ARTESIAN RESOURCES CORP (Form: 10-Q, Received: 11/08/2019 11:16:53)

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

□ 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 name of registrant as specified in its charter)

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

664 Churchmans Road, Newark, Delaware 19702

------------------------------------------------------------------

Address of principal executive offices

(302) 453 – 6900

-----------------------------------------------------------

Registrant's telephone number, including area code

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

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

☑

Yes

□

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

☑

Yes

□

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

Large Accelerated Filer □

Accelerated Filer ☑

Non-Accelerated Filer □

Smaller Reporting Company □

Emerging Growth Company ☐

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

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

□

Yes

☑

As of November 5, 2019, 8,403,873 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

ARTESIAN RESOURCES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(In thousands)

ASSETS	September 30, 2019		December 31, 2018
Utility plant, at original cost (less accumulated depreciation 2019 - $134,310; 2018 - $126,114)	$	518,636	$	498,678
Current assets
Cash and cash equivalents		458		293
Accounts receivable (less allowance for doubtful accounts - 2019 - $254; 2018 - $232)		6,647		8,159
Income tax receivable		182		772
Unbilled operating revenues		1,424		1,441
Materials and supplies		1,275		1,459
Prepaid property taxes		2,672		1,870
Prepaid expenses and other		2,197		2,124
Total current assets		14,855		16,118
Other assets
Non-utility property (less accumulated depreciation - 2019 - $780; 2018 - $734)		3,819		3,849
Other deferred assets		4,205		3,931
Operating lease right of use assets		489		–
Total other assets		8,513		7,780
Regulatory assets, net		6,933		7,254
Total Assets	$	548,937	$	529,830

LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock	$	9,284	$	9,250
Preferred stock		–		–
Additional paid-in capital		101,552		100,639
Retained earnings		46,067		43,362
Total stockholders' equity		156,903		153,251
Long-term debt, net of current portion		114,558		115,862
		271,461		269,113
Current liabilities
Lines of credit		31,693		15,942
Current portion of long-term debt		1,671		1,725
Dividends payable		2,317		–
Accounts payable		4,950		8,187
Accrued expenses		2,561		3,902
Overdraft payable		51		117
Accrued interest		1,229		784
Income taxes payable		732		–
Customer deposits		1,074		1,044
Revenue reserve for refund		–		3,298
Other		3,969		2,732
Total current liabilities		50,247		37,731

Commitments and contingencies

Deferred credits and other liabilities
Net advances for construction		5,814		6,596
Operating lease liabilities		459		–
Regulatory liabilities		22,452		22,813
Deferred investment tax credits		495		508
Deferred income taxes		53,224		55,054
Total deferred credits and other liabilities		82,444		84,971

Net contributions in aid of construction		144,785		138,015
Total Liabilities and Stockholders' Equity	$	548,937	$	529,830

See notes to the condensed consolidated financial statements.

Table of Contents

ARTESIAN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

(In thousands, except per share amounts)

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,

	2019			2018		2019		2018
Operating revenues
Water sales	$	20,102		$	19,469	$	55,227	$	53,983
Other utility operating revenue		1,245			1,189		3,515		3,273
Non-utility operating revenue		1,202			1,266		3,844		3,812
Total Operating Revenues		22,549			21,924		62,586		61,068

Operating expenses
Utility operating expenses		10,495			10,333		28,865		28,454
Non-utility operating expenses		838			735		2,385		2,069
Depreciation and amortization		2,679			2,513		8,117		7,623
State and federal income taxes		1,498			1,834		4,002		4,737
Property and other taxes		1,309			1,265		3,884		3,731
Total Operating Expenses		16,819			16,680		47,253		46,614

Operating income		5,730			5,244		15,333		14,454

Other income, net
Allowance for funds used during construction (AFUDC) construction (AFUDC)		566			146		1,058		413
Miscellaneous (expense) income		(73	)		87		670		1,014

Income before interest charges		6,223			5,477		17,061		15,881

Interest charges		1,765			1,548		5,235		4,548

Net income applicable to common stock	$	4,458		$	3,929	$	11,826	$	11,333

Income per common share:
Basic	$	0.48		$	0.43	$	1.28	$	1.23
Diluted	$	0.48		$	0.42	$	1.27	$	1.22

Weighted average common shares outstanding:
Basic		9,283			9,244		9,272		9,235
Diluted		9,329			9,299		9,322		9,290

Cash dividends per share of common stock	$	0.2459		$	0.2387	$	0.7341	$	0.7126

See notes to the condensed consolidated financial statements.

ARTESIAN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(In thousands)

	For the Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	11,826		$	11,333
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,117			7,623
Deferred income taxes, net		(1,843	)		1,314
Stock compensation		136			144
AFUDC, equity portion		(649	)		(287	)

Changes in assets and liabilities:
Accounts receivable, net of allowance for doubtful accounts		1,512			207
Income tax receivable		590			180
Unbilled operating revenues		17			101
Materials and supplies		184			230
Income taxes payable		732			–
Prepaid property taxes		(802	)		(692	)
Prepaid expenses and other		(73	)		(124	)
Other deferred assets		(300	)		(199	)
Regulatory assets		272			168
Regulatory liabilities		(361	)		726
Accounts payable		(3,237	)		(3,680	)
Accrued expenses		(1,341	)		599
Accrued interest		445			(635	)
Revenue reserved for refund		(3,298	)		–
Customer deposits and other, net		1,237			4,060
NET CASH PROVIDED BY OPERATING ACTIVITIES		13,164			21,068

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (net of AFUDC, equity portion)		(27,344	)		(34,962	)
Proceeds from sale of assets		43			44
NET CASH USED IN INVESTING ACTIVITIES		(27,301	)		(34,918	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under lines of credit agreements		15,751			5,748
(Decrease) increase in overdraft payable		(66	)		191
Net advances and contributions in aid of construction		5,968			6,634
Net proceeds from issuance of common stock		811			783
Issuance of long-term debt		–			7,500
Dividends paid		(6,804	)		(6,579	)
Debt issuance costs		–			(75	)
Principal repayments of long-term debt		(1,358	)		(1,071	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		14,302			13,131

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		165			(719	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		293			952

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	458		$	233

Non-cash Investing and Financing Activity:
Utility plant received as construction advances and contributions	$	1,819		$	623
Dividends declared but not paid		2,317			2,206

Supplemental Disclosures of Cash Flow Information:
Interest paid	$	4,790		$	5,183
Income taxes paid	$	4,850		$	2,417

See notes to the condensed consolidated financial statements.

ARTESIAN RESOURCES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Unaudited

(In thousands)

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

Balance as of December 31, 2017		8,333		882	$	8,333	$	882	$	99,526	$	37,903		$	146,644
Net income		–		–		–		–		–		3,478			3,478
Cash dividends declared
Common stock		–		–		–		–		–		(2,168	)		(2,168	)
Issuance of common stock
Dividend reinvestment plan		3		–		3		–		88		–			91
Employee stock options and awards(4)		–		–		–		–		47		–			47
Employee Retirement Plan(3)		12		–		12		–		290		–			302
Balance as of March 31, 2018		8,348		882		8,348		882		99,951		39,213			148,394
Net income		–		–		–		–		–		3,926			3,926
Cash dividends declared
Common stock		–		–		–		–		–		(4,411	)		(4,411	)
Issuance of common stock
Dividend reinvestment plan		2		–		2		–		91		–			93
Employee stock options and awards(4)		6		–		6		–		67		–			73
Employee Retirement Plan(3)		3		–		3		–		99		–			102
Balance as of June 30, 2018		8,359		882		8,359		882		100,208		38,728			148,177
Net income		–		–		–		–		–		3,929			3,929
Cash dividends declared
Common stock		–		–		–		–		–		(2,240	)		(2,240	)
Issuance of common stock
Dividend reinvestment plan		2		–		2		–		87		–			89
Employee stock options and awards(4)		–		–		–		–		48		–			48
Employee Retirement Plan(3)		3		–		3		–		79		–			82
Balance as of September 30, 2018		8,364		882	$	8,364	$	882	$	100,422	$	40,417		$	150,085

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

Balance as of December 31, 2018		8,368		882	$	8,368	$	882	$	100,639	$	43,362		$	153,251
Net income		–		–		–		–		–		3,590			3,590
Cash dividends declared
Common stock		–		–		–		–		–		(2,241	)		(2,241	)
Issuance of common stock
Dividend reinvestment plan		2		–		2		–		85		–			87
Employee stock options and awards(4)		14		–		14		–		263		–			277
Employee Retirement Plan(3)		2		–		2		–		76		–			78
Balance as of March 31, 2019		8,386		882		8,386		882		101,063		44,711			155,042
Net income		–		–		–		–		–		3,778			3,778
Cash dividends declared
Common stock		–		–		–		–		–		(4,563	)		(4,563	)
Issuance of common stock
Dividend reinvestment plan		3		–		3		–		87		–			90
Employee stock options and awards(4)		5		–		5		–		38		–			43
Employee Retirement Plan(3)		3		–		3		–		110		–			113
Balance as of June 30, 2019		8,397		882		8,397		882		101,298		43,926			154,503
Net income		–		–		–		–		–		4,458			4,458
Cash dividends declared
Common stock		–		–		–		–		–		(2,317	)		(2,317	)
Issuance of common stock
Dividend reinvestment plan		3		–		3		–		115		–			118
Employee stock options and awards(4)		–		–		–		–		45		–			45
Employee Retirement Plan(3)		2		–		2		–		94		–			96
Balance as of September 30, 2019		8,402		882	$	8,402	$	882	$	101,552	$	46,067		$	156,903

(1)	At September 30, 2019 and September 30, 2018, Class A Common Stock had 15,000,000 shares authorized. For the same periods, shares issued, inclusive of treasury shares, were 8,432,220 and 8,393,208, respectively.

(2)	At September 30, 2019 and September 30, 2018, Class B Common Stock had 1,040,000 shares authorized and 881,452 shares issued.

(3)	Artesian Resources Corporation registered 500,000 shares of Class A Common Stock available for purchase through the Artesian Retirement Plan and the Artesian Supplemental Retirement Plan.

(4)

Under the Equity Compensation Plan, effective December 9, 2015, Artesian Resources Corporation authorized up to 331,500 shares of Class A Common Stock for issuance of grants in forms of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the 2015 Plan. Includes stock compensation expense for September 30, 2019 and September 30, 2018, see Note 5-Stock Compensation Plans.

See notes to the condensed consolidated financial statements

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – GENERAL

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

DELAWARE REGULATED SUBSIDIARIES

Artesian Water Company, Inc., or Artesian Water, our principal subsidiary, is the oldest and largest public water utility in the State of Delaware and has been providing water service within the state since 1905. Artesian Water distributes and sells water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware. In addition, Artesian Water provides services to other water utilities, including operations and billing functions, and has contract operation agreements with private and municipal water providers. We also provide water for public and private fire protection to customers in our service territories.

Artesian Wastewater Management, Inc., or Artesian Wastewater, is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Delaware as a regulated public wastewater service company. Artesian Wastewater owns and operates four wastewater treatment facilities, which are permitted to treat approximately 500,000 gallons per day. Artesian Wastewater and Sussex County, a political subdivision of Delaware, provide reciprocal services to address the periodic need of each for additional wastewater treatment and disposal capacity in certain service areas within Sussex County. There are numerous locations in Sussex County where Artesian Wastewater’s and Sussex County’s facilities are capable of being connected or integrated to allow for the movement and disposal of wastewater generated by one or the other’s system in a manner that most efficiently and cost effectively manages wastewater transmission, treatment and disposal.

