E2%80%93%20LEGAL%20PROCEEDINGS) The Company is periodically involved in legal proceedings arising in the ordinary course of business. Management does not believe the ultimate resolution of these matters will materially affect its business, financial position, or results of operations, though significant litigation expense and diversion of management attention may occur - The Company is involved in ordinary course legal proceedings, which are not expected to materially affect business, financial position, or results of operations[168](index=168&type=chunk) - Potential risks include significant litigation expense and diversion of management attention, regardless of the outcome[168](index=168&type=chunk) [ITEM 1A – RISK FACTORS](index=35&type=section&id=Item%201A%20%E2%80%93%20RISK%20FACTORS) This section updates the risk factors from the annual report, specifically highlighting the adverse impact of pandemics like COVID-19 on the Company's business, financial condition, cash flows, and stock price. It notes that state executive orders related to COVID-19 may lead to longer receivable cycles and increased bad debt reserves - The COVID-19 pandemic is a new material risk factor that may adversely affect the Company's business, results of operations, financial condition, cash flows, and stock price[169](index=169&type=chunk)[170](index=170&type=chunk) - State executive orders prohibiting service disconnections and late fees due to COVID-19 are anticipated to result in a longer receivable cycle and increased bad debt reserves[171](index=171&type=chunk) - Concerns over the economic impact of COVID-19 have caused extreme volatility in financial markets, potentially impacting the Company's stock price[171](index=171&type=chunk) [ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=36&type=section&id=Item%202%20%E2%80%93%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This item is not applicable to the current report [ITEM 3 – DEFAULTS UPON SENIOR SECURITIES](index=36&type=section&id=Item%203%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to the current report [ITEM 4 – MINE SAFETY DISCLOSURES](index=36&type=section&id=Item%204%20Mine%20Safety%20Disclosures) This item is not applicable to the current report [ITEM 5 – OTHER INFORMATION](index=36&type=section&id=Item%205%20Other%20Information) This item is not applicable to the current report [ITEM 6 – EXHIBITS](index=37&type=section&id=Item%206%20-%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including financing agreements, general obligation notes, an asset purchase agreement, and certifications from the Chief Executive Officer and Chief Financial Officer - Exhibits include financing agreements and general obligation notes with the Delaware Drinking Water State Revolving Fund for water main transmission replacements[174](index=174&type=chunk) - An Asset Purchase Agreement dated June 11, 2020, between Artesian Water Company Inc. and the City of Delaware City is filed as an exhibit[174](index=174&type=chunk) - Certifications from the CEO and CFO (Rule 13a–14(a) and 13a-14(b)) are included[174](index=174&type=chunk)

[PART I – FINANCIAL INFORMATION](index=3&type=section&id=Part%20I%20%E2%80%93%20FINANCIAL%20INFORMATION) This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the period [ITEM 1 – FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201%20%E2%80%93%20FINANCIAL%20STATEMENTS) This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, cash flows, and changes in stockholders' equity, along with detailed notes explaining the company's accounting policies, revenue recognition, regulatory assets and liabilities, stock compensation, and the impact of recent events like COVID-19 [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific points in time **Condensed Consolidated Balance Sheets (Amounts in thousands):** | Item | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | Total Assets | $565,587 | $560,368 | | Total Stockholders' Equity | $162,354 | $160,268 | | Total Current Assets | $12,679 | $14,207 | | Total Current Liabilities | $27,923 | $25,599 | [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section outlines the company's financial performance over a period, showing revenues, expenses, and net income **Condensed Consolidated Statements of Operations (Amounts in thousands, except per share amounts):** | Item | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change ($k) | Change (%) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :---------- | :--------- | | Total Operating Revenues | $19,901 | $19,386 | $515 | 2.7% | | Operating Income | $4,462 | $4,284 | $178 | 4.2% | | Net Income Applicable to Common Stock | $4,074 | $3,590 | $484 | 13.5% | | Basic Income per Common Share | $0.44 | $0.39 | $0.05 | 12.8% | | Diluted Income per Common Share | $0.44 | $0.39 | $0.05 | 12.8% | | Cash Dividends per Share of Common Stock | $0.2496 | $0.2423 | $0.0073 | 3.0% | [Condensed Consolidated Statements of Cash Flows](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section details the cash inflows and outflows from operating, investing, and financing activities over a period **Condensed Consolidated Statements of Cash Flows (Amounts in thousands):** | Item | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net Cash Provided by Operating Activities | $7,129 | $7,621 | | Net Cash Used in Investing Activities | $(9,182) | $(9,064) | | Net Cash Provided by Financing Activities | $1,787 | $1,415 | | Net Decrease in Cash and Cash Equivalents | $(266) | $(28) | | Cash and Cash Equivalents at End of Period | $330 | $265 | [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity) This section illustrates the changes in the company's equity accounts, including net income, dividends, and stock issuances **Condensed Consolidated Statements of Changes in Stockholders' Equity (Amounts in thousands):** | Item | March 31, 2020 | March 31, 2019 | | :----------------------------------- | :------------- | :------------- | | Balance as of December 31 | $160,268 | $153,251 | | Net Income | $4,074 | $3,590 | | Cash Dividends Declared | $(2,319) | $(2,241) | | Issuance of Common Stock (Dividend reinvestment plan) | $108 | $87 | | Issuance of Common Stock (Employee stock options and awards) | $134 | $277 | | Issuance of Common Stock (Employee Retirement Plan) | $89 | $78 | | Balance as of March 31 | $162,354 | $155,042 | [NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS](index=8&type=section&id=NOTES%20TO%20THE%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) These notes provide essential details and explanations for the figures presented in the condensed consolidated financial statements [NOTE 1 – GENERAL](index=10&type=section&id=NOTE%201%20%E2%80%93%20GENERAL) This note describes Artesian Resources Corporation's business operations, including its regulated water and wastewater services and non-regulated infrastructure development activities - Artesian Resources Corporation operates through eight wholly-owned subsidiaries, providing water and wastewater services in Delaware, Maryland, and Pennsylvania, alongside non-regulated activities like infrastructure development and service line protection plans[19](index=19&type=chunk)[20](index=20&type=chunk)[25](index=25&type=chunk) - Artesian Wastewater Management, Inc. received an operations permit in March 2020 for a new disposal facility (**90 million gallon storage lagoon**) in Delaware, expected to operate in Q2 2020 for an industrial customer at approximately **1.5 million gallons per day**[21](index=21&type=chunk) - Non-regulated subsidiaries include Artesian Utility Development, Inc. (design/build infrastructure, contract operations, Service Line Protection Plans), Artesian Development Corporation (real estate holding), and Artesian Storm Water Services, Inc. (storm water management systems)[25](index=25&type=chunk)[26](index=26&type=chunk)[30](index=30&type=chunk) [NOTE 2 – BASIS OF PRESENTATION](index=11&type=section&id=NOTE%202%20%E2%80%93%20BASIS%20OF%20PRESENTATION) This note explains the preparation of the unaudited condensed consolidated financial statements in accordance with SEC rules, including consolidation principles and the nature of interim results - The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules for Form 10-Q, with certain information condensed or omitted[31](index=31&type=chunk) - The statements include Artesian Resources Corporation and its wholly-owned subsidiaries, reflecting all normal recurring adjustments[32](index=32&type=chunk) - Interim results are not necessarily indicative of the results for the full year or for future periods[33](index=33&type=chunk) [NOTE 3 – REVENUE RECOGNITION](index=11&type=section&id=NOTE%203%20%E2%80%93%20REVENUE%20RECOGNITION) This note details the company's revenue streams from tariff and non-tariff contract services and discusses the anticipated impact of COVID-19 on receivables and bad debt reserves - Artesian's operating revenues are primarily from tariff contract services (water consumption, industrial wastewater, fixed fees, service charges, DSIC) and non-tariff contract revenues (Service Line Protection Plan fees, water/wastewater contract operations, wastewater inspection fees)[35](index=35&type=chunk) - Due to the COVID-19 pandemic and state executive orders prohibiting service disconnections and late fees, the Company anticipates a longer receivable cycle and increased reserves for bad debt compared to 2019[42](index=42&type=chunk) **Disaggregated Revenues (Amounts in thousands):** | Revenue Type | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | **Tariff Revenue** | | | | Consumption charges | $10,160 | $10,393 | | Fixed fees | $6,737 | $6,648 | | Service charges | $147 | $177 | | DSIC | $1,152 | $888 | | Industrial wastewater services | $8 | $– | | Revenue reserved for refund – TCJA impact | $– | $(422) | | **Total Tariff Revenue** | **$18,204** | **$17,684** | | **Non-Tariff Revenue** | | | | Service line protection plans | $1,088 | $1,050 | | Contract operations | $216 | $328 | | Inspection fees | $102 | $23 | | **Total Non-Tariff Revenue** | **$1,406** | **$1,401** | | Other Operating Revenue (not in scope of ASC 606) | $291 | $301 | | **Total Operating Revenue** | **$19,901** | **$19,386** | [NOTE 4 – LEASES](index=15&type=section&id=NOTE%204%20%E2%80%93%20LEASES) This note provides information on the company's operating lease arrangements, including right-of-use assets, liabilities, and future payment maturities - The Company leases land and office equipment under operating leases with remaining terms of **2 to 77 years**, some including options to extend for up to **66 years**[52](index=52&type=chunk) **Supplemental Balance Sheet Information Related to Leases (Amounts in thousands):** | Item | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | Operating lease right-of-use assets | $474 | $480 | | Total operating lease liabilities | $465 | $469 | | Weighted Average Remaining Lease Term (years) | 58 | 58 | | Weighted Average Discount Rate (%) | 5.0 | 5.0 | **Maturities of Operating Lease Liabilities (Amounts in thousands) as of March 31, 2020:** | Year | Operating Leases | | :--- | :--------------- | | 2020 | $42 | | 2021 | $42 | | 2022 | $23 | | 2023 | $23 | | 2024 | $23 | | Thereafter | $1,319 | | Total undiscounted lease payments | $1,472 | | Less effects of discounting | $(1,007) | | Total lease liabilities recognized | $465 | [NOTE 5 – STOCK COMPENSATION PLANS](index=18&type=section&id=NOTE%205%20%E2%80%93%20STOCK%20COMPENSATION%20PLANS) This note outlines the company's equity compensation plan, detailing stock option and restricted stock awards, associated expenses, and unrecognized compensation costs - The 2015 Equity Compensation Plan allows for various forms of grants, including stock options and restricted stock awards, administered by the Compensation Committee[58](index=58&type=chunk) **Stock Compensation Expense (Amounts in thousands):** | Period | Compensation Expense | | :----------------------------------- | :------------------- | | Three Months Ended March 31, 2020 | $45 | | Three Months Ended March 31, 2019 | $47 | **Summary of Class A Stock Options/Restricted Stock Awards (Amounts in thousands, except shares and years) (as of March 31, 2020):** | Item | Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Yrs.) | Aggregate Intrinsic Value ($k) | Restricted Stock Awards | | :----------------------------------- | :------------ | :------------------------------ | :------------------------------------- | :----------------------------- | :---------------------- | | Outstanding at January 1, 2020 | 153,250 | $20.40 | N/A | $2,575 | 5,000 | | Exercised/Vested and Released | (4,750) | $18.61 | N/A | $70 | – | | Outstanding at March 31, 2020 | 148,500 | $20.46 | 2.384 | $2,512 | 5,000 | | Exercisable/Vested at March 31, 2020 | 148,500 | $20.46 | 2.384 | $2,512 | – | - As of March 31, 2020, there was **$18,000** in total unrecognized expenses related to non-vested restricted shares, to be recognized over **0.10 years**[62](index=62&type=chunk) [NOTE 6 – REGULATORY ASSETS](index=19&type=section&id=NOTE%206%20%E2%80%93%20REGULATORY%20ASSETS) This note explains regulatory assets, which represent expenses recoverable through customer rates, and provides a breakdown of these assets - Regulatory assets represent certain expenses recoverable through customer rates, deferred and amortized over future periods as permitted by state regulatory agencies (DEPSC, MDPSC, PAPUC)[63](index=63&type=chunk) **Regulatory Assets, net of amortization (Amounts in thousands):** | Item | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | Postretirement benefit obligation | $51 | $51 | | Deferred income taxes | $382 | $386 | | Expense of rate case studies | $25 | $27 | | Debt related costs | $5,468 | $5,556 | | Goodwill | $286 | $288 | | Deferred acquisition and franchise costs | $573 | $583 | | **Total Regulatory Assets, net** | **$6,785** | **$6,891** | - Debt related costs associated with the Series V First Mortgage bond (issued December 2019) are recovered over the term of the new long-term debt[66](index=66&type=chunk) [NOTE 7 – REGULATORY LIABILITIES](index=20&type=section&id=NOTE%207%20%E2%80%93%20REGULATORY%20LIABILITIES) This note describes regulatory liabilities, which are deferred cost recoveries or other items probable to be returned to customers through future regulated rates - Regulatory liabilities represent excess recovery of costs or other items deferred because they are probable to be returned to customers through future regulated rates, as determined by state commissions[69](index=69&type=chunk) - The utility plant retirement cost obligation consists of estimated costs for facility removal and replacement, charged to a regulated retirement liability annually[70](index=70&type=chunk) **Regulatory Liabilities (Amounts in thousands):** | Item | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | Utility plant retirement cost obligation | $216 | $247 | | Deferred income taxes (related to TCJA) | $21,888 | $21,999 | | **Total Regulatory Liabilities** | **$22,104** | **$22,246** | [NOTE 8 – NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE](index=21&type=section&id=NOTE%208%20%E2%80%93%20NET%20INCOME%20PER%20COMMON%20SHARE%20AND%20EQUITY%20PER%20COMMON%20SHARE) This note presents the calculation of basic and diluted net income per common share and the company's equity per common share **Weighted Average Common Shares Outstanding (Shares in thousands):** | Item | March 31, 2020 | March 31, 2019 | | :----------------------------------- | :------------- | :------------- | | Basic computation | 9,297 | 9,258 | | Dilutive effect of employee stock options and awards | 46 | 56 | | **Diluted computation** | **9,343** | **9,314** | - Equity per common share was **$17.46** at March 31, 2020, compared to **$17.28** at December 31, 2019[76](index=76&type=chunk) - **6,050 shares** of restricted stock awards were excluded from diluted net income per share calculations for Q1 2020 due to an anti-dilutive effect[74](index=74&type=chunk) [NOTE 9 – REGULATORY PROCEEDINGS](index=21&type=section&id=NOTE%209%20%E2%80%93%20REGULATORY%20PROCEEDINGS) This note details the regulatory oversight by state commissions and the mechanisms for rate adjustments, including temporary increases and Distribution System Improvement Charges - Artesian's water and wastewater utilities are regulated by the Delaware Public Service Commission (DEPSC), Maryland Public Service Commission (MDPSC), and Pennsylvania Public Utility Commission (PAPUC)[78](index=78&type=chunk) - In Delaware, utilities can implement temporary rate increases under bond, up to the lesser of **$2.5 million annually** or **15% of gross water sales**, pending final regulatory approval[79](index=79&type=chunk) **Distribution System Improvement Charge (DSIC) Rates (Delaware):** | Application Date | DEPSC Approval Date | Effective Date | Cumulative DSIC Rate (%) | Net Eligible Plant Improvements – Cumulative Dollars (in millions) | | :--------------- | :------------------ | :------------- | :----------------------- | :--------------------------------------------------------------- | | 11/28/2018 | 12/20/2018 | 01/01/2019 | 5.55 | $30.4 | | 05/29/2019 | 06/18/2019 | 07/01/2019 | 7.41 | $43.1 | | 11/15/2019 | 12/12/2019 | 01/01/2020 | 7.50 | $43.1 | - DSIC revenue for the three months ended March 31, 2020, was approximately **$1.2 million**, up from **$0.9 million** in the prior year period[82](index=82&type=chunk) [NOTE 10 – INCOME TAXES](index=22&type=section&id=NOTE%2010%20%E2%80%93%20INCOME%20TAXES) This note discusses deferred income taxes, the impact of the Tax Cuts and Jobs Act on Contributions in Aid of Construction, and the company's tax examination status - Deferred income taxes are provided on temporary differences between tax basis and financial statement amounts, with rate-regulated utilities recognizing regulatory liabilities or assets for deferred taxes[83](index=83&type=chunk) - The Tax Cuts and Jobs Act (TCJA) repealed the 1996 exclusion from taxable income for Contributions in Aid of Construction (CIAC) and Advances, effective December 22, 2017[85](index=85&type=chunk) - The Company accrued approximately **$5,000** in penalties and interest for uncertain tax positions for the three months ended March 31, 2020, and is subject to examination for tax years 2016 through 2019[84](index=84&type=chunk) [NOTE 11 – FAIR VALUE OF FINANCIAL INSTRUMENTS](index=23&type=section&id=NOTE%2011%20%E2%80%93%20FAIR%20VALUE%20OF%20FINANCIAL%20INSTRUMENTS) This note explains how the fair value of financial instruments, particularly long-term debt, is determined and its approximation for current assets and liabilities - The carrying amounts of current assets and liabilities approximate fair value due to their short maturity[87](index=87&type=chunk) - All outstanding long-term debt is fixed-rate, with fair value determined by discounting future cash flows using current market interest rates (classified as Level 2 measurements)[87](index=87&type=chunk) **Long-term Debt (including current portion) (Amounts in thousands):** | Item | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | Carrying amount | $145,352 | $145,862 | | Estimated fair value | $164,083 | $157,710 | [NOTE 