MARYLAND REGULATED SUBSIDIARIES

Artesian Water Maryland, Inc., or Artesian Water Maryland, began operations in August 2007. Artesian Water Maryland distributes and sells water to residential, commercial, industrial and municipal customers in Cecil County, Maryland. Artesian Water Maryland owns and operates 8 public water systems including one in Port Deposit that has the ability to supply up to 1 million gallons per day, or mgd, of water through an intake in the Susquehanna River.

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

PENNSYLVANIA REGULATED SUBSIDIARY

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

OTHER SUBSIDIARIES

Our four other subsidiaries, none of which are regulated, are Artesian Utility Development, Inc., or Artesian Utility, Artesian Development Corporation, or Artesian Development, Artesian Storm Water Services, Inc., or Artesian Storm Water, and Artesian Consulting Engineers, Inc., or Artesian Consulting Engineers.

Artesian Utility was formed in 1996 and designs and builds water and wastewater infrastructure and provides contract water and wastewater operation services on the Delmarva Peninsula to private, municipal and governmental institutions. Artesian Utility also evaluates land parcels, provides recommendations to developers on the size of water or wastewater facilities and the type of technology that should be used for treatment at such facilities, and operates water and wastewater facilities in Delaware for municipal and governmental organizations. Artesian Utility also contracts with developers for design and construction of wastewater facilities within the Delmarva Peninsula, using a number of different technologies for treatment of wastewater at each facility. In addition, as further discussed below, Artesian Utility operates the Water Service Line Protection Plan, or WSLP Plan, the Sewer Service Line Protection Plan, or SSLP Plan, and the Internal Service Line Protection Plan, or ISLP Plan.

Table of Contents

Artesian Utility currently operates wastewater treatment facilities for the town of Middletown, in southern New Castle County, Delaware, or Middletown, under a 20-year contract that expires in July 2039. The facilities include two wastewater treatment stations with capacities of up to approximately 2.5 mgd and 250,000 gallons per day, respectively. We also operate a wastewater disposal facility in Middletown in order to support the 2.5 mgd wastewater facility. One of the wastewater treatment facilities in Middletown now provides reclaimed wastewater for use in spray irrigation on public and agricultural lands in the area.

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

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

Artesian Storm Water, incorporated on January 17, 2017, was formed to provide design, installation, maintenance and repair services related to existing or proposed storm water management systems in Delaware and the surrounding areas. The ability to offer storm water services will complement the primary water and wastewater services that we provide.

Artesian Consulting Engineers ceased offering services in 2011. In September 2019, the Board of Directors of Artesian Consulting Engineers unanimously approved its dissolution. Also, in September 2019, the Board of Directors of Artesian Resources Corporation, the sole shareholder of Artesian Consulting Engineers, unanimously approved the dissolution of Artesian Consulting Engineers. The Company filed a Certificate of Dissolution with the Delaware Secretary of State in October 2019.

NOTE 2 – BASIS OF PRESENTATION

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, for Form 10-Q. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Accordingly, these condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes in the Company's annual report on Form 10-K for fiscal year 2018 as filed with the SEC on March 15, 2019.

The condensed consolidated financial statements include the accounts of Artesian Resources Corporation and its wholly owned subsidiaries, including its principal operating company, Artesian Water. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments (unless otherwise noted) necessary to present fairly the Company's balance sheet position as of September 30, 2019, the results of its operations for the three and nine months periods ended September 30, 2019 and September 30, 2018, its cash flows for the nine month periods ended September 30, 2019 and September 30, 2018 and the changes in stockholders’ equity for the three and nine months period ended September 30, 2019 and 2018. The December 31, 2018 Condensed Consolidated Balance Sheet was derived from the Company’s December 31, 2018 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.

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

In the first quarter of 2019, the Company adopted the new standard on leases that was issued by the Financial Accounting Standards Board, or FASB. The FASB issued new guidance on leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard establishes a right-of-use, or ROU, model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

Table of Contents

The Company adopted this new standard using the modified retrospective method and did not apply the standard to the comparative periods presented in this Form 10-Q. The Company elected the practical expedient not to evaluate land easements that existed prior to implementation and were not previously accounted for as leases. The Company also elected not to recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less.

The Company has agreements for land easements and office equipment under operating leases. The Company evaluated each lease agreement to determine whether the lease was to be accounted for as an operating or financing lease. It was determined that all leases subject to this new standard are operating leases and are recognized on a straight line basis. The amount of ROU assets and related liabilities recognized on the Condensed Consolidated Balance Sheet as of September 30, 2019 are approximately $489,000 and reported as “Operating Lease Right of Use Assets” and “Operating Lease Liabilities.” The adoption of this new standard impacted our consolidated balance sheets, but did not have a material effect on our consolidated results of operations or cash flows.

Management makes certain estimates and assumptions regarding each lease agreement, renewal and amendment, including, but not limited to, discount rates and probable term, which can impact the escalations in payment that are taken into consideration when calculating the straight line basis. The amount of rent expense and income reported could vary if different estimates and assumptions are used. Management also makes certain estimates and assumptions regarding the fair value of the leased property at lease commencement and the separation of lease and nonlease components.

NOTE 3 – REVENUE RECOGNITION

Background

On January 1, 2018 the Company adopted Accounting Standards Codification 606, or ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach. The Company identified its sources of revenue streams that fall within the scope of this guidance and applied the five-step model to all qualifying revenue streams to determine when to recognize revenue. The Company concluded there is not a material change to how revenue was recognized before and after the adoption of ASC 606; therefore, no cumulative retained earnings adjustment was required.

Artesian’s operating revenues are primarily attributable to contract services based upon tariff rates approved by the Delaware Public Service Commission, or DEPSC, the Maryland Public Service Commission, or MDPSC and the Pennsylvania Public Utility Commission, or PAPUC. Tariff contract service revenues consist of water consumption, industrial wastewater services, fixed fees for water and wastewater services including customer and fire protection fees, service charges and Distribution System Improvement Charges, or DSIC, billed to customers at rates outlined in our tariffs that represent stand-alone selling prices. Our non-tariff contract revenues consist of Service Line Protection Plan, or SLP Plan, fees, water and wastewater contract operations and wastewater inspection fees. Other operating revenue primarily consists of developer guarantee contributions for wastewater and rental income for antenna contracts.

Tariff Contract Revenues

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

Artesian generates revenue from industrial wastewater services provided to a customer in Sussex County, Delaware. We recognize industrial wastewater service revenue at a contract rate on a monthly basis for the volume of wastewater transferred to Artesian’s wastewater facilities based upon meter readings for actual gallons of wastewater transferred. These services are invoiced at the end of every month based on the actual meter readings for that month, and therefore there is no contract asset or liability associated with this revenue.

Table of Contents

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

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

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

The DEPSC required Delaware utilities to determine the impact that the Tax Cuts and Jobs Act of 2017, or TCJA, had on its customers and potential rate relief due to customers. The reduction in corporate income tax expense resulting from the TCJA was passed through to customers in the form of reduced tariff rates as approved by the DEPSC on January 31, 2019. Approximately $3.8 million was refunded to customers during the second quarter of 2019. This amount was previously held in reserve (refund liability) and was not reflected in income.

Accounts receivable related to tariff contract revenues are typically due within 25 days of invoicing. An allowance for doubtful accounts is calculated as a percentage of total associated revenues. We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related allowance for doubtful accounts and associated bad debt expense has not been significant.

Non-tariff Contract Revenues

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

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

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

Table of Contents

Sales Tax

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

Disaggregated Revenues

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

As a result of the reduced tariff rates approved by the DEPSC on January 31, 2019, the tariff revenues presented below for the three months ended September 30, 2018 and the nine months ended September 30, 2018 were reallocated to the appropriate line items for comparison purposes.

(in thousands)	Three months ended September 30, 2019		Three months ended September 30, 2018			Nine months ended September 30, 2019		Nine months ended September 30, 2018
Tariff Revenue
Consumption charges	$	12,844	$	13,672		$	34,320	$	36,459
Fixed fees		6,529		6,305			19,525		19,009
Service charges		133		183			467		508
DSIC		1,334		655			3,129		2,203
Industrial wastewater services		10		–			14		–
Revenue reserved for refund – TCJA impact		–		(655	)		–		(2,203	)
Total Tariff Revenue	$	20,850	$	20,160		$	57,455	$	55,976

Non-Tariff Revenue
Service line protection plans	$	1,039	$	982		$	3,117	$	2,960
Contract operations		210		329			866		1,025
Inspection fees		69		115			155		171
Total Non-Tariff Revenue	$	1,318	$	1,426		$	4,138	$	4,156

Other Operating Revenue not in scope of ASC 606	$	381	$	338		$	993	$	936

Total Operating Revenue	$	22,549	$	21,924		$	62,586	$	61,068

Contract Assets and Contract Liabilities

Our contract assets and liabilities consist of the following:

(in thousands)	September 30, 2019		December 31, 2018

Contract Assets – Tariff	$	2,367	$	2,367

Deferred Revenue
Deferred Revenue – Tariff	$	1,058	$	1,025
Deferred Revenue – Non-Tariff		239		227
Total Deferred Revenue	$	1,297	$	1,252

Refund Liability - Tariff	$	–	$	3,298

For the nine months ended September 30, 2019, the Company recognized revenue of $1.0 million from amounts that were included in Deferred Revenue – Tariff at the beginning of the year and revenue of $207,000 from amounts that were included in Deferred Revenue – Non- Tariff at the beginning of the year.

The increases (decreases) of Accounts Receivable, Contract Assets and Deferred Revenue were primarily due to normal timing differences between our performance and customer payments. The Refund Liability as of December 31, 2018 is based on the calculated amount approved by the DEPSC on January 31, 2019 related to the TCJA. This amount was refunded to customers during the second quarter of 2019.

Table of Contents

Remaining Performance Obligations

As of September 30, 2019 and December 31, 2018, Deferred Revenue – Tariff is recorded net of contract assets within Unbilled operating revenues and represents our remaining performance obligations for our fixed fee water and wastewater services, all of which are expected to be satisfied and associated revenue recognized in the next three months.

As of September 30, 2019 and December 31, 2018, Deferred Revenue – Non-Tariff is recorded within Other current liabilities and represents our remaining performance obligations for our SLP Plan services and wastewater inspections, which are expected to be satisfied and associated revenue recognized within the next three months and one year for the SLP Plan revenue and inspection fee revenue, respectively.

NOTE 4 – LEASES

The Company leases land and office equipment under operating leases from non-related parties. Our leases have remaining lease terms of 3 years to 78 years, some of which include options to automatically extend the leases for up to 66 years. Payments made under operating leases are recognized in the condensed consolidated statement of operations on a straight-line basis over the period of the lease. The annual lease payments for the land operating leases increase each year either by the most recent increase in the Consumer Price Index or by 3%, as applicable based on the lease agreements. Periodically, the annual lease payment for one operating land lease is determined based on the fair market value of the applicable parcel of land. None of the operating leases contain contingent rent provisions. The commencement date of all the operating leases is the earlier of the date we become legally obligated to make rent payments or the date we may exercise control over the use of the land or equipment. The Company currently does not have any financing leases and does not have any lessor leases that require disclosure.