12 – RELATED PARTY TRANSACTIONS](index=23&type=section&id=NOTE%2012%20%E2%80%93%20RELATED%20PARTY%20TRANSACTIONS) This note discloses payments made to a law firm where a director is a partner and the company's policy for reviewing related party transactions - The Company paid **$119,000** to the law firm Morris Nichols Arsht & Tunnell (MNAT) for legal and director-related services during the three months ended March 31, 2020, compared to **$40,000** in the prior year period[89](index=89&type=chunk) - Mr. Michael Houghton, a director of Artesian Resources, is a Partner in MNAT[89](index=89&type=chunk) - The Audit Committee reviews and approves all related party transactions to ensure they are in the best interests of the Company and its stockholders[90](index=90&type=chunk) [NOTE 13 – IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS](index=24&type=section&id=NOTE%2013%20%E2%80%93%20IMPACT%20OF%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) This note discusses the impact of new FASB guidance on credit losses and the anticipated effects of the COVID-19 pandemic on receivables and bad debt reserves - New FASB guidance on credit losses (effective after December 15, 2019) is primarily applicable to accounts receivable balances[92](index=92&type=chunk) - Due to the COVID-19 pandemic and state government executive orders, the Company anticipates a longer receivable cycle and the need for increased reserves for bad debt[92](index=92&type=chunk) - The MDPSC authorized deferred regulatory treatment for incremental COVID-19 costs, including increased bad debt expense, and the DEPSC is anticipated to issue a similar order[92](index=92&type=chunk) [NOTE 14 – SUBSEQUENT EVENTS](index=24&type=section&id=NOTE%2014%20%E2%80%93%20SUBSEQUENT%20EVENTS) This note addresses the potential impacts of the COVID-19 pandemic, recent financing agreements, and the CARES Act on the company's operations - The COVID-19 outbreak was classified as a pandemic in March 2020, leading to potential impacts on operations, workforce disruptions, longer receivable cycles, increased bad debt reserves, and changes in revenue mix[93](index=93&type=chunk) - On April 28, 2020, Artesian Water entered into three financing agreements with the Delaware Drinking Water State Revolving Fund for up to **$4.0 million** in loans (**0.6% interest + 0.6% administrative fee**) to finance water transmission main replacements in New Castle County, Delaware[95](index=95&type=chunk) - The United States Government enacted the CARES Act on March 27, 2020, and the Company is reviewing its provisions to assess potential impacts on operations[94](index=94&type=chunk) [ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=25&type=section&id=ITEM%202%20%E2%80%93%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on the company's financial performance, condition, and future outlook for the three months ended March 31, 2020. It discusses the impact of the COVID-19 pandemic, operational results across water, wastewater, and non-regulated divisions, strategic direction, and liquidity and capital resources [CAUTION REGARDING FORWARD-LOOKING STATEMENTS](index=25&type=section&id=CAUTION%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section warns that the report contains forward-looking statements subject to various risks and uncertainties, many of which are heightened by the COVID-19 pandemic - The report contains forward-looking statements subject to risks and uncertainties, including those related to the COVID-19 pandemic, weather, regulatory decisions, and economic conditions[97](index=97&type=chunk) - Many of these risks and uncertainties are currently elevated by and may continue to be elevated by the COVID-19 pandemic[97](index=97&type=chunk) [RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2020](index=25&type=section&id=RESULTS%20OF%20OPERATIONS%20FOR%20THE%20PERIOD%20ENDED%20MARCH%2031%2C%202020) This section analyzes the company's operational performance for the three months ended March 31, 2020, covering revenue drivers, divisional results, and strategic initiatives [OVERVIEW](index=25&type=section&id=OVERVIEW) This overview highlights that gross water sales are the primary driver of profitability, with the company actively seeking growth in wastewater and non-regulated services for diversification - Gross water sales constituted **87.4%** of total operating revenues for the three months ended March 31, 2020, making profitability primarily attributable to water sales[98](index=98&type=chunk) - The Company seeks growth opportunities in wastewater services and non-regulated contract operations (e.g., wastewater management, design, construction, engineering) to diversify revenue streams and mitigate seasonal weather fluctuations affecting water sales[99](index=99&type=chunk) [COVID-19 Pandemic](index=26&type=section&id=COVID-19%20Pandemic) This section discusses the potential future adverse impacts of the COVID-19 pandemic on the company's financial results, including workforce disruptions, receivable cycles, and bad debt - While the COVID-19 pandemic did not materially adversely affect Q1 2020 financial results, rapid changes in economic and health conditions since the period end pose future risks[101](index=101&type=chunk) - Anticipated future impacts include prolonged workforce disruptions, a longer receivable cycle, increased bad debt reserves, and changes in revenue mix between commercial and residential customers due to state executive orders[102](index=102&type=chunk) - The MDPSC authorized deferred regulatory treatment for incremental COVID-19 costs, including increased bad debt expense, and the DEPSC is expected to issue a similar order[102](index=102&type=chunk) [Water Division](index=26&type=section&id=Water%20Division) This section provides an update on the company's water customer base and distributed water volumes in its Delaware and Maryland systems - As of March 31, 2020, the Company had approximately **88,000 metered water customers** in Delaware (up ~**1,900 YoY**) and ~**2,490** in Maryland (up ~**60 YoY**), with consistent customer numbers in Pennsylvania[104](index=104&type=chunk) - For Q1 2020, approximately **1.8 billion gallons** of water were distributed in Delaware systems and **23.4 million gallons** in Maryland systems[104](index=104&type=chunk) [Wastewater Division](index=26&type=section&id=Wastewater%20Division) This section details the growth in Delaware wastewater customers, the flat monthly fee billing structure, and agreements with industrial customers - Delaware wastewater customers totaled approximately **2,550** as of March 31, 2020, an increase of approximately **350**, or **15.9%**, compared to March 31, 2019[105](index=105&type=chunk) - Residential and commercial wastewater customers are billed a flat monthly fee, providing a revenue stream unaffected by weather[105](index=105&type=chunk) - Artesian Wastewater has wastewater services agreements with Allen Harim Foods, LLC, a large industrial customer[105](index=105&type=chunk) [Non-Regulated Division](index=26&type=section&id=Non-Regulated%20Division) This section describes the Non-Regulated Division's Service Line Protection Plans, highlighting consistent customer growth and their weather-unaffected revenue contribution - The Non-Regulated Division, primarily through Artesian Utility, offers Service Line Protection (SLP) Plans (WSLP, SSLP, ISLP) with consistent customer growth, providing a weather-unaffected revenue stream[106](index=106&type=chunk) **SLP Plan Customer Enrollment (as of March 31, 2020):** | Plan Type | Number of Customers | % of Eligible Water Customers | | :----------------------------------- | :------------------ | :---------------------------- | | WSLP Plan | ~20,500 | 24.3% | | SSLP Plan | ~16,000 | 19.0% | | ISLP Plan | ~7,200 | 8.6% | | Non-utility customers enrolled in one of the three plans | ~1,890 | N/A | [Strategic Direction](index=27&type=section&id=Strategic%20Direction) This section outlines the company's strategy to expand services, increase customer growth, and enhance earnings through acquisitions and infrastructure investments across the Delmarva Peninsula - The Company's strategy is to increase customer growth, revenues, earnings, and dividends by expanding water, wastewater, and SLP Plan services across the Delmarva Peninsula, leveraging acquisitions and infrastructure investments[108](index=108&type=chunk) - Recent acquisitions include utility assets in Kent County, Delaware (Oct 2019, ~**400 customers**) and the Town of Frankford's water system (Feb 2020, closed April 2020, ~**360 customers** for **$3.6 million**)[110](index=110&type=chunk)[111](index=111&type=chunk) - In the regulated wastewater division, the Company plans to utilize larger regional facilities to expand service areas and convert smaller treatment facilities into regional pump stations for efficiency[113](index=113&type=chunk) - A new **90 million gallon storage lagoon** and spray irrigation facility for industrial process wastewater (Allen Harim) is expected to be operational in Q2 2020, treating approximately **1.5 mgd**[114](index=114&type=chunk) [Inflation](index=28&type=section&id=Inflation) This section notes that inflation impacts the company through increasing costs for maintaining, improving, and expanding service capabilities, which must be recovered through future cash flows - The Company is affected by inflation, particularly through continually increasing costs for maintaining, improving, and expanding service capabilities, which must be recovered from future cash flows[117](index=117&type=chunk) [Results of Operations – Analysis of the Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019](index=28&type=section&id=Results%20of%20Operations%20%E2%80%93%20Analysis%20of%20the%20Three%20Months%20Ended%20March%2031%2C%202020%20Compared%20to%20the%20Three%20Months%20Ended%20March%2031%2C%202019.) This section provides a detailed comparative analysis of the company's operating revenues, expenses, other income, interest charges, and net income for the first quarter of 2020 versus 2019 [Operating Revenues](index=28&type=section&id=Operating%20Revenues) This section analyzes the increase in total operating revenues, primarily driven by higher water sales due to DSIC and consumption, alongside changes in other utility and non-utility revenues - Total operating revenues increased by **$0.5 million**, or **2.7%**, to **$19.9 million** for Q1 2020, primarily driven by a **$0.5 million** increase in water sales revenue[118](index=118&type=chunk) - The increase in water sales was mainly due to higher Distribution System Improvement Charge (DSIC) revenue (**7.50% rate** in Q1 2020 vs. **5.55%** in Q1 2019) and consumption revenue[118](index=118&type=chunk) - Other utility operating revenue increased by **$0.1 million** (**11.9%**) due to wastewater customer growth and inspection fee revenue, while non-utility operating revenue decreased by **$0.1 million** (**5.7%**) due to lower contract service revenue[119](index=119&type=chunk)[120](index=120&type=chunk) [Operating Expenses](index=28&type=section&id=Operating%20Expenses) This section examines the increase in operating expenses, driven by higher payroll and employee benefits, partially offset by reduced repair and maintenance costs, and an increase in income tax expense - Operating expenses (excluding depreciation and income taxes) increased by **$0.1 million**, or **1.1%**, for Q1 2020[120](index=120&type=chunk) - Utility operating expenses rose by **$0.1 million** (**1.2%**) due to increased payroll and employee benefit costs, partially offset by decreased repair and maintenance costs[121](index=121&type=chunk) - Federal and state income tax expense increased by **$0.2 million** (**15.2%**) due to higher pre-tax book income[122](index=122&type=chunk) [Other Income, Net](index=29&type=section&id=Other%20Income%2C%20Net) This section details the increase in other income, primarily from a patronage refund and an increase in Allowance for Funds Used During Construction - Other income increased by **$0.5 million**, primarily driven by a **$0.3 million** increase in miscellaneous income from an annual patronage refund from CoBank, ACB (including a one-time additional distribution)[122](index=122&type=chunk) - Allowance for Funds Used During Construction (AFUDC) increased by **$0.2 million** due to higher long-term construction activity[122](index=122&type=chunk) [Interest Charges](index=29&type=section&id=Interest%20Charges) This section explains the increase in interest expense, mainly due to higher long-term debt from a new bond issuance, partially offset by lower short-term borrowing costs - Interest expense increased by **$0.2 million**, mainly due to higher long-term debt interest from the Series V First Mortgage Bond issued on December 17, 2019[123](index=123&type=chunk) - This increase was partially offset by a decrease in short-term debt interest, primarily related to lower short-term borrowing levels in 2020[123](index=123&type=chunk) [Net Income](index=29&type=section&id=Net%20Income) This section summarizes the increase in net income applicable to common stock, attributing it to higher operating revenues and other income, partially offset by increased expenses - Net income applicable to common stock increased by **$0.5 million**, driven by a **$0.5 million** increase in operating revenues and a **$0.5 million** increase in other income, partially offset by a **$0.3 million** increase in operating expenses and a **$0.2 million** increase in interest expense[124](index=124&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=29&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) This section discusses the company's sources of liquidity, capital expenditure plans, financing arrangements, and compliance with debt covenants [Overview](index=29&type=section&id=Overview) This overview identifies primary liquidity sources and emphasizes the importance of timely rate increases for recovering utility plant investments - Primary liquidity sources for Q1 2020 included **$7.1 million** from operating activities, **$3.2 million** in net contributions/advances from developers, **$1.1 million** from lines of credit borrowings, and **$0.3 million** from common stock issuance[125](index=125&type=chunk) - Maintaining financial objectives relies on ensuring investments in utility plant and equipment are recovered through timely and adequate rate increases[125](index=125&type=chunk) [Investment in Plant and Systems](index=29&type=section&id=Investment%20in%20Plant%20and%20Systems) This section details capital expenditures for Q1 2020, highlighting key investments in infrastructure and future financing plans - Capital expenditures for Q1 2020 were **$9.2 million**, compared to **$9.1 million** in Q1 2019[126](index=126&type=chunk) - Key investments in Q1 2020 included **$2.0 million** for transmission/distribution rehabilitation, **$1.9 million** for treatment facility enhancements, **$1.3 million** for Delaware wastewater projects, and **$1.7 million** for mandatory utility plant expenditures due to governmental highway projects[126](index=126&type=chunk) - Future investments are expected to be financed by operations and external sources, including available cash, bank credit lines, state revolving fund loans, and potential capital market financing[127](index=127&type=chunk) [Lines of Credit and Long Term Debt](index=30&type=section&id=Lines%20of%20Credit%20and%20Long%20Term%20Debt) This section outlines the company's available lines of credit, details contractual cash obligations, and confirms compliance with debt covenants - As of March 31, 2020, Artesian Resources had a **$40 million** line of credit with Citizens Bank (**$38.9 million available**, LIBOR + **1.00%**, expires May 23, 2020) and Artesian Water had a **$20 million** line of credit with CoBank (**$12.5 million available**, LIBOR + **1.50%** or weekly variable rate, expires July 20, 2020); both are expected to be renewed[129](index=129&type=chunk)[130](index=130&type=chunk) **Contractual Cash Obligations (Amounts in thousands) as of March 31, 2020:** | Obligation Type | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | Total | | :----------------------------------- | :--------------- | :-------- | :-------- | :------------ | :---- | | First mortgage bonds (principal and interest) | $6,650 | $13,218 | $13,115 | $194,734 | $227,717 | | State revolving fund loans (principal and interest) | $1,002 | $838 | $674 | $4,042 | $6,556 | | Promissory note (principal and interest) | $960 | $1,921 | $1,921 | $13,257 | $18,059 | | Operating leases | $42 | $65 | $46 | $1,319 | $1,472 | | Operating agreements | $72 | $88 | $77 | $896 | $1,133 | | Unconditional purchase obligations | $3,881 | $2,995 | $52 | --- | $6,928 | | **Total contractual cash obligations** | **$12,607** | **$19,125** | **$15,885** | **$214,248** | **$261,865** | - The Company was in compliance with all affirmative and negative covenants in its long-term debt agreements and revolving lines of credit as of March 31, 2020[131](index=131&type=chunk) [Off-Balance Sheet Arrangements](index=31&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms that the company does not have any off-balance sheet arrangements, including those with structured finance or special purpose entities - The Company does not have any off-balance sheet arrangements, including with structured finance, special purpose, or variable interest entities[138](index=138&type=chunk) [Critical Accounting Assumptions, Estimates and Policies; Recent Accounting Pronouncements](index=31&type=section&id=Critical%20Accounting%20Assumptions%2C%20Estimates%20and%20Policies%3B%20Recent%20Accounting%20Pronouncements) This section states that there have been no material changes to critical accounting policies or significant impacts from new accounting pronouncements during the quarter - There have been no changes in the Company's critical accounting policies from those disclosed in its 2019 Annual Report on Form 10-K[140](index=140&type=chunk) - No new accounting policies adopted in the first three months of 2020 had a material impact on the Company's financial condition, liquidity, or results of operations[141](index=141&type=chunk) [ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=32&type=section&id=ITEM%203%20-%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section outlines the company's exposure to market risks, primarily fluctuating interest rates on variable-rate debt and commodity price changes. It details how these risks are mitigated through fixed-rate long-term debt, multi-year fixed-price electric supply contracts, and the ability to recover costs through rate increases - The Company is exposed to interest rate risk on **$60 million** of variable rate lines of credit, with approximately **$8.6 million** outstanding at March 31, 2020[142](index=142&type=chunk) - Interest rate risk is managed through the use of fixed-rate long-term debt (**4.24% to 5.96% interest rates**, maturities 2028-2038)[142](index=142&type=chunk) - Commodity price risk (e.g., chemicals, electricity) is mitigated by the ability to recover costs through rate increases to customers and by signing multi-year fixed-price electric supply