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

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

	(in thousands)
	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019

Minimum rentals	$	7	$	16
Contingent rentals		--		-

	$	7	$	16

Supplemental cash flow information related to leases is as follows:

	(in thousands)
	Nine Months Ended September 30, 2019

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	33
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	489

Table of Contents

Supplemental balance sheet information related to leases is as follows:

	(in thousands, except lease term and discount rate)
	September 30, 2019

Operating Leases:
Operating lease right-of-use assets	$	489

Other current liabilities	$	19
Operating lease liabilities		459
Total operating lease liabilities	$	478


Weighted Average Remaining Lease Term
Operating leases	57 years
Weighted Average Discount Rate
Operating leases		4.9	%

Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2019 are as follows:

	(in thousands)
	Operating Leases
Year
2019	$	42
2020		42
2021		33
2022		23
2023		23
Thereafter		1,338
Total undiscounted lease payments	$	1,501
Less effects of discounting		(1,023	)
Total lease liabilities recognized		478

The change in accounting due to the adoption of the new lease guidance did not result in a material change to the future minimum rental payments when compared to December 31, 2018. As of September 30, 2019, we have not entered into operating or finance leases that will commence at a future date.

NOTE 5 – STOCK COMPENSATION PLANS

On December 9, 2015, the Company's stockholders approved the 2015 Equity Compensation Plan, or the 2015 Plan, which replaced the 2005 Equity Compensation Plan that expired on May 24, 2015. The 2015 Plan provides that grants may be in any of the following forms: incentive stock options, nonqualified stock options, stock units, stock awards, dividend equivalents and other stock-based awards. The 2015 Plan is administered and interpreted by the Compensation Committee, or the Committee, of the Board of Directors of the Company, or the Board. The Committee has the authority to determine the individuals to whom grants will be made under the 2015 Plan, the type, size and terms of the grants, the time when grants will be made and the duration of any applicable exercise or restriction period (subject to the limitations of the 2015 Plan), and deal with any other matters arising under the 2015 Plan. The Committee presently consists of three directors, each of whom is a non-employee director of the Company. All of the employees of the Company and its subsidiaries and non-employee directors of the Company are eligible for grants under the 2015 Plan.

Compensation expense, for the three and nine months ended September 30, 2019, of approximately $45,000 and $136,000, respectively, was recorded for restricted stock awards issued in May 2018 and May 2019. For the three and nine months ended September 30, 2018, compensation expense of approximately $49,000 and $144,000, respectively, was recorded for restricted stock awards issued in May 2017 and May 2018. Costs were determined based on the fair value on the dates of the awards and those costs were charged to income over the service periods associated with the awards. There was no stock compensation cost capitalized as part of an asset.

Table of Contents

On May 8, 2019, 5,000 shares of Class A Common Stock, or Class A Stock, were granted as restricted stock awards. The fair value per share was $36.11, the closing price of the Class A Stock as recorded on the NASDAQ Global Select Market on May 8, 2019. Prior to their release date, these restricted stock awards may be subject to forfeiture in the event of the recipient’s termination of service.

On May 2, 2018, 5,000 shares of Class A Stock were granted as restricted stock awards. The fair value per share was $38.51, the closing price of the Class A Stock as recorded on the NASDAQ Global Select Market on May 2, 2018.

The following summary reflects changes in the shares of Class A Stock underlying options and restricted stock awards for the nine months ended September 30, 2019:

	Options									Restricted Awards
	Option Shares			Weighted Average Exercise Price		Weighted Average Remaining Life (Yrs.)		Aggregate Intrinsic Value (in thousands)		Outstanding Restricted Stock Awards			Weighted Average Grant Date Fair Value
Plan options/restricted stock awards
Outstanding at January 1, 2019		168,750		$	20.11			$	2,491		5,000		$	38.51
Granted		–			–				–		5,000		$	36.11
Exercised/vested and released		(13,500	)		16.94				297		(5,000	)	$	38.51
Expired/cancelled		–			–				–		–			–
Outstanding at September 30, 2019		155,250		$	20.38		2.787	$	2,580		5,000		$	36.11

Exercisable/vested at September 30, 2019		155,250		$	20.38		2.787	$	2,580		–			–

The total intrinsic value of options exercised during the nine months ended September 30, 2019 was approximately $297,000.

There were no unvested option shares outstanding under the 2015 Plan during the nine months ended September 30, 2019.

As of September 30, 2019, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan.

As of September 30, 2019, there was $109,000 total unrecognized expenses related to non-vested awards of restricted shares awarded under the 2015 Plan. The cost will be recognized over 0.60 years, the remaining vesting period for the restricted stock awards.

NOTE 6 - REGULATORY ASSETS

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

The postretirement benefit obligation is the recognition of an offsetting regulatory liability as it relates to the accrual of the expected cost of providing postretirement health care and life insurance benefits to retired employees. Artesian Water contributed approximately $17,000 to its postretirement benefit plan in the first nine months of 2019. These contributions consist of insurance premium payments for medical, dental and life insurance benefits made on behalf of the Company's eligible retired employees.

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

Table of Contents

Debt related costs include debt issuance costs and other debt related expense. The DEPSC has allowed rate recovery on unamortized issuance costs and make-whole premiums associated with the early retirement of Series O and Q First Mortgage bonds as the replacement of that debt in January 2017 with Series T First Mortgage bonds was deemed more favorable for the ratepayers. The DEPSC has also allowed rate recovery on issuance costs associated with the Series U First Mortgage bond purchase in January 2018 that paid the full indebtedness of the Series P First Mortgage bond. These amounts are recovered over the term of the new long-term debt issued. For both the Series T First Mortgage bond purchase and the Series U First Mortgage bond purchase, no cash, other than the issue costs, was paid or received as the trustee facilitated direct exchanges of the bonds issued.

Regulatory expenses amortized on a straight-line basis are noted below:

Expense	Years Amortized
Rate case studies	5
Debt related costs	15 to 25 (based on term of related debt)
Goodwill (resulting from acquisition of Mountain Hill Water Company in 2008)	50
Deferred acquisition costs (resulting from purchase of water assets in Cecil County, Maryland in 2011 and Port Deposit, Maryland in 2010)	20
Franchise Costs (resulting from purchase of water assets in Cecil County, Maryland in 2011)	80

Regulatory assets, net of amortization, comprise:
	(in thousands)
	September 30, 2019		December 31, 2018

Postretirement benefit obligation	$	74	$	74
Deferred income taxes		389		401
Expense of rate case studies		30		46
Debt issuance costs		5,557		5,815
Goodwill		290		295
Deferred acquisition and franchise costs		593		623
	$	6,933	$	7,254

NOTE 7 – REGULATORY LIABILITIES

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

The postretirement benefit obligation is the recognition of an offsetting regulatory asset as it relates to the accrual of the expected cost of providing postretirement health care and life insurance benefits to retired employees when they render the services necessary to earn the benefits. Artesian Water contributed approximately $17,000 to its postretirement benefit plan in the first nine months of 2019. These contributions consist of insurance premium payments for medical, dental and life insurance benefits made on behalf of the Company's eligible retired employees.

Utility plant retirement cost obligation consists of estimated costs related to the potential removal and replacement of facilities and equipment on the Company’s water and wastewater properties. Effective January 1, 2012, as authorized by the DEPSC, when depreciable units of utility plant are retired, any cost associated with retirement, less any salvage value or proceeds received, is charged to a regulated retirement liability. Each year the liability is increased by an annual amount authorized by the DEPSC.

Pursuant to the enactment of the TCJA, on December 22, 2017, the Company adjusted its existing deferred income tax balances to reflect the decrease in the corporate income tax rate from 34% to 21% (see Note 10). This resulted in a decrease in the net deferred income tax liability of approximately $24.3 million, of which $22.8 million was reclassed to a regulatory liability. The regulatory liability amount is subject to certain Internal Revenue Service normalization rules that require the benefits to customers be spread over the remaining useful life of the underlying assets giving rise to the associated deferred income taxes. On January 31, 2019, the DEPSC approved the amortization of the regulatory liability amount of $22.2 million over a period of 49.5 years beginning February 1, 2018, subject to audit at a later date. The MDPSC has not issued a final order on the regulatory liability amount of $0.6 million regarding the effects of the TCJA on Maryland customers.

Regulatory liabilities comprise:
	(in thousands)
	September 30, 2019		December 31, 2018

Postretirement benefit obligation	$	52	$	52
Utility plant retirement cost obligation		291		319
Deferred income taxes (related to TCJA)		22,109		22,442

	$	22,452	$	22,813

NOTE 8 - NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE

Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share is based on the weighted average number of common shares outstanding, the potentially dilutive effect of employee stock options and restricted stock awards.

The following table summarizes the shares used in computing basic and diluted net income per share:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands)				(in thousands)

Weighted average common shares outstanding during the period for Basic computation		9,283		9,244		9,272		9,235
Dilutive effect of employee stock options and awards		46		55		50		55

Weighted average common shares outstanding during the period for Diluted computation		9,329		9,299		9,322		9,290

For both the three and nine months ended September 30, 2019, 5,000 shares of restricted stock awards were excluded from the calculations of diluted net income per share. For the three and nine months ended September 30, 2018, no shares of restricted stock awards were excluded from the calculations of diluted net income per share. Due to unrecognized compensation costs, the hypothetical repurchase of shares exceeded the number of restricted shares expected to vest during the period, creating an anti-dilutive effect. For the three and nine months ended September 30, 2019 and September 30, 2018, no shares of stock options were excluded from the calculations of diluted net income per share, as the calculated proceeds from the options’ exercise were lower than the average market price of the Company’s common stock during the period.

The Company has 15,000,000 authorized shares of Class A Stock and 1,040,000 authorized shares of Class B Common Stock, or Class B Stock. As of September 30, 2019, 8,403,243 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of September 30, 2018, 8,364,231 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. The par value for both classes is $1.00 per share. During the three months ended September 30, 2019 and September 30, 2018, the Company issued 5,929 and 4,493 shares of Class A Stock, respectively. For the nine months ended September 30, 2019 and September 30, 2018, the Company issued 34,215 and 30,777 shares of Class A Stock, respectively.

Equity per common share was $16.92 and $16.53 at September 30, 2019 and December 31, 2018, respectively. These amounts were computed by dividing common stockholders' equity by the number of shares of common stock outstanding on September 30, 2019 and December 31, 2018, respectively.

Table of Contents

NOTE 9 - REGULATORY PROCEEDINGS

Our water and wastewater utilities generate operating revenue from customers based on rates that are established by state Public Service Commissions through a rate setting process that may include public hearings, evidentiary hearings and the submission of evidence and testimony in support of the requested level of rates by the Company.

We are subject to regulation by the following state regulatory commissions:

•

The DEPSC regulates both Artesian Water and Artesian Wastewater.

•

The MDPSC regulates both Artesian Water Maryland and Artesian Wastewater Maryland.

•

The PAPUC regulates Artesian Water Pennsylvania.