contracts[142](index=142&type=chunk) [ITEM 4 – CONTROLS AND PROCEDURES](index=32&type=section&id=ITEM%204%20%E2%80%93%20CONTROLS%20AND%20PROCEDURES) This section confirms that management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2020, concluding they were effective. It also states that no material changes to internal control over financial reporting occurred during the quarter - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of March 31, 2020, providing reasonable assurance for timely and accurate financial reporting[143](index=143&type=chunk) - No change in internal control over financial reporting occurred during the most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, internal control over financial reporting[144](index=144&type=chunk) [Part II - Other Information](index=32&type=section&id=Part%20II%20-%20Other%20Information) This section covers legal proceedings, risk factors, and other required disclosures, including exhibits, for the reporting period [ITEM 1 – LEGAL PROCEEDINGS](index=32&type=section&id=ITEM%201%20%E2%80%93%20LEGAL%20PROCEEDINGS) This section states that the company is periodically involved in ordinary course legal proceedings but does not believe their ultimate resolution will materially affect its business, financial position, or results of operations, while acknowledging potential litigation expenses and diversion of management attention - The Company is periodically involved in legal proceedings arising in the ordinary course of business[145](index=145&type=chunk) - Management does not believe the ultimate resolution of these matters will materially affect the Company's business, financial position, or results of operations[145](index=145&type=chunk) - However, significant litigation expense and diversion of management attention may occur regardless of the outcome[145](index=145&type=chunk) [ITEM 1A – RISK FACTORS](index=32&type=section&id=ITEM%201A%20%E2%80%93%20RISK%20FACTORS) This section highlights that the company's business and financial results may be adversely affected by pandemics like COVID-19. Government orders prohibiting service disconnections and late fees are expected to lead to longer receivable cycles, increased bad debt reserves, and shifts in revenue mix, while market volatility may impact stock price - The Company's business, results of operations, financial condition, cash flows, and stock price may be adversely affected by pandemics, epidemics, or other public health emergencies, such as the recent COVID-19 outbreak[146](index=146&type=chunk)[147](index=147&type=chunk) - State government executive orders prohibiting service disconnections for non-payment and late fees are anticipated to result in a longer receivable cycle, increased reserves for bad debt, and changes in revenue mix between commercial and residential customers[148](index=148&type=chunk) - Concerns over the economic impact of COVID-19 have caused extreme volatility in financial and capital markets, which has and may continue to adversely impact the Company's stock price[148](index=148&type=chunk) [ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=33&type=section&id=ITEM%202%20%E2%80%93%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This item is not applicable to the current report [ITEM 3 – DEFAULTS UPON SENIOR SECURITIES](index=33&type=section&id=ITEM%203%20%E2%80%93%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) This item is not applicable to the current report [ITEM 4 – MINE SAFETY DISCLOSURES](index=33&type=section&id=ITEM%204%20%E2%80%93%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the current report [ITEM 5 – OTHER INFORMATION](index=33&type=section&id=ITEM%205%20%E2%80%93%20OTHER%20INFORMATION) This item is not applicable to the current report [ITEM 6 - EXHIBITS](index=34&type=section&id=ITEM%206%20-%20EXHIBITS) This section lists all exhibits filed with the Form 10-Q, including various agreements, notes, and certifications, which provide supporting documentation for the financial statements and other disclosures - Exhibits include the Asset Purchase Agreement with the Town of Frankford (dated February 27, 2020) and multiple Financing Agreements and General Obligation Notes with the Delaware Drinking Water State Revolving Fund (dated April 28, 2020)[151](index=151&type=chunk) - Certifications of the Chief Executive Officer and Chief Financial Officer (required by Rule 13a–14(a) and 13a-14(b)) are filed or furnished[151](index=151&type=chunk) - The financial statements are also provided in eXtensible Business Reporting Language (XBRL) format[151](index=151&type=chunk)

Table of Contents 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, 2019 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) (State or other jurisdiction of incorporation or organization) (I.R. ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2019 OR □ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 000-18516 ARTESIAN RESOURCES CORPORATION -------------------------------------------------------------- (Exac ...

Part I – FINANCIAL INFORMATION [ITEM 1 – FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201%20%E2%80%93%20FINANCIAL%20STATEMENTS) This section presents Artesian Resources Corporation's unaudited condensed consolidated financial statements as of June 30, 2019, with notes on accounting policies and financial position [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheets Key Data (As of June 30, Thousands of USD) | Metric | June 30, 2019 | December 31, 2018 | Change | Change Rate | | :--- | :--- | :--- | :--- | :--- | | Net Property and Equipment | $512,153 | $498,678 | $13,475 | 2.70% | | Total Current Assets | $10,713 | $16,118 | $(5,405) | -33.53% | | Total Other Assets | $8,606 | $7,780 | $826 | 10.62% | | Net Regulatory Assets | $7,031 | $7,254 | $(223) | -3.07% | | Total Assets | $538,503 | $529,830 | $8,673 | 1.64% | | Total Stockholders' Equity | $154,503 | $153,251 | $1,252 | 0.82% | | Net Long-Term Debt | $114,982 | $115,862 | $(880) | -0.76% | | Total Current Liabilities | $43,749 | $37,731 | $6,018 | 15.95% | | Total Deferred Credits and Other Liabilities | $83,031 | $84,971 | $(1,940) | -2.28% | | Net Contributions in Aid of Construction | $142,238 | $138,015 | $4,223 | 3.06% | | Total Liabilities and Stockholders' Equity | $538,503 | $529,830 | $8,673 | 1.64% | [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Condensed Consolidated Statements of Operations Key Data (Thousands of USD, except per share amounts) | Metric | June 30, 2019 (3 Months) | June 30, 2018 (3 Months) | Change | Change Rate | June 30, 2019 (6 Months) | June 30, 2018 (6 Months) | Change | Change Rate | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenues | $20,652 | $20,238 | $414 | 2.05% | $40,037 | $39,144 | $893 | 2.28% | | Total Operating Expenses | $15,332 | $14,999 | $333 | 2.22% | $30,433 | $29,935 | $498 | 1.66% | | Operating Income | $5,320 | $5,239 | $81 | 1.55% | $9,604 | $9,209 | $395 | 4.29% | | Interest Expense | $1,750 | $1,501 | $249 | 16.59% | $3,470 | $3,000 | $470 | 15.67% | | Net Income Attributable to Common Stock | $3,778 | $3,926 | $(148) | -3.77% | $7,368 | $7,404 | $(36) | -0.49% | | Basic Earnings Per Share | $0.41 | $0.43 | $(0.02) | -4.65% | $0.80 | $0.80 | $0.00 | 0.00% | | Diluted Earnings Per Share | $0.41 | $0.42 | $(0.01) | -2.38% | $0.79 | $0.80 | $(0.01) | -1.25% | | Cash Dividends Per Share | $0.2459 | $0.2387 | $0.0072 | 3.02% | $0.4882 | $0.4739 | $0.0143 | 3.02% | [Condensed Consolidated Statements of Cash Flows](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Condensed Consolidated Statements of Cash Flows Key Data (As of June 30, Thousands of USD) | Cash Flow Type | 2019 | 2018 | Change | Change Rate | | :--- | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $8,976 | $12,664 | $(3,688) | -29.12% | | Net Cash from Investing Activities | $(18,121) | $(22,964) | $4,843 | -21.10% | | Net Cash from Financing Activities | $9,037 | $9,564 | $(527) | -5.51% | | Net Decrease in Cash and Cash Equivalents | $(108) | $(736) | $628 | -85.33% | | Cash and Cash Equivalents at End of Period | $185 | $216 | $(31) | -14.35% | [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) Stockholders' Equity Key Data (As of June 30, Thousands of USD) | Metric | June 30, 2019 | December 31, 2018 | Change | Change Rate | | :--- | :--- | :--- | :--- | :--- | | Common Stock | $9,279 | $9,250 | $29 | 0.31% | | Additional Paid-in Capital | $101,298 | $100,639 | $659 | 0.65% | | Retained Earnings | $43,926 | $43,362 | $564 | 1.30% | | Total Stockholders' Equity | $154,503 | $153,251 | $1,252 | 0.82% | - As of June 30, 2019, authorized shares for Class A Non-Voting Common Stock and Class B Common Stock were **15,000,000** and **1,040,000** shares, respectively, with **8,397,314** Class A shares and **881,452** Class B shares issued and outstanding[11](index=11&type=chunk) [NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS](index=10&type=section&id=NOTES%20TO%20THE%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) [NOTE 1 – GENERAL](index=10&type=section&id=NOTE%201%20%E2%80%93%20GENERAL) This note outlines Artesian Resources Corporation's business, covering regulated water and wastewater services and non-regulated infrastructure and protection programs - The company's primary subsidiary, Artesian Water, is Delaware's oldest and largest public water utility, providing water services since **1905**[14](index=14&type=chunk) - Non-regulated subsidiary Artesian Utility offers water and wastewater infrastructure design, construction, and contract operations, managing Water Service Line Protection (WSLP), Sewer Service Line Protection (SSLP), and