Rate Proceedings

Our regulated utilities periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business. In Delaware, utilities are permitted by law to place rates into effect, under bond, on a temporary basis pending completion of a rate increase proceeding. The first temporary increase may be up to the lesser of $2.5 million on an annual basis or 15% of gross water sales. Should the rate case not be completed within seven months, by law, the utility may put the entire requested rate relief, up to 15% of gross water sales, in effect under bond until a final resolution is ordered and placed into effect. If any such rates are found to be in excess of rates the DEPSC finds to be appropriate, the utility must refund customers the portion found to be in excess with interest. The timing of our rate increase requests is therefore dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we hope to recover through the rate increase. We can provide no assurances that rate increase requests will be approved by applicable regulatory agencies and, if approved, we cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase.

On January 16, 2018, the DEPSC approved the opening of Docket No. 17-1240 requiring Delaware utilities to determine the impact that the TCJA had on their customers and potential rate relief due to customers. The reduction in corporate income tax expense resulting from the TCJA was passed through to customers in the form of reduced tariff rates as approved by the DEPSC on January 31, 2019. Approximately $3.8 million was refunded to customers during the second quarter of 2019. This amount was previously held in reserve (refund liability) and was not reflected in income.

Other Proceedings

Delaware law permits water utilities to put into effect, on a semi-annual basis, increases related to specific types of distribution system improvements through a DSIC. This charge may be implemented by water utilities between general rate increase applications that normally recognize changes in a water utility's overall financial position. The DSIC approval process is less costly when compared to the approval process for general rate increase requests. The DSIC rate applied between base rate filings is capped at 7.50% of the amount billed to customers under otherwise applicable rates and charges, and the DSIC rate increase applied cannot exceed 5.0% within any 12-month period.

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

Application Date

11/29/2016

05/31/2018

11/28/2018

05/29/2019

DEPSC Approval Date

12/20/2016

06/19/2018

12/20/2018

06/18/2019

Effective Date

01/01/2017

07/01/2018

01/01/2019

07/1/2019

Cumulative DSIC Rate

4.71

3.63

5.55

7.41

Net Eligible Plant Improvements – Cumulative Dollars (in millions)

16.6

24.7

30.4

43.1

Eligible Plant Improvements – Installed Beginning Date

10/01/2014

Eligible Plant Improvements – Installed Ending Date

10/31/2016

04/30/2018

10/31/2018

04/30/2019

The DSIC rate effective July 1, 2019 replaces the DSIC rate effective January 1, 2019. This increased rate reflects the eligible plant improvements installed through April 30, 2019. The DSIC rates effective January 1, 2019 and July 1, 2019 are still subject to audit at a later date by the DEPSC. For the three and nine months ended September 30, 2019, we earned approximately $1.3 million and $3.1 million in DSIC revenue, respectively. For the three and nine months ended September 30, 2018, we earned approximately $0.7 million and $2.2 million in DSIC revenue, respectively.

Table of Contents

NOTE 10 – INCOME TAXES

The TCJA made many significant changes to the Internal Revenue Code, including, but not limited to (1) reducing the federal corporate tax rate to a flat 21%; (2) creating a 30% limitation on deductible interest expense (not applicable to regulated utilities); (3) eliminating future bonus depreciation deductions on utility plant capital projects that began after December 31, 2017; (4) eliminating the domestic production activities deduction; (5) eliminating the corporate alternative minimum tax and changing how existing alternative minimum tax credits can be realized; (6) changing the rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017 and (7) repealing the exclusion from gross income contributions in aid of construction (CIAC) for water utilities. The most significant change that impacted Artesian Resources was the reduction of the corporate federal income tax rate from our previous effective rate of 34% to the new flat tax rate of 21% beginning January 1, 2018. The SEC Staff issued Accounting Bulletin No. 118, Income Tax Accounting of the TCJA, allowing provisional amounts to be reported based on reasonable estimates, subject to adjustment during a one year measurement period. In 2018 the Company finalized making such adjustments. However, since many provisions of the 2017 Tax Act still do not have final guidance issued, it may be necessary for the Company to make future adjustments based on such new guidance.

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

Under FASB ASC Topic 740, an uncertain tax position represents our expected treatment of a tax position taken, or planned to be taken in the future, that has not been reflected in measuring income tax expense for financial reporting purposes. The Company establishes reserves for uncertain tax positions based upon management's judgment as to the sustainability of these positions. These accounting estimates related to the uncertain tax position reserve require judgments to be made as to the sustainability of each uncertain tax position based on its technical merits. The Company believes its tax positions comply with applicable law and that it has adequately recorded reserves as required. However, to the extent the final tax outcome of these matters is different than the estimates recorded, the Company would then adjust its tax reserves or unrecognized tax benefits in the period that this information becomes known. The Company had previously recorded a provision for the possible disallowance of a portion of the repair deduction for the tax return year of 2015. The statute of limitations lapsed during the third quarter of 2019, which resulted in the reversal of the reserve in the amount of approximately $73,000. The Company has elected to recognize accrued interest (net of related tax benefits) and penalties related to uncertain tax positions as a component of its income tax expense. The Company has accrued approximately $17,000 in penalties and interest for the nine months ended September 30, 2019. The Company remains subject to examination by federal and state authorities for the tax years 2016 through 2018.

The Tax Reform Act of 1986 mandated that Advances and CIAC received subsequent to December 31, 1986, generally are taxable income. The 1996 Tax Act provided an exclusion from taxable income for CIAC and Advances received after June 12, 1996 except for certain contributions for large services that are not included in rate base for rate-making purposes. On December 22, 2017, the TCJA repealed the 1996 exclusion from gross income effective on the enactment date.

Investment tax credits were deferred through 1986 and are recognized as a reduction of deferred income tax expense over the estimated economic useful lives of the related assets.

NOTE 11 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value.

Current Assets and Liabilities

For those current assets and liabilities that are considered financial instruments, the carrying amounts approximate fair value because of the short maturity of those instruments.

Table of Contents

Long-term Financial Liabilities

All of Artesian Resources’ outstanding long-term debt as of September 30, 2019 and December 31, 2018 was fixed-rate. The fair value of the Company’s long-term debt is determined by discounting its future cash flows using current market interest rates on similar instruments with comparable maturities consistent with FASB ASC 825. Under the fair value hierarchy, the fair value of the long-term debt in the table below is classified as Level 2 measurements. Level 2 is valued using observable inputs other than quoted prices. The fair values for long-term debt differ from the carrying values primarily due to interest rates that differ from the current market interest rates. The carrying amount and fair value of Artesian Resources' long-term debt (including current portion) are shown below:

In thousands
	September 30, 2019			December 31, 2018
Carrying amount		$	116,229		$	117,587
Estimated fair value		$	129,783		$	116,818

The fair value of Advances for Construction cannot be reasonably estimated due to the inability to estimate accurately the timing and amounts of future refunds expected to be paid over the life of the contracts. Refund payments are based on the water sales to new customers in the particular development constructed. The fair value of Advances for Construction would be less than the carrying amount because these financial instruments are non-interest bearing.

NOTE 12 – RELATED PARTY TRANSACTIONS

On September 23, 2018, the Board elected Mr. Michael Houghton to serve as a director for the remainder of the three year term class that expires at the Annual Meeting of the Class B Stock shareholders to be held in 2021 and until his respective successor shall be elected and qualified. Mr. Houghton is a Partner in the law firm of Morris Nichols Arsht & Tunnell, or MNAT, in Wilmington, Delaware. In the normal course of business, the Company utilizes the services of MNAT for various regulatory, real estate and public policy matters. Approximately $45,000 and $168,000 was paid to MNAT during the three and nine months ended September 30, 2019, respectively, for legal services. Approximately $65,000 and $182,000 was paid to MNAT during the three and nine months ended September 30, 2018, respectively, for legal services. As of September 30, 2019, the Company did not have an accounts payable balance due to MNAT.

As set forth in the Charter of the Audit Committee of the Board, the Audit Committee is responsible for reviewing and, if appropriate, approving all related party transactions between us and any officer, any director, any person known to be the beneficial owner of more than 5% of any class of the Company's voting securities or any other related person that would potentially require disclosure. In its review and approval of the related party transactions with MNAT, the Audit Committee considered the nature of the related person's interest in the transactions; the satisfactory performance of work contracted with the related party prior to the director election of Mr. Houghton; and the material terms of the transactions, including, without limitation, the amount and type of transactions, the importance of the transactions to the related person, the importance of the transactions to the Company and whether the transactions would impair the judgment of a director or officer to act in the best interest of the Company. The Audit Committee approves only those related person transactions that are in, or are consistent with, the best interests of the Company and its stockholders.

NOTE 13 – BUSINESS COMBINATIONS

On March 29, 2018, Artesian Water purchased the utility assets of Slaughter Beach Water Company, which serves the community of Slaughter Beach located in Sussex County, Delaware along the Delaware Bay consisting of 265 customers. The total purchase price was $450,000 in cash, which approximates the fair value of the net identifiable assets received. The acquisition was accounted for as a business combination under ASC Topic 805, “Business Combinations”. The purchase price was allocated to the acquired utility assets, including land, based on the utility assets’ estimated fair values as of the acquisition date. This acquisition was approved by the DEPSC on March 27, 2018 subject to the DEPSC determining the appropriate ratemaking treatment of the acquisition price and the assets acquired in Artesian Water’s next base rate case. The pro forma effect of the business acquired is not material to the Company’s financial position or results of operations.

Table of Contents

NOTE 14 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

There was no new guidance issued by the FASB during the nine months ended September 30, 2019 that is applicable to the Company.

NOTE 15 - SUBSEQUENT EVENT

On October 8, 2019, Artesian Water Company entered into an interest rate lock agreement, or the Agreement, with CoBank, ACB, or CoBank. The Company is seeking to finance a $30 million principal amount First Mortgage Bond, or the Bond. The Agreement allows for a maturity period of 30 years and a fixed interest rate of 4.42% per annum, or the Fixed Rate, for the Bond. The Agreement is effective through December 31, 2019, or the Settlement Date. Pursuant to the Agreement, the Bond is not subject to redemption based on mortgage style amortization; interest on the outstanding principal balance will be payable quarterly on the 30th day of January, April, July and October each year. The proceeds from the sale of the Bond shall be used to pay down outstanding lines of credit of Artesian Water, any additional proceeds shall be used to fund future capital investments in Artesian Water. Closing on the debt financing is subject to approval by the DEPSC. Also pursuant to the Agreement, the Company agrees to pay to CoBank, on demand, a broken funding charge if the Company does not, for any reason whatsoever, borrow the entire $30 million principal amount on or before the Settlement Date. The broken funding charge shall be in an amount equal to the present value of the sum of all losses and expenses incurred by CoBank in retiring, liquidating, or reallocating any debt, obligation, or cost incurred or allocated by CoBank to fund or hedge the Fixed Rate.

Table of Contents

ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q that express our "belief", "anticipation" or "expectation," as well as other statements that are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and the Private Securities Litigation Reform Act of 1995. Statements regarding our goals, priorities, growth and expansion plans and expectation for our water and wastewater subsidiaries and non-regulated subsidiaries, customer base growth opportunities in Delaware and Cecil County, Maryland, our belief regarding our capacity to provide water services for the foreseeable future to our customers, our belief relating to our compliance and the cost to achieve compliance with relevant governmental regulations, our expectation of the timing of decisions by regulatory authorities, the impact of weather on our operations and the execution of our strategic initiatives, our expectation of the timing for construction on new projects, our expectation relating to the adoption of recent accounting pronouncements, contract operations opportunities, legal proceedings, our properties, deferred tax assets, adequacy of our available sources of financing, the expected recovery of expenses related to our long-term debt, our expectation to be in compliance with financial covenants in our debt instruments, our ability to refinance our debt as it comes due, our ability to adjust our debt level, interest rate, maturity schedule and structure, the timing and terms of renewals of our lines of credit, plans to increase our wastewater treatment operations, engineering services and other revenue streams less affected by weather, expected future contributions to our postretirement benefit plan, anticipated growth in our non-regulated division, the impact of recent acquisitions on our ability to expand and foster relationships, anticipated investments in certain of our facilities and systems and the sources of funding for such investments, and the sufficiency of internally generated funds and credit facilities to provide working capital and our liquidity needs are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "projects", "forecasts", "may", "should", variations of such words and similar expressions are intended to identify such forward-looking statements. Certain factors as discussed under Item 1A -Risk Factors, in our Annual Report on Form10-K for the year ended December 31, 2018, such as changes in weather, changes in our contractual obligations, changes in government policies, the timing and results of our rate requests, failure to receive regulatory approval, changes in economic and market conditions generally, and other matters could cause results to differ materially from those in the forward-looking statements. While the Company may elect to update forward-looking statements, we specifically disclaim any obligation to do so and you should not rely on any forward-looking statement as a representation of the Company's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2019

OVERVIEW

Our profitability is primarily attributable to the sale of water. Gross water sales composed 88.2% of total operating revenues for the nine months ended September 30, 2019. Our profitability is also attributed to the various contract operations, water, sewer and internal SLP Plans and other services we provide. Water sales are subject to seasonal fluctuations, particularly during summer when water demand may vary with rainfall and temperature. In the event temperatures during the typically warmer months are cooler than expected, or rainfall is greater than expected, the demand for water may decrease and our revenues may be adversely affected. We believe the effects of weather are short term and do not materially affect the execution of our strategic initiatives. Our contract operations and other services provide a revenue stream that is not affected by changes in weather patterns.

While water sales are our primary source of revenues, we continue to seek growth opportunities to provide wastewater services in Delaware and the surrounding areas. We also continue to explore and develop relationships with developers and municipalities in order to increase revenues from contract water and wastewater operations, wastewater management services, and design, construction and engineering services. We plan to continue developing and expanding our contract operations and other services in a manner that complements our growth in water service to new customers. Our anticipated growth in these areas is subject to changes in residential and commercial construction, which may be affected by interest rates, inflation and general housing and economic market conditions. We anticipate continued growth in our non-regulated division due to our water, sewer, and internal SLP Plans.

Table of Contents

Water Division

Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water service to residential, commercial, industrial, governmental, municipal and utility customers. Increases in the number of customers contribute to increases, or help to offset any intermittent decreases, in our operating revenue. As of September 30, 2019, we had approximately 87,000 metered water customers in Delaware, an increase of approximately 1,400 compared to September 30, 2018. The number of metered water customers in Maryland totaled approximately 2,470 as of September 30, 2019, an increase of approximately 110 compared to September 30, 2018. The number of metered water customers in Pennsylvania remained consistent compared to September 30, 2018. For the nine months ended September 30, 2019, approximately 6.3 billion gallons of water were distributed in our Delaware systems and approximately 90.3 million gallons of water were distributed in our Maryland systems.

Wastewater Division

Artesian Wastewater owns wastewater collection and treatment infrastructure and began providing regulated wastewater services to customers in Delaware in July 2005. Artesian Wastewater Maryland was incorporated on June 3, 2008 and is able to provide regulated wastewater services to customers in the State of Maryland. It is not currently providing these services in Maryland. Our residential and commercial wastewater customers are billed a flat monthly fee, which contributes to providing a revenue stream unaffected by weather. The number of Delaware wastewater customers totaled approximately 2,350 as of September 30, 2019, an increase of approximately 310, or 15.3%, compared to September 30, 2018. In addition, Artesian Wastewater entered into wastewater services agreements with Allen Harim Foods, LLC, or Allen Harim, a large industrial customer. The wastewater services agreements with Allen Harim are discussed further in the “Strategic Direction” section below.

Non-Regulated Division

Artesian Utility provides contract water and wastewater operation services to private, municipal and governmental institutions. Artesian Utility also offers three protection plans to customers, the WSLP Plan, the SSLP Plan, and the ISLP Plan. SLP Plan customers are billed a flat monthly or quarterly rate, which contributes to providing a revenue stream unaffected by weather. There has been consistent customer growth over the years. As of September 30, 2019, approximately 19,300, or 23.1%, of our eligible water customers enrolled in the WSLP Plan, approximately 15,600, or 18.7%, of our eligible customers enrolled in the SSLP Plan, and approximately 6,800, or 8.2%, of our eligible customers enrolled in the ISLP Plan. Approximately 1,800 non-utility customers enrolled in one of our three protection plans.

Strategic Direction

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

In our regulated water division, our strategy is to focus on a wide spectrum of activities, which include identifying new and dependable sources of supply, developing the wells, treatment plants and delivery systems to supply water to customers and educating customers on the wise use of water. Our strategy includes focused efforts to expand in new regions added to our Delaware service territory over the last 10 years. We plan to expand our regulated water service area in the Cecil County designated growth corridor and to expand our business through the design, construction, operation, management and acquisition of additional water systems. The expansion of our exclusive franchise areas elsewhere in Maryland and the award of contracts will similarly enhance our operations within the state.

On March 29, 2018, Artesian Water purchased the utility assets of Slaughter Beach Water Company, or SBWC, for $450,000. The public water system currently serves the community of Slaughter Beach located in Sussex County, Delaware along the Delaware Bay consisting of 265 customers. The SBWC was founded in 1951 as a public water system in Delaware.

On October 1, 2019, Artesian Water purchased utility assets from High Point Associates, L.P. and connected these assets to our public water system to serve the residents of High Point Park located in Kent County, Delaware consisting of approximately 400 customers.

Table of Contents

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

In our regulated wastewater division, we foresee significant growth opportunities and will continue to seek strategic partnerships and relationships with developers and governmental agencies to complement existing agreements for the provision of wastewater service on the Delmarva Peninsula. Artesian Wastewater plans to utilize our larger regional wastewater facilities to expand service areas to new customers while transitioning our smaller treatment facilities into regional pump stations in order to gain additional efficiencies in the treatment and disposal of wastewater. We believe this will reduce operational costs at the smaller treatment facilities in the future because they will be converted from treatment and disposal plants to pump stations to assist with transitioning the flow of wastewater from one regional facility to another.

On September 27, 2016, Artesian Wastewater entered into a wastewater services agreement with Allen Harim for Artesian Wastewater to provide treatment and disposal services for sanitary wastewater discharged from Allen Harim’s properties located in Sussex County, Delaware upon completion of a pipeline to transfer the sanitary wastewater. The pipeline was completed in the second quarter of 2017. The transfer of sanitary wastewater began in the second quarter of 2019. On January 27, 2017, Artesian Wastewater entered into a second wastewater agreement with Allen Harim for Artesian Wastewater to provide disposal services for approximately 1.5 mgd of treated industrial process wastewater upon completion of an approximately eight mile pipeline that will transfer the wastewater from Allen Harim’s properties to a 90 million gallon storage lagoon at Artesian’s Sussex Regional Recharge Facility. We will use the reclaimed wastewater for spray irrigation on agricultural land in the area. The completion of the industrial process wastewater pipeline and storage lagoon should occur during 2019. Construction of the facility is substantially complete and nearing commencement of operation pending permit approval.

The general need for increased capital investment in our water and wastewater systems is due to a combination of population growth, more protective water quality standards and aging infrastructure. Our capital investment plan for the next three years includes projects for water treatment plant improvements and additions in both Delaware and Maryland and wastewater treatment plant improvements and expansion in Delaware. Capital improvements are planned and budgeted to meet anticipated changes in regulations and needs for increased capacity related to projected growth. The DEPSC and MDPSC have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates for current customers and capacity charges for new customers.

In our non-regulated division, we continue pursuing opportunities to expand our contract operations. Through Artesian Utility, we will seek to expand our contract design, engineering and construction services of water and wastewater facilities for developers, municipalities and other utilities. We also anticipate continued growth due to our water, sewer and internal SLP Plans. Artesian Development owns two nine-acre parcels of land, located in Sussex County, Delaware, which will allow for construction of a water treatment facility and wastewater treatment facility. Artesian Storm Water was recently formed to expand contract work related to the design, installation, maintenance and repair services associated with existing or proposed storm water management systems in Delaware and the surrounding areas.

Inflation

We are affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand our service capability. The cumulative effect of inflation results in significantly higher facility costs compared to investments made 20 to 40 years ago, which must be recovered from future cash flows.

Results of Operations – Analysis of the Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018.

Operating Revenues

Revenues totaled $22.5 million for the three months ended September 30, 2019, $0.6 million, or 2.9%, more than revenues for the three months ended September 30, 2018. Water sales revenue increased $0.6 million, or 3.3%, for the three months ended September 30, 2019 from the corresponding period in 2018, primarily due to an increase in DSIC revenue related to a rate increase from 3.63% to 7.41% for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. We realized 89.1% and 88.8% of our total operating revenue for the three months ended September 30, 2019 and September 30, 2018, respectively, from the sale of water.

Table of Contents

Other utility operating revenue increased approximately $0.1 million, or 4.7%, for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase is primarily due to an increase in wastewater revenue from customer growth.

Non-utility operating revenue decreased approximately $0.1 million, or 5.1%, for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The decrease is primarily due to a decrease in contract service revenue related to a reduction in treatment plant operation services.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $0.3 million, or 2.5%, for the three months ended September 30, 2019, compared to the same period in 2018. The components of the change in operating expenses primarily include an increase in utility operating expenses of $0.2 million and an increase in non-utility operating expenses of $0.1 million.

Utility operating expenses increased $0.2 million, or 1.6%, for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily related to an increase in administration, water treatment, and purchased water costs.

Non-utility expenses increased approximately $0.1 million, or 14.1%, primarily due to an increase in payroll and benefit costs as well as an increase in plumbing services related to the SLP Plans.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 56.1% for the three months ended September 30, 2019, compared to 56.3% for the three months ended September 30, 2018.

Depreciation and amortization expense increased $0.2 million, or 6.6%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.

Federal and state income tax expense decreased $0.3 million, or 18.3%, primarily due to a reversal of a federal tax deduction, the Domestic Production Activities Deduction, recorded in 2018 that was disallowed by the TCJA as well as the amortization of the deferred tax regulatory liability in 2019 related to the reduction in the federal corporate income tax rate by the TCJA.

Other Income, Net

Other income increased $0.3 million, primarily due to an increase in AFUDC of $0.4 million, as a result of higher long-term construction activity subject to AFUDC for the three months ended September 30, 2019 compared to the same period in 2018. Miscellaneous income decreased $0.2 million, primarily due to a one-time additional patronage payment from CoBank, ACB, in 2018 related predominately to savings generated from the TCJA.

Interest Charges

Interest expense increased $0.2 million, primarily due to long-term debt interest associated with the $7.5 million wastewater loan issued in August 2018 and the $4.5 million wastewater loan issued in December 2018. In addition, short-term debt interest increased due to an increase in the amount borrowed under lines of credit and an increase in the interest rate.