In-House Service Line Protection (ISLP) programs[20](index=20&type=chunk)[22](index=22&type=chunk) [NOTE 2 – BASIS OF PRESENTATION](index=11&type=section&id=NOTE%202%20%E2%80%93%20BASIS%20OF%20PRESENTATION) This note explains the preparation of unaudited condensed consolidated financial statements under SEC Form 10-Q rules and details the Q1 2019 adoption of ASC 842 for lease assets and liabilities - The company adopted the new lease standard (ASC 842) in the first quarter of **2019** using the modified retrospective approach, opting not to restate comparative periods[29](index=29&type=chunk)[30](index=30&type=chunk) - As of June 30, 2019, recognized 'right-of-use assets' and 'lease liabilities' on the balance sheet totaled approximately **$494,000**, with no material impact on consolidated operations or cash flows[31](index=31&type=chunk) [NOTE 3 – REVENUE RECOGNITION](index=12&type=section&id=NOTE%203%20%E2%80%93%20REVENUE%20RECOGNITION) This note details the company's revenue recognition policy under ASC 606, distinguishing regulated tariff and non-tariff revenues, and discloses revenue breakdown, contract assets/liabilities, and a **$3.8 million** TCJA-related customer refund - The company's primary operating revenues derive from tariff-based contract services approved by public service commissions in Delaware, Maryland, and Pennsylvania[34](index=34&type=chunk) - In the second quarter of **2019**, the company refunded approximately **$3.8 million** to customers due to reduced corporate income tax expenses from the **2017** Tax Cuts and Jobs Act (TCJA), an amount previously held in reserve and not recognized as revenue[39](index=39&type=chunk)[50](index=50&type=chunk) Disaggregated Revenue (Thousands of USD) | Revenue Type | June 30, 2019 (3 Months) | June 30, 2018 (3 Months) | June 30, 2019 (6 Months) | June 30, 2018 (6 Months) | | :--- | :--- | :--- | :--- | :--- | | **Tariff Revenue** | | | | | | Consumption Charges | $11,505 | $11,991 | $21,476 | $22,787 | | Fixed Charges | $6,349 | $6,374 | $12,997 | $12,704 | | Service Charges | $156 | $168 | $333 | $324 | | DSIC | $908 | $800 | $1,795 | $1,548 | | Refund Reserve – TCJA Impact | - | -$800 | - | -$1,548 | | **Total Tariff Revenue** | **$18,918** | **$18,533** | **$36,601** | **$35,815** | | **Non-Tariff Revenue** | | | | | | Service Line Protection Programs | $1,028 | $996 | $2,079 | $1,978 | | Contract Operations | $328 | $337 | $656 | $696 | | Inspection Fees | $64 | $47 | $86 | $56 | | **Total Non-Tariff Revenue** | **$1,420** | **$1,380** | **$2,821** | **$2,730** | | Other Operating Revenue (Outside ASC 606) | $314 | $325 | $615 | $599 | | **Total Operating Revenues** | **$20,652** | **$20,238** | **$40,037** | **$39,144** | Contract Assets and Contract Liabilities (Thousands of USD) | Metric | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Accounts Receivable – Tariff | $3,792 | $5,751 | | Accounts Receivable – Non-Tariff | $275 | $320 | | **Total Accounts Receivable** | **$4,067** | **$6,071** | | Contract Assets – Tariff | $2,689 | $2,367 | | Deferred Revenue – Tariff | $1,026 | $1,025 | | Deferred Revenue – Non-Tariff | $265 | $227 | | **Total Deferred Revenue** | **$1,291** | **$1,252** | | Refund Liability – Tariff | - | $3,298 | [NOTE 4 – LEASES](index=15&type=section&id=NOTE%204%20%E2%80%93%20LEASES) This note details the company's operating leases for land and office equipment, including the recognition of right-of-use assets and liabilities under new lease standards, along with lease liability maturities, weighted-average lease term, and discount rate - The company leases land and office equipment with lease terms ranging from **3 to 78 years**, some including automatic renewal options for up to **66 years**[52](index=52&type=chunk) Lease-Related Supplemental Balance Sheet Information (As of June 30, 2019, Thousands of USD) | Metric | Amount | | :--- | :--- | | Operating Lease Right-of-Use Assets | $494 | | Other Current Lease Liabilities | $19 | | Operating Lease Liabilities | $463 | | **Total Operating Lease Liabilities** | **$482** | | Weighted-Average Remaining Lease Term (Operating Leases) | 57 years | | Weighted-Average Discount Rate (Operating Leases) | 4.9% | [NOTE 5 – STOCK COMPENSATION PLANS](index=16&type=section&id=NOTE%205%20%E2%80%93%20STOCK%20COMPENSATION%20PLANS) This note describes the company's **2015** equity incentive plan, allowing for stock options, stock units, and restricted stock awards, and discloses stock compensation expense and restricted stock award activity for the six months ended June 30, 2019 - For the three and six months ended June 30, 2019, the company recorded restricted stock award compensation expense of approximately **$43,000** and **$90,000**, respectively[58](index=58&type=chunk) Summary of Class A Stock Option and Restricted Stock Award Activity (Six Months Ended June 30, 2019) | Metric | Number of Options | Weighted-Average Exercise Price | Number of Restricted Stock Awards | Weighted-Average Grant Date Fair Value | | :--- | :--- | :--- | :--- | :--- | | Unexercised/Unvested at January 1, 2019 | 168,750 | $20.11 | 5,000 | $38.51 | | Granted | - | - | 5,000 | $36.11 | | Exercised/Vested and Released | (13,500) | $16.94 | (5,000) | $38.51 | | Unexercised/Unvested at June 30, 2019 | 155,250 | $20.38 | 5,000 | $36.11 | - As of June 30, 2019, total unrecognized compensation cost related to unvested restricted stock awards granted under the **2015** plan was **$154,000**, to be recognized over a remaining vesting period of **0.85 years**[61](index=61&type=chunk) [NOTE 6 – REGULATORY ASSETS](index=17&type=section&id=NOTE%206%20%E2%80%93%20REGULATORY%20ASSETS) This note explains the company's accounting principles for recognizing regulatory assets under FASB ASC Topic 980, representing costs recoverable from customers through rates and amortized over future periods Net Regulatory Assets (Net of Amortization, Thousands of USD) | Regulatory Asset Type | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Postretirement Benefit Obligation | $74 | $74 | | Deferred Income Taxes | $393 | $401 | | Rate Case Study Costs | $28 | $46 | | Debt Issuance Costs | $5,641 | $5,815 | | Goodwill | $292 | $295 | | Deferred Acquisition and Franchise Costs | $603 | $623 | | **Total** | **$7,031** | **$7,254** | [NOTE 7 – REGULATORY LIABILITIES](index=18&type=section&id=NOTE%207%20%E2%80%93%20REGULATORY%20LIABILITIES) This note outlines the company's accounting principles for recognizing regulatory liabilities under FASB ASC Topic 980, representing excess cost recoveries or other items to be returned to customers via regulated rates, and details the TCJA's impact on deferred income tax regulatory liabilities - Under TCJA, the company reduced net deferred income tax liabilities by approximately **$24.3 million**, reclassifying **$22.8 million** as regulatory liabilities[72](index=72&type=chunk) - The Delaware Public Service Commission (DEPSC) approved amortizing **$22.2 million** of regulatory liabilities over **49.5 years**, commencing February 1, 2018[72](index=72&type=chunk) Regulatory Liabilities (Thousands of USD) | Regulatory Liability Type | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Postretirement Benefit Obligation | $52 | $52 | | Utility Plant Decommissioning Cost Obligation | $331 | $319 | | Deferred Income Taxes (TCJA Related) | $22,220 | $22,442 | | **Total** | **$22,603** | **$22,813** | [NOTE 8 – NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE](index=19&type=section&id=NOTE%208%20%E2%80%93%20NET%20INCOME%20PER%20COMMON%20SHARE%20AND%20EQUITY%20PER%20COMMON%20SHARE) This note provides the calculation methodology for basic and diluted net income per share, along with details on equity per common share, including the weighted-average common shares used in calculations Shares Used in Net Income Per Share Calculation (Thousands of Shares) | Metric | June 30, 2019 (3 Months) | June 30, 2018 (3 Months) | June 30, 2019 (6 Months) | June 30, 2018 (6 Months) | | :--- | :--- | :--- | :--- | :--- | | Weighted-Average Common Shares for Basic Calculation | 9,276 | 9,237 | 9,267 | 9,230 | | Dilutive Effect of Employee Stock Options and Awards | 48 | 56 | 52 | 57 | | Weighted-Average Common Shares for Diluted Calculation | 9,324 | 9,293 | 9,319 | 9,287 | - As of June 30, 2019, and December 31, 2018, equity per common share was **$16.67** and **$16.53**, respectively[77](index=77&type=chunk) [NOTE 9 – REGULATORY PROCEEDINGS](index=20&type=section&id=NOTE%209%20%E2%80%93%20REGULATORY%20PROCEEDINGS) This note outlines the state public service commission regulation of the company's water and wastewater utilities, including rate proceedings, DSIC applications, and the TCJA's impact on customer rates - The company is regulated by the Public Service Commissions of Delaware, Maryland, and Pennsylvania[79](index=79&type=chunk) - Delaware law permits water utilities to implement semi-annual rate increases via DSIC for specific distribution system improvements, capped at **7.50%** of applicable rates and a **5.0%** increase within any **12-month** period[82](index=82&type=chunk) Artesian Water's DSIC Rate Applications and Qualified Plant Improvements (Millions of USD) | Application Date | November 29, 2016 | May 31, 2018 | November 28, 2018 | May 29, 2019 | | :--- | :--- | :--- | :--- | :--- | | DEPSC Approval Date | December 20, 2016 | June 19, 2018 | December 20, 2018 | June 18, 2019 | | Effective Date | January 1, 2017 | July 1, 2018 | January 1, 2019 | July 1, 2019 | | Cumulative DSIC Rate | 4.71% | 3.63% | 5.55% | 7.41% | | Qualified Plant Improvements, Net – Cumulative | $16.6 | $24.7 | $30.4 | $43.1 | [NOTE 10 – INCOME TAXES](index=21&type=section&id=NOTE%2010%20%E2%80%93%20INCOME%20TAXES) This note details the significant impact of the **2017** TCJA on the company's income taxes, including federal corporate tax rate reduction and accounting for deferred income taxes and uncertain tax positions - The TCJA significantly impacted the company by reducing the federal corporate tax rate from **34%** to **21%**, effective January 1, 2018[84](index=84&type=chunk) - For the six months ended June 30, 2019, the company accrued approximately **$11,000** in penalties and interest related to uncertain tax positions[86](index=86&type=chunk) [NOTE 11 – FAIR VALUE OF FINANCIAL INSTRUMENTS](index=22&type=section&id=NOTE%2011%20%E2%80%93%20FAIR%20VALUE%20OF%20FINANCIAL%20INSTRUMENTS) This note provides estimation methods and assumptions for the fair value of the company's financial instruments, especially fixed-rate long-term debt, noting that contributions in aid of construction fair value cannot be reasonably estimated Book Value and Fair Value of Long-Term Debt (Thousands of USD) | Metric | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Book Value | $116,816 | $117,587 | | Estimated Fair Value | $125,673 | $116,818 | - The fair value of contributions in aid of construction cannot be reasonably estimated due to the difficulty in accurately estimating the timing and amount of expected refunds over future contract periods[91](index=91&type=chunk) [NOTE 12 – RELATED PARTY TRANSACTIONS](index=22&type=section&id=NOTE%2012%20%E2%80%93%20RELATED%20PARTY%20TRANSACTIONS) This note discloses legal service transactions between the company and Morris Nichols Arsht & Tunnell (MNAT), a law firm associated with director Michael Houghton, and outlines the Audit Committee's review and approval process for these related party transactions Legal Service Fees Paid to MNAT (Thousands of USD) | Period | June 30, 2019 (3 Months) | June 30, 2018 (3 Months) | June 30, 2019 (6 Months) | June 30, 2018 (6 Months) | | :--- | :--- | :--- | :--- | :--- | | Legal Service Fees | $97 | $56 | $123 | $116 | [NOTE 13 – BUSINESS COMBINATIONS](index=23&type=section&id=NOTE%2013%20%E2%80%93%20BUSINESS%20COMBINATIONS) This note discloses Artesian Water's acquisition of Slaughter Beach Water Company's utility assets on March 29, 2018, for **$450,000** in cash, a transaction approved by DEPSC - Artesian Water acquired Slaughter Beach Water Company's utility assets for **$450,000** in cash, serving **265** customers in Sussex County, Delaware[94](index=94&type=chunk) [NOTE 14 – IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS](index=23&type=section&id=NOTE%2014%20%E2%80%93%20IMPACT%20OF%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) This note states that no new accounting pronouncements applicable to the company were issued by FASB for the six months ended June 30, 2019 - No new accounting pronouncements applicable to the company were issued by FASB for the six months ended June 30, 2019[95](index=95&type=chunk) [ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=23&type=section&id=ITEM%202%20%E2%80%93%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's detailed discussion and analysis of the company's financial condition and operating results for the period ended June 30, 2019, covering business overview, divisional operations, strategic direction, inflation impact, comparative operating results, and liquidity and capital resources [CAUTION REGARDING FORWARD-LOOKING STATEMENTS](index=23&type=section&id=CAUTION%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) - Forward-looking statements in this report involve risks and uncertainties that could cause actual results to differ materially from expectations, including changes in weather, contractual obligations, government policies, rate application outcomes, and economic and market conditions[96](index=96&type=chunk) [RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2019](index=24&type=section&id=RESULTS%20OF%20OPERATIONS%20FOR%20THE%20PERIOD%20ENDED%20JUNE%2030%2C%202019) [OVERVIEW](index=24&type=section&id=OVERVIEW) The company's profitability primarily stems from water sales, accounting for **87.7%** of total operating revenues in the first half of **2019**, while also pursuing growth through contract operations and service line protection programs to develop weather-independent revenue streams - Water sales constituted **87.7%** of total operating revenues in the first half of **2019**, though subject to seasonal fluctuations[97](index=97&type=chunk) - The company seeks to increase revenue by offering wastewater services, contract water and wastewater operations, wastewater management services, and design, build, and engineering services[98](index=98&type=chunk) [Water Division](index=24&type=section&id=Water%20Division) The Water Division serves diverse customers across Delaware, Maryland, and Pennsylvania, showing growth in metered water customers in Delaware and Maryland and stable water distribution volumes as of June 30, 2019 Water Division Customers and Water Distribution Volume (As of June 30, 2019) | Metric | June 30, 2019 | June 30, 2018 | Change | Change Rate | | :--- | :--- | :--- | :--- | :--- | | Delaware Metered Water Customers | 86,500 | 85,200 | 1,300 | 1.53% | | Maryland Metered Water Customers | 2,450 | 2,350 | 100 | 4.26% | | Delaware Water Distribution Volume (6 Months) | 3.9 Billion Gallons | - | - | - | | Maryland Water Distribution Volume (6 Months) | 57.4 Million Gallons | - | - | - | [Wastewater Division](index=24&type=section&id=Wastewater%20Division) The Wastewater Division provides regulated wastewater services in Delaware, achieving continuous customer growth, with a significant increase in Delaware wastewater customers and a service agreement signed with Allen Harim Foods, LLC as of June 30, 2019 - As of June 30, 2019, total Delaware wastewater customers were approximately **2,300**, an increase of about **300** customers or **16.3%** from June 30, 2018[100](index=100&type=chunk) - Artesian Wastewater entered into a wastewater service agreement with Allen Harim Foods, LLC, with services expected to commence in **2019**[100](index=100&type=chunk) [Non-Regulated Division](index=24&type=section&id=Non-Regulated%20Division) The Non-Regulated Division, through Artesian Utility, offers contract water and wastewater operations and three service line protection programs (WSLP, SSLP, ISLP), which consistently grow customer numbers and provide weather-independent revenue streams Service Line Protection Program Customer Participation (As of June 30, 2019) | Program Type | Participating Customer Percentage | | :--- | :--- | | WSLP Program | 23.4% (approx. 19,400 customers) | | SSLP Program | 19.0% (approx. 15,700 customers) | | ISLP Program | 8.1% (approx. 6,700 customers) | - Approximately **1,900** non-utility customers participate in the company's protection programs[101](index=101&type=chunk) [Strategic Direction](index=24&type=section&id=Strategic%20Direction) The company's strategy aims to increase customer growth, revenue, profitability, and dividends by expanding water, wastewater, and SLP services, focusing on new water sources, infrastructure development, water conservation, and business expansion through acquisitions and strategic partnerships - The company's strategy is to expand water, wastewater, and SLP program services to increase customer growth, revenue, profitability, and dividends[102](index=102&type=chunk) - Plans include expanding regulated water service areas in Delaware and Maryland and growing the business through designing, building, operating, managing, and acquiring additional water systems[103](index=103&type=chunk) - The capital investment plan for the next three years includes water treatment plant improvements and expansions in Delaware and Maryland, along with wastewater treatment plant improvements and expansions in Delaware[108](index=108&type=chunk) [Inflation](index=26&type=section&id=Inflation) The company is impacted by inflation, primarily through continuously increasing costs required for maintaining, improving, and expanding service capabilities, resulting in significantly higher facility costs than in the past - Inflation has led to significantly higher facility costs compared to investments made **20 to 40 years** ago, which must be recovered from future cash flows[111](index=111&type=chunk) [Analysis of the Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018](index=26&type=section&id=Analysis%20of%20the%20Three%20Months%20Ended%20June%2030%2C%202019%20Compared%20to%20the%20Three%20Months%20Ended%20June%2030%2C%202018%2E) For the three months ended June 30, 2019, total operating revenues grew by **2.0%**, driven by increased water sales and DSIC revenue, though net income attributable to common stock slightly decreased due to higher operating expenses and interest Operating Results Comparison (Three Months Ended June 30, Thousands of USD) | Metric | 2019 | 2018 | Change | Change Rate | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | $20,652 | $20,238 | $414 | 2.0% | | Water Sales Revenue | $18,192 | $17,869 | $323 | 1.8% | | DSIC Revenue Increase | $100 | - | - | - | | Operating Expenses (Excluding Depreciation and Income Taxes) | $11,558 | $11,180 | $378 | 3.4% | | Net Income Attributable to Common Stock | $3,778 | $3,926 | $(148) | -3.8% | | Interest Expense | $1,750 | $1,501 | $249 | 16.6% | - Operating expenses (excluding depreciation and income taxes) as a percentage of total revenues increased from **53.8%** in **2018** to **54.6%** in **2019**[117](index=117&type=chunk) [Analysis of the Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018](index=27&type=section&id=Analysis%20of%20the%20Six%20Months%20Ended%20June%2030%2C%202019%20Compared%20to%20the%20Six%20Months%20Ended%20June%2030%2C%202018%2E) For the six months ended June 30, 2019, total operating revenues increased by **2.3%**, driven by DSIC, consumption revenue, and customer growth, with net income attributable to common stock only slightly decreasing by **0.49%** despite higher operating and interest expenses Operating Results Comparison (Six Months Ended June 30, Thousands of USD) | Metric | 2019 | 2018 | Change | Change Rate | | :--- | :--- | :--- | :--- | :--- | | Operating Revenues | $40,037 | $39,144 | $893 | 2.3% | | Water Sales Revenue | $35,125 | $34,514 | $611 | 1.8% | | DSIC Revenue Increase | $200 | - | - | - | | Operating Expenses (Excluding Depreciation and Income Taxes) | $24,491 | $23,823 | $668 | 2.8% | | Net Income Attributable to Common Stock | $7,368 | $7,404 | $(36) | -0.5% | | Interest Expense | $3,470 | $3,000 | $470 | 15.7% | - Operating expenses (excluding depreciation and income taxes) as a percentage of total revenues increased from **56.0%** in **2018** to **56.2%** in **2019**[126](index=126&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=28&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) [Overview](index=28&type=section&id=Overview) The company's primary liquidity sources include cash from operations, credit line borrowings, net developer contributions and advances, and net proceeds from common stock issuance, with cash flow influenced by the timeliness and adequacy of rate increases and water consumption changes - For the six months ended June 30, 2019, key liquidity sources included **$9.0 million** from operating activities, **$9.8 million** in credit line borrowings, **$3.3 million** in net developer contributions and advances, and **$0.6 million** in net common stock issuance proceeds[130](index=130&type=chunk) [Investment in Plant and Systems](index=29&type=section&id=Investment%20in%20Plant%20and%20Systems) The company continuously invests in utility plant and systems to provide high-quality, reliable service, with **$18.2 million** in capital expenditures during the first half of **2019** primarily for transmission and distribution upgrades, treatment facility improvements, equipment, and wastewater projects Capital Expenditures (Six Months Ended June 30, Millions of USD) | Category | 2019 | 2018 | Change | Change Rate | | :--- | :--- | :--- | :--- | :--- | | Total Capital Expenditures | $18.2 | $23.0 | $(4.8) | -20.9% | | Transmission and Distribution System Upgrades | $4.0 | - | - | - | | Treatment Facility Improvements | $6.3 | - | - | - | | Equipment Purchases, etc. | $1.2 | - | - | - | | Developer-Funded Water Main and Fire Hydrant Installations | $1.9 | $2.0 | $(0.1) | -5.0% | | Wastewater Projects | $3.1 | - | - | - | [Lines of Credit](index=29&type=section&id=Lines%20of%20Credit) The company maintains two credit lines totaling **$60 million** for operational needs, with **$32.3 million** available from Citizens Bank and **$2.0 million** from CoBank as of June 30, 2019 Credit Line Commitments (As of June 30, 2019, Thousands of USD) | Bank | Committed Amount | Available Funds | Interest Rate | Maturity Date | | :--- | :--- | :--- | :--- | :--- | | Citizens Bank | $40,000 | $32,300 | LIBOR + 1.00% | May 23, 2020 | | CoBank, ACB | $20,000 | $2,000 | LIBOR + 1.50% | October 20, 2019 | [Long-Term Debt](index=29&type=section&id=Long-Term%20Debt) The company's long-term debt agreements include customary affirmative and negative covenants, all of which were complied with as of June 30, 2019, and the note details future contractual cash obligations including first mortgage bonds, state revolving fund loans, and promissory notes - As of June 30, 2019, the company complied with all financial covenants and ratios in its long-term debt agreements[136](index=136&type=chunk) Contractual Obligations (Thousands of USD) | Obligation Type | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | First Mortgage Bonds (Principal and Interest) | $5,356 | $10,620 | $10,517 | $138,162 | $164,655 | | State Revolving Fund Loans (Principal and Interest) | $1,002 | $1,841 | $1,296 | $3,341 | $7,480 | | Promissory Notes (Principal and Interest) | $1,197 | $1,921 | $1,920 | $13,979 | $19,017 | | Operating Leases | $42 | $80 | $46 | $1,353 | $1,521 | | Operating Agreements | $71 | $98 | $76 | $920 | $1,165 | | Unconditional Purchase Obligations | $3,892 | $5,866 | $95 | - | $9,853 | | Storage Tank Painting Contractual Obligations | $213 | - | - | - | $213 | | **Total Contractual Cash Obligations** | **$11,773** | **$20,426** | **$13,950** | **$157,755** | **$203,904** | [Off-Balance Sheet Arrangements](index=31&type=section&id=Off-Balance%20Sheet%20Arrangements) The company has not entered into any off-balance sheet arrangements, including those related to structured finance, special purpose entities, or variable interest entities - The company has no off-balance sheet arrangements[141](index=141&type=chunk) [Critical Accounting Assumptions, Estimates and Policies; Recent Accounting Pronouncements](index=31&type=section&id=Critical%20Accounting%20Assumptions%2C%20Estimates%20and%20Policies%3B%20Recent%20Accounting%20Pronouncements) This section reaffirms that the company's financial statements are based on GAAP and notes no changes in critical accounting policies or adoption of new policies with significant impact on financial condition, liquidity, or operating results as of the first half of 2019 - The company's critical accounting policies remain unchanged[143](index=143&type=chunk) - In the first half of **2019**, the company adopted no accounting policies with a material impact on financial condition, liquidity, or operating results[144](index=144&type=chunk) [ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=31&type=section&id=ITEM%203%20-%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company faces interest rate and commodity price risks, managing interest rate exposure with fixed-rate long-term debt and mitigating commodity price increases through multi-year fixed-price supply contracts and rate adjustments to customers - The company faces interest rate fluctuation risk primarily from fixed-rate long-term debt (maturing **2028-2038**, rates **4.24%-5.96%**) and a **$60 million** variable-rate credit line, with approximately **$25.7 million** borrowed as of June 30, 2019[145](index=145&type=chunk) - The company mitigates risks from rising chemical, electricity, and other commodity prices through multi-year fixed-price supply contracts and by passing costs to customers via rate increases[145](index=145&type=chunk) [ITEM 4 – CONTROLS AND PROCEDURES](index=32&type=section&id=ITEM%204%20%E2%80%93%20CONTROLS%20AND%20PROCEDURES) This section discloses management's assessment of the company's disclosure controls and procedures and reports on changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=32&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - As of the end of the reporting period, the company's CEO and CFO assessed and concluded that disclosure controls and procedures are reasonably designed and effective, ensuring timely recording, processing, summarizing, and reporting of information[147](index=147&type=chunk) [Change in Internal Control over Financial Reporting](index=32&type=section&id=Change%20in%20Internal%20Control%20over%20Financial%20Reporting) - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that materially affected or are reasonably likely to materially affect the company[148](index=148&type=chunk) Part II – OTHER INFORMATION [ITEM 1 – LEGAL PROCEEDINGS](index=32&type=section&id=ITEM%201%20%E2%80%93%20LEGAL%20PROCEEDINGS) The company is involved in legal proceedings in the ordinary course of business, but management believes their ultimate resolution will not materially impact the company's business, financial condition, or operating results - The company does not believe that legal proceedings arising in the ordinary course of business will materially impact its business, financial condition, or operating results[148](index=148&type=chunk) [ITEM 1A – RISK FACTORS](index=32&type=section&id=ITEM%201A%20%E2%80%93%20RISK%20FACTORS) This section refers to risk factors disclosed in the company's annual report and states that no material changes to these factors have occurred since the annual report's filing - No material changes to risk factors have occurred since the filing of the **2018** annual report[149](index=149&type=chunk) [ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=32&type=section&id=ITEM%202%20%E2%80%93%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section is not applicable [ITEM 3 – DEFAULTS UPON SENIOR SECURITIES](index=32&type=section&id=ITEM%203%20%E2%80%93%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) This section is not applicable [ITEM 4 – MINE SAFETY DISCLOSURES](index=32&type=section&id=ITEM%204%20%E2%80%93%20MINE%20SAFETY%20DISCLOSURES) This section is not applicable [ITEM 5 – OTHER INFORMATION](index=32&type=section&id=ITEM%205%20%E2%80%93%20OTHER%20INFORMATION) This section is not applicable [ITEM 6 – EXHIBITS](index=33&type=section&id=ITEM%206%20%E2%80%93%20EXHIBITS) This section lists all exhibits filed or furnished with this report, including certifications from the Chief Executive Officer and Chief Financial Officer, and financial statements in XBRL format

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 000-18516 ARTESIAN RESOURCES CORPORATION -------------------------------------------------------------- (Exact na ...