Net Income

Our net income applicable to common stock increased $0.5 million, primarily due to an increase in operating income.

Results of Operations – Analysis of the Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018.

Operating Revenues

Revenues totaled $62.6 million for the nine months ended September 30, 2019, $1.5 million, or 2.5%, more than revenues for the nine months ended September 30, 2018. Water sales revenue increased $1.2 million, or 2.3%, for the nine months ended September 30, 2019 from the corresponding period in 2018, primarily due to an increase in DSIC revenue and an increase from customer growth. The DSIC rates during the first nine months of 2018 were 4.71% for six months and 3.63% for three months. The DSIC rates during the first nine months of 2019 were 5.55% for six months and 7.41% for three months. As a result of the reduced tariff rates approved by the DEPSC on January 31, 2019 related to the impact of the TCJA, approximately $3.8 million was refunded to customers during the second quarter of 2019, the majority of which was issued as a credit to customer bills. This amount was previously held in reserve and was not included in water sales revenue or net income. We realized 88.2% and 88.4% of our total operating revenue for the nine months ended September 30, 2019 and September 30, 2018, respectively, from the sale of water.

Table of Contents

Other utility operating revenue increased approximately $0.2 million, or 7.4%, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase is primarily due to an increase in wastewater revenue from customer growth.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $0.9 million, or 2.6%, for the nine months ended September 30, 2019, compared to the same period in 2018. The components of the change in operating expenses primarily include an increase in utility operating expenses of $0.4 million, an increase in non-utility operating expenses of $0.3 million and an increase in property and other taxes of $0.2 million.

Utility operating expenses increased $0.4 million, or 1.4%, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The net increase is primarily related to the following.

Payroll, employee benefit costs and related expenses increased $0.4 million, primarily due to an increase in overall compensation.

Administration costs increased $0.2 million, primarily due to an increase in regulatory application costs to expand our service territory in Delaware and contract services related to wastewater facilities.

Repair and maintenance expense decreased $0.2 million, primarily due to the painting of an elevated water storage tank in 2018 in our Cecil County, Maryland system as well as timing of expenses related to the maintenance of water treatment equipment, specifically carbon filter replacements, in our Delaware water system.

Non-utility expenses increased approximately $0.3 million, or 15.3%, primarily due to an increase in payroll and benefit costs as well as an increase in plumbing services related to the SLP Plans.

Property and other taxes increased $0.2 million, or 4.1%, primarily due to an increase in utility plant subject to taxation. Property taxes are assessed on land, buildings and certain utility plant, which include the footage and size of pipe, hydrants and wells. In addition, payroll taxes increased due to increased payroll related expenses.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 56.1% for both the nine months ended September 30, 2019 and September 30, 2018.

Depreciation and amortization expense increased $0.5 million, or 6.5%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.

Federal and state income tax expense decreased $0.7 million, or 15.5%, primarily due to the amortization of the deferred tax regulatory liability related to the reduction in the federal corporate income tax rate by the TCJA and a reversal of a federal tax deduction, the Domestic Production Activities Deduction, recorded in 2018 that was disallowed by the TCJA.

Other Income, Net

Other income increased $0.3 million, or 21.1%, primarily due to an increase in AFUDC of $0.6 million as a result of higher long-term construction activity subject to AFUDC for the nine months ended September 30, 2019 compared to the same period in 2018. Miscellaneous income decreased $0.3 million, primarily due to a one-time additional patronage payment in 2018 related predominately to savings generated from the TCJA as well as a decrease in the amount of the annual patronage refund, both paid by CoBank, ACB. The annual patronage refund rate was reduced in 2019 to 0.80% from 1.00% of the average line of credit and loan volume outstanding.

Interest Charges

Interest expense increased $0.7 million primarily due to long-term debt interest associated with the $7.5 million wastewater loan issued in August 2018 and the $4.5 million wastewater loan issued in December 2018. In addition, short-term debt interest increased due to an increase in the amount borrowed under lines of credit and an increase in the interest rate.

Net Income

Our net income applicable to common stock increased $0.5 million. Operating revenues increased $1.5 million and other income, net increased $0.3 million, while operating expenses increased $0.6 million and interest expense increased $0.6 million.

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our primary sources of liquidity for the nine months ended September 30, 2019 were $13.2 million of cash provided by operating activities, $15.8 million from lines of credit borrowings, $6.0 million in net contributions and advances from developers and $0.8 million in net proceeds from the issuance of common stock. Cash flow from operating activities is primarily provided by our utility operations, and is impacted by the timeliness and adequacy of rate increases and changes in water consumption as a result of year-to-year variations in weather conditions, particularly during the summer. A significant part of our ability to maintain and meet our financial objectives is to ensure that our investments in utility plant and equipment are recovered in the rates charged to customers. As such, from time to time, we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment.

Investment in Plant and Systems

The primary focus of Artesian Water’s investment is to continue to provide high quality reliable service to our growing service territory. We invested approximately $27.3 million in capital expenditures during the first nine months of 2019 compared to $35.0 million invested during the same period in 2018. During the first nine months of 2019, we invested approximately $6.0 million for our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains and for new transmission and distribution facilities. We invested $8.7 million to enhance or improve existing treatment facilities and replace aging wells and pumping equipment to better serve our customers. We invested $1.7 million for equipment purchases, computer hardware and software upgrades and transportation equipment. Developers financed $3.4 million for the installation of water mains and hydrants in 2019 compared to $3.3 million in 2018. We invested $1.5 million to upgrade and automate our meter reading equipment. We invested approximately $1.9 million in mandatory utility plant expenditures due to governmental highway projects, which required the relocation of water service mains in addition to facility improvements and upgrades. An additional $4.1 million was invested in wastewater projects in Delaware, of which $2.1 million was invested in the construction of an eight mile pipeline and a 90 million gallon storage lagoon for spray irrigation to dispose of treated wastewater from a new industrial customer that is scheduled to be completed in 2019.

We depend on the availability of capital for expansion, construction and maintenance. We have several sources of liquidity to finance our investment in utility plant and other fixed assets. We estimate that future investments will be financed by our operations and external sources, including a combination of capital investment and debt financing. We expect to fund our activities for the next twelve months using our available cash balances, bank credit lines, projected cash generated from operations and financing in the debt markets. Our cash flows from operations are primarily derived from water sales revenues and may be materially affected by changes in water sales due to weather and the timing and extent of increases in rates approved by state Public Service Commissions.

Lines of Credit

At September 30, 2019, Artesian Resources had a $40 million line of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources. As of September 30, 2019, there was $26.3 million of available funds under this line of credit. The interest rate for borrowings under this line is the London Interbank Offered Rate, or LIBOR, plus 1.00%. This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time. The term of this line of credit expires on the earlier of May 23, 2020 or any date on which Citizens demands payment. The Company expects to renew this line of credit.

At September 30, 2019, Artesian Water had a $20 million line of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 million of this line available for the operations of Artesian Water Maryland. As of September 30, 2019, there was $2.0 million of available funds under this line of credit. The interest rate for borrowings under this line allows the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company has historically used the weekly variable interest rate. The term of this line of credit expires on July 20, 2020. Artesian Water expects to renew this line of credit.

Line of Credit Commitments	Commitment Due by Period
In thousands	Less than 1 Year			1-3 Years			4-5 Years			Over 5 Years
Lines of Credit		$	31,693		$	--		$	--		$	--

Long-Term Debt

Artesian’s long-term debt agreements contain customary affirmative and negative covenants that are binding on us (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on our ability to make certain loans and investments, guarantee certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions, transfer certain assets or change our business. In addition, we are required to abide by certain financial covenants and ratios. As of September 30, 2019, we were in compliance with these covenants.

Contractual Obligations	Payments Due by Period
In thousands	Less than 1 Year		1-3 Years		4-5 Years		After 5 Years		Total
First mortgage bonds (principal and interest)	$	5,356	$	10,620	$	10,517	$	138,162	$	164,655
State revolving fund loans (principal and interest)		1,002		1,677		1,244		3,135		7,058
Promissory note (principal and interest)		958		1,921		1,921		13,740		18,540
Operating leases		42		75		46		1,338		1,501
Operating agreements		72		95		76		911		1,154
Unconditional purchase obligations		3,892		4,902		81		---		8,875
Tank painting contractual obligation		106		---		---		---		106
Total contractual cash obligations	$	11,428	$	19,290	$	13,885	$	157,286	$	201,889

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

Payments for unconditional purchase obligations reflect minimum water purchase obligations based on rates that are subject to change under our interconnection agreement with the Chester Water Authority, which expires December 31, 2021 and minimum water purchase obligations based on a contract rate under our interconnection agreement with the Town of North East, which expires June 26, 2024.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, including any arrangements with any structured finance, special purpose or variable interest entities.

Table of Contents

Critical Accounting Assumptions, Estimates and Policies; Recent Accounting Pronouncements

This discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2018 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2018. The preparation of those financial statements required management to make assumptions and estimates that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Actual amounts or results could differ from those based on such assumptions and estimates.

Our critical accounting policies are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2018. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2018 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2018.

Information concerning our implementation and the impact of recent accounting pronouncements issued by the FASB is included in the notes to our 2018 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2018 and also in the notes to our unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. We did not adopt any accounting policy in the first nine months of 2019 that had a material impact on our financial condition, liquidity or results of operations.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt. The Company's exposure to interest rate risk related to existing fixed rate, long-term debt is due to the term of the majority of our First Mortgage Bonds and the term of the promissory note, which have final maturity dates ranging from 2028 to 2038, and interest rates ranging from 4.24% to 5.96%, which exposes the Company to interest rate risk as interest rates may drop below the existing fixed rate of the long-term debt prior to such debt’s maturity. In addition, the Company has interest rate exposure on $60 million of variable rate lines of credit with two banks, under which the interim bank loans payable at September 30, 2019 were approximately $31.7 million. An increase in interest rates will result in an increase in the cost of borrowing on this variable rate line. We are also exposed to market risk associated with changes in commodity prices. Our risks associated with price increases in chemicals, electricity and other commodities are mitigated by our ability to recover our costs through rate increases to our customers. We have also sought to mitigate future significant electric price increases by signing multi-year supply contracts at fixed prices.

ITEM 4 – CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were designed to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (2) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In addition, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to achieve the foregoing objectives.

(b) Change in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Periodically, we are involved in other proceedings or litigation arising in the ordinary course of business. We do not believe that the ultimate resolution of these matters will materially affect our business, financial position or results of operations. However, we cannot ensure that we will prevail in any litigation and, regardless of the outcome, may incur significant litigation expense and may have significant diversion of management attention.

ITEM 1A – RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in such Annual Report on Form 10-K.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

Not applicable.

Table of Contents

ITEM 6 - EXHIBITS

Exhibit No.	Description

4.1	Interest Rate Lock Agreement, dated as of October 8, 2019, by and between Artesian Water
	Company, Inc. and CoBank, ACB. Incorporated by reference to Exhibit 4.1 filed with the Company’s
	Form 8-K filed on October 11, 2019.

4.2	Amended and Restated Revolving Credit Agreement between Artesian Water Company, Inc. and CoBank, ACB dated September 20, 2019*

31.1	Certification of Chief Executive Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*

31.2	Certification of Chief Financial Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*

32	Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350).**

101	The following financial statements from Artesian Resources Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Cash Flows; and (iv) the Notes to the Condensed Consolidated Financial Statements.*

* Filed herewith

** Furnished herewith

Exhibit 31.1
Certification of Chief Executive Officer of Artesian Resources Corporation required by Rule 13a – 14 (a) under the Securities Act of 1934, as amended

I, Dian C. Taylor, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2019 of Artesian Resources Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)		Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)		Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: November 8, 2019			/s/ DIAN C. TAYLOR
			Dian C. Taylor
			Chief Executive Officer (Principal Executive Officer)

Exhibit 31.2

Certification of Chief Financial Officer of Artesian Resources Corporation required by Rule 13a – 14 (a) under the Securities Act of 1934, as amended

I, David B. Spacht, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2019 of Artesian Resources Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)		Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)		Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



Date: November 8, 2019			/s/ DAVID B. SPACHT
			David B. Spacht
			Chief Financial Officer (Principal Financial and Accounting Officer)

Exhibit 32


Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350


I, Dian C. Taylor, Chief Executive Officer, and David B. Spacht, Chief Financial Officer, of Artesian Resources Corporation, a Delaware corporation (the "Company"), hereby certify, pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on our knowledge:

(1)	The Company's Quarterly Report on Form 10-Q for the period ended September 30, 2019 (the " Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 USC Section 78m(a) or Section 78o(d)), as amended; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Report and results of operations of the Company for the period covered by the Report.




Date: November 8, 2019

CHIEF EXECUTIVE OFFICER:		CHIEF FINANCIAL OFFICER:


/s/ DIAN C. TAYLOR		/s/ DAVID B. SPACHT
Dian C. Taylor		David B. Spacht



These certifications accompany the Report to which they relate, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.

SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT

BETWEEN

ARTESIAN WATER COMPANY, INC.

AND

COBANK, ACB

DATED AS OF SEPTEMBER 20, 2019

ARTICLE 1

DEFINITIONS AND ACCOUNTING TERMS

SECTION 1.01.

Definitions

SECTION 1.02.

Rules of Interpretation

ARTICLE 2

AMOUNT AND TERMS OF LOANS

Purpose

Note

Broken Funding Surcharge

ARTICLE 3 CONDITIONS PRECEDENT

SECTION 3.01.

Conditions Precedent to Initial Loan

SECTION 3.02.

Conditions to Each Loan

ARTICLE 4 REPRESENTATIONS AND WARRANTIES

SECTION 4.01.

Organizations and Good Standing

Taxes

Liens

Calamities, Strikes, etc.

SECTION 4.10.

Restrictions on the Company

Validity. Enforceable Obligations

ERISA

Principal Place of Business; Records

SECTION 4.19.

Rate Matters

SECTION 4.20.

System Condition; Water Rights

SECTION 4.21. [Intentionally Omitted]

SECTION 4.22.

Investment Company Act.

SECTION 4.23.

No Default Under Other Agreements

Franchise, Licenses, Etc.

SECTION 4.28.

Sanctions

ARTICLE 5 FURNISHING FINANCIAL AND OTHER INFORMATION

SECTION 5.01.

Annual Financial Statements of Company

SECTION 5.02.

Financial Statements of the Corporation

SECTION 5.03.

SEC and Other Related Reports

SECTION 5.04.

Requested Information

SECTION 5.05.

Officer’s Annual Certificate

Notice of Non-Environmental Litigation

SECTION 5.09.

Notice of Environmental Matters

SECTION 5.10.

ERISA Reportable Events

ARTICLE 6 COVENANTS

SECTION 6.01.

Compliance With Laws and Agreements

Loans and Investments

SECTION 6.06.

Guarantees

SECTION 6.07.

Mergers; Acquisitions: Etc

Preservation of Existence, Franchise and Assets

SECTION 6.12.

Books and Records

SECTION 6.13.

Payment of Taxes and Other Indebtedness

SECTION 6.14.

Insurance

SECTION 6.15.

Performance of Obligation

Arm’s-Length Transactions

SECTION 6.19.

Fiscal Year; Organization Documents

Liens

EBITDA to Interest Coverage Ratio

SECTION 6.23.

Sanctions, Etc.

ARTICLE 7 EVENTS OF DEFAULT

SECTION 7.01.

Events of Default

SECTION 7.02.

Acceleration; Remedies

SECTION 7.03.

Application of Payments After Event of Default.

ARTICLE 8 MISCELLANEOUS

SECTION 8.01.

Notices and Other Communications; Facsimile Copies

SECTION 8.02.

Rights of Set-Off.

SECTION 8.03.

Successors and Assigns

SECTION 8.04.

No Waiver; Remedies Cumulative

SECTION 8.05.

Payment of Expenses, Etc.

SECTION 8.06. Amendments, Waivers and Consents

Survival of Indemnification and Representations and Warranties

Binding Effect; Continuing Agreement

DEFINITIONS AND RULES OF INTERPRETATION A-

EXHIBIT B

FORM OF PROMISSORY NOTE B-

EXHIBIT C

FORM OF ANNUAL COMPLIANCE CERTIFICATE C-

SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT

THIS SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT (this “Agreement”) is entered into as of September 20, 2019, between ARTESIAN WATER COMPANY, INC., a Delaware corporation (the “Company”), and CoBANK, ACB, a federally chartered instrumentality of the United States (the “Lender” or “CoBank”).

BACKGROUND

The Company and CoBank are parties to an Amended and Restated Revolving Credit Agreement dated as of September 28, 2017, as amended by a First Amendment to Amended and Restated Revolving Credit Agreement dated as of July 18, 2018 (the “Existing Credit Agreement”). The parties now desire to amend and restate the Existing Credit Agreement.

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree to amend and restate the Existing Credit Agreement to read as follows:

ARTICLE 1

(i) DEFINITIONS AND ACCOUNTING TERMS

(1) SECTION 1.01. Definitions. Except as otherwise expressly provided in this Agreement, capitalized terms used in this Agreement and defined in Exhibit A hereto shall have the meanings set forth in such Exhibit.

SECTION 1.02. Rules of Interpretation. Except as otherwise expressly provided in this Agreement, the rules of interpretation set forth in Exhibit A hereto shall apply to this Agreement.

ARTICLE 2

(ii) AMOUNT AND TERMS OF LOANS

SECTION 2.01. The Commitment. On the terms and conditions set forth in this Agreement, the Lender agrees to make loans (each a “Loan” and collectively the “Loans”) to the Company from time to time during the period commencing on September 28, 2017 and ending on July 20, 2020 or such later date as CoBank may, in its sole discretion, authorize in writing (the “Maturity Date”), in an aggregate principal amount not to exceed, at any one time outstanding, $20,000,000 (the “Commitment”). The Commitment will be renewed for an additional year only if, on or before the Maturity Date, CoBank provides to the Company a written notice of renewal for an additional year (a “Renewal Notice”). If on or before the Maturity Date, CoBank grants a short-term extension of the Commitment, the Commitment will be renewed for an additional year only if CoBank provides to the Company a Renewal Notice on or before such extended expiration date. All annual renewals will be measured from, and effective as of, the same day as the Maturity Date in any year. Within the limits and during the term of the Commitment, the Company may borrow, prepay pursuant to Section 2.07 hereof, and reborrow.

SECTION 2.02. Purpose. The purpose of the Loans is to finance the operations of the Company and to provide up to $10,000,000 for the purpose of making loans to Artesian Water Maryland, Inc. The Company agrees to use the proceeds of the Loans for those purposes and no other.

SECTION 2.03. Availability. Loans will be made available on any Business Day upon the telephonic, written, or, if provided by separate agreement between the parties, electronic request of an authorized employee of the Company; provided, however, that any request made telephonically shall be promptly confirmed in writing by the Company if required by CoBank. Requests for Loans must be received not later than 12:00 Noon, Eastern time on the date the Loan is to be made. Loans will be made available by wire transfer of immediately available funds. Wire transfers shall be made to such account or accounts as may be authorized by the Company on forms supplied or approved by CoBank.

SECTION 2.04.Interest.

(A)Interest Rate Options. The Company agrees to pay interest on the unpaid principal balance of the Loans in accordance with one or more of the following interest rate options, as selected by the Company in accordance with the terms hereof:

(1)Weekly Variable Rate Option. At a rate per annum equal to the rate of interest established by CoBank on the first Business Day of each week (the “Variable Rate Option”). The rate established by CoBank shall be effective until the first Business Day of the next week. Each change in the rate shall be applicable to all balances subject to this option and information about the then current rate shall be made available upon telephonic request.

(2) LIBOR Option. At a fixed rate per annum equal to LIBOR (but in no event less than zero) plus 1.50% (the “LIBOR Option”). Under this option rates may be fixed: (A) for Interest Periods of 1, 2, 3, or 6, months, as selected by the Company; provided, however, that in no event may rates be fixed for Interest Periods expiring after the Maturity Date; (B) on balances of $100,000 or in multiples thereof; (C) on a Banking Day on 3 Banking Days’ prior notice; and (D) on not more than five (5) separate balances at any one time.

(B)Elections. Subject to the limitations set forth above, the Company: (1) shall select the applicable rate option(s) each time it requests a Loan; (2) may, on three Banking Days’ notice, elect to convert balances bearing interest at the Variable Rate Option to the LIBOR Option; (3) may, three (3) Banking Days’ prior to the expiration of any Interest Period elect, effective on the last day of the Interest Period, to refix a rate under the LIBOR Option or convert the balance the Variable Rate Option. In the absence of an election provided for herein, the Company shall be deemed to have elected the Variable Rate Option. All elections provided for herein may be made telephonically, in writing, or, if agreed to in a separate agreement, electronically, and must be received by 12:00 Noon Company’s local time on the applicable day. Any election made telephonically, shall, if required by CoBank, be promptly confirmed in writing.

(C)Calculation and Payment. Interest shall be calculated on the actual number of days each Loan is outstanding on the basis of a year consisting of 360 days. In calculating interest, the date each Loan is made shall be included and the date each Loan is repaid shall, if received before 3:00 P.M. Mountain time, be excluded. Interest shall be: (1) alculated monthly in arrears as of the last day of each month and on the Maturity Date; and (2) due and payable on the 20th day of the following month and on the Maturity Date. Notwithstanding the foregoing, at CoBank’s option, interest on balances bearing interest at the LIBOR Option shall be payable on the last day of the Interest Period or, in case of Interest Periods of longer than three months, at three month itervals.

(D)Additional Provisions Regarding LIBOR Option. Notwithstanding any other provision hereof, CoBank shall have the right to temporarily suspend or permanently terminate the Company’s ability to fix rates under the LIBOR Option or for one or more Interest Periods if, for any reason whatsoever (including a change in Applicable Law): (1) LIBOR is no longer being quoted in the London interbank market or is no longer being quoted for an Interest Period; (2) CoBank is prohibited from offering rates based on LIBOR; or (3) CoBank’s cost to fund balances bearing interest at the LIBOR Option (as determined by CoBank in its sole discretion) increases beyond any corresponding increase in LIBOR or decreases less than any corresponding decrease in LIBOR. In addition, if as a result of a change in Applicable Law or otherwise, CoBank is required to allocate additional capital to, or otherwise bear increased costs as a result of maintaining balances under, the LIBOR Option, the Company agrees to indemnify CoBank upon demand against all such costs.

SECTION 2.05.Commitment Fees. In consideration of the Commitment, the Company agrees to pay to the Lender a commitment fee on the average daily unused portion of the Commitment from the date hereof until the Commitment expires or is terminated at the rate of 1/4^th of 1% (0.25%) per annum (calculated on an actual/360 day basis). Such fees shall be: (a) calculated quarterly in arrears as of the last day of each calendar quarter and on the date the Commitment expires or is terminated; and (b) due and payable on the 20^th day of each January, April, July and October and on the date the Commitment expires or is terminated. Such fee shall be payable for each quarter or portion thereof during the original or any extended term of the Commitment; provided, however, that nothing contained herein shall obligate CoBank to extend the term of the Commitment.

SECTION 2.06.Repayment. The Loans shall mature and be due and payable on the Maturity Date.

SECTION 2.07.Prepayment.

(A) Voluntary. The Company shall have the right upon one, or, in the case of LIBOR Balances, three Business Days prior notice (which notice shall be irrevocable), to prepay the Loans in whole or part. In the event the Company prepays any LIBOR Balance, then at the time thereof, the Company shall pay to CoBank a prepayment surcharge calculated in accordance with Section 2.11 hereof.

(B) Mandatory. The Company shall prepay the Loans if required pursuant to Section 7.02 hereof.

SECTION 2.08.Note. The Company’s obligation to repay the Loans shall be evidenced by a promissory note in substantially the form of Exhibit B hereto, duly completed, dated the date hereof, and in the amount of the Commitment (the “Note”).

SECTION 2.09. Security. The Company’s obligations under the Credit Documents shall be secured by a statutory first priority Lien on all equity which the Company may now own or hereafter acquire or be allocated in the Lender and all proceeds thereof. The Company agrees to take such steps (including the execution and recording of such instruments and documents) as the Lender may from time to time require in order to confirm or enable the Lender to realize upon its Lien.

SECTION 2.10. Payments.

(A)Manner of Making Payments. The Company shall make all payments to the Lender under this Agreement and the other Credit Documents by wire transfer of immediately available funds in accordance with the following wire transfer instructions (or in accordance with such other wire transfer instructions as the Lender may direct by notice):

Name of Bank: COBANK

Location: Greenwood Village, CO

ABA No. 307088754

Reference: Artesian Water Company, Inc.

(B)Business Days. In the event any day on which any payment required to be made hereunder or under the Note is not a Business Day, then such payment shall be due and payable on the next Business Day and, in the case of principal, interest shall continue to accrue thereon.

(C)Records. The Lender shall keep a record of the unpaid principal balance of the Loans, the interest rate elections made with respect thereto, the interest accrued on the Loans, and all payments made with respect to the Loans, and such record shall, absent proof of error, be conclusive evidence of the outstanding principal and interest on the Loans.

SECTION 2.11. Broken Funding Surcharge. In the event the Company: (i) repays any LIBOR Balance prior to the last day of the Interest Period applicable thereto, whether such payment is made voluntary, by reason of acceleration, or otherwise; or (ii) fails for any reason to borrow, convert to, or renew any LIBOR Balance on the date fixed therefor, then the Company shall pay to the Lender a surcharge calculated in accordance with the next sentence hereof. Such surcharge shall be in an amount equal to the greater of: (i) the present value of the sum of: (a) any funding losses imputed by the Lender to have been incurred as a result of such payment, conversion or failure; and (b) a per annum yield of ½ of 1% on the amount prepaid, converted or not borrowed for the period such amount was scheduled to have been outstanding at such fixed rate; or (ii) $300. Such surcharge shall be determined and calculated in accordance with methodology established by the Lender, a copy of which will be made available upon request.

ARTICLE 3

CONDITIONS PRECEDENT

SECTION 3.01. Conditions Precedent to Initial Loan. The obligation of the Lender to make the initial Loan to the Company is subject to the conditions precedent that the Lender shall have received, on or before the day of such initial Loan, each of the following (which, in the case of instruments or documents, must be originals and in form and content satisfactory to the Lender):

(A) This Agreement. This Agreement, duly executed by each of the parties hereto in sufficient counterparts for each party hereto.

(B) The Note. The Note duly executed by the Company.

(C)Secretary’s Certificate. A certificate of the Secretary of the Company in form and content prescribed by CoBank, attaching and certifying as to each of the following (each of which must be in form and content reasonably acceptable to CoBank): (1) resolutions of the Company’s board of directors authorizing the transactions contemplated herein and in the other Credit Documents; (2) a certificate of incumbency showing the names and true ink signatures of the officers of the Company that are authorized to enter into this Agreement and the other Credit Documents; (3) the certificate of incorporation of the Company, as amended to the date hereof; (4) the bylaws of the Company, as amended to the date hereof; and (5) a certificate of the Secretary of State of Delaware attesting to the due incorporation and good standing of the Company in the State of Delaware.

(D) [Intentionally Omitted].

(E) Fees and Expenses. Payment by the Company of all fees and expenses owed by it to the Lender.

(F) Insurance. Such evidence as the Lender shall require that the Company is in compliance with Section 6.14 hereof.

(B) (G) Officer’s Certificate. A certificate of a Financial Officer of the Company as of the Closing Date in form and content prescribed by CoBank.

SECTION 3.02. Conditions to Each Loan. The obligation of the Lender to make any Loan to the Company, including the initial Loan, is subject to the conditions precedent that: (A) each of the representations and warranties set forth herein and in such other Credit Documents be true and correct on the date of such Loan, except to the extent such representations and warranties expressly related to an earlier date (in which case such representations and warranties shall have been true and correct in all material respects as of such earlier date); (B) no Default or Event of Default shall have occurred and be continuing; and (C) at the time of such Loan, there shall not exist any event which could reasonably be expected to have a Material Adverse Effect.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES

The Company hereby represents and warrants to the Lender that:

SECTION 4.01. Organizations and Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware with corporate power and authority to own and operate its properties and to carry on its business as now conducted, which consists of the gathering, purification, transportation, storage and distribution of water solely in the State of Delaware. The Company is a wholly owned subsidiary of Artesian Resources Corporation, a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware (the “Corporation”).

SECTION 4.02. Subsidiaries. The Company has no Subsidiaries.

SECTION 4.03. Financial Statements. (A) The balance sheets of the Company for the year ended December 31 in each of the years 2015 and 2016 and the related statements of income, retained earnings and cash flows for the years ended on said dates, copies of all of which have been furnished to the Lender, accompanied by a report thereon containing an opinion unqualified as to scope limitations imposed by the Company and otherwise without qualification except as therein noted, by the Company’s independent certified public accountants, have been prepared in accordance with generally accepted accounting principles consistently applied and the applicable provisions of the regulatory authorities having jurisdiction in the premises, are correct and complete, and present fully and fairly the financial position of the Company as of such dates and the results of its operations and changes in its financial position for such periods.

(B) Since December 31, 2016, there has been no change in the condition, financial or otherwise, of the Company as shown on the balance sheet as of such date except increases, if any, in its current indebtedness to banks incurred for working capital and except changes in the ordinary course of business, none of which individually or in the aggregate has had a Material Adverse Effect.

(C) All budgets, projections, feasibility studies, and other similar documentation submitted by the Company to the Lender in connection with the transactions contemplated by this Agreement were based upon assumptions that were reasonable and, as of the date hereof, no fact has come to light, and no event has occurred, that would cause any such assumption not to be reasonable.

SECTION 4.04. Litigation. Except as set forth in Schedule 4.04 hereof, there are no actions, suits or proceedings pending or, to the best of the knowledge of the Company, threatened against or affecting the Company at law or in equity or before or by any Governmental Authority, that would reasonably be expected to involve the possibility of any material judgment or liability against the Company or otherwise have a Material Adverse Effect. The Company is not in default with respect to any order of any court or Governmental Authority.

SECTION 4.05. Taxes. The Company has filed prior to delinquency all required tax returns and paid all applicable federal, state and local taxes, other than taxes not yet due or that may hereafter be paid without penalty, and the Company has no knowledge of any material deficiency or additional assessment in connection therewith not provided for on the books of the Company.

SECTION 4.06. Liens. There are no Liens on any property of the Company other than the Lien of the Indenture and Permitted Encumbrances.

SECTION 4.07. Title to Properties. The Company has good title to all its property and assets reflected on the balance sheet of the Company as of December 31, 2016 (other than property or assets subsequently disposed of in the normal and ordinary course of business).

SECTION 4.08. [Reserved].

SECTION 4.09. Calamities, Strikes, etc. Since December 31, 2016, the business, properties and assets of the Company have not been adversely affected in any substantial way as the result of any fire, explosion, accident, windstorm, strike, labor disturbance, lockout, combination of workmen, requisition or taking of property by the United States or any agency thereof or by the State of Delaware or any municipality or other agency thereof, flood, drought, embargo, riot, war or act of God or the public enemy.

SECTION 4.10. Restrictions on the Company. The Company is not a party to or bound by any contract, indenture, agreement or instrument, or any law, rule or regulation, any judgment or order of any court or Governmental Authority that restricts or limits the right or ability of the Company to enter into and perform the Credit Documents; and no approval, authorization, consent or withholding of objection on the part of any Person, including any Governmental Authority, is necessary in connection with the execution or performance of the Credit Documents. No action on the part of any shareholder of the Company is necessary in connection with the execution and delivery by the Company of and the performance by the Company of its obligations under the Credit Documents.

SECTION 4.11. No Conflicts. The execution and delivery of the Credit Documents and the consummation of the transactions therein contemplated, and the compliance with the Credit Documents by the Company, will not conflict with or result in a breach of any of the terms, conditions or provisions of, or constitute a default under, or result in the creation or imposition of any Lien upon any of the property or assets of the Company pursuant to the terms of, the charter or by-laws of the Company, or any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or the Corporation is a party, or by which the property or assets of either may be bound or affected.

SECTION 4.12. No Defaults. The Company is operating its business in compliance with the terms of the Credit Documents, and no Default or Event of Default exists.

SECTION 4.13. Compliance with Laws.

(A) The Company is not (i) in default with respect to any order, writ, injunction or decree of any court or (ii) in default in any material respect under any law, ordinance, order, regulation, license or demand (including ERISA, the Occupational Safety and Health Act of 1970 and laws and regulations establishing quality criteria and standards for air, water, land and toxic waste) of any Governmental Authority, default under which would have consequences that could reasonably be expected to have a Material Adverse Effect.

(B) The Company is not in violation of any applicable Federal, state or local

laws, statutes, rules, regulations, ordinances, permit, licenses or authorizations relating to public health, safety or the environment, including, without limitation, relating to releases, discharges, emissions or disposals to air, water, land or ground water, to the withdrawal or use of ground water, to the use, handling or disposal of polychlorinated biphenyls (PCBs), asbestos or urea formaldehyde, to the treatment, storage, disposal or management of hazardous substances (including, without limitation, petroleum, crude oil or any fraction thereof or other hydrocarbons), pollutants or contaminants, to exposure to toxic, hazardous or other controlled, prohibited or regulated substances which violation could reasonably be expected to have a Material Adverse Effect. The Company does not know of any liability or class of liability of the Company under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.), or the Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C. Section 6901 et seq.).

SECTION 4.14. Validity. Enforceable Obligations. This Agreement and the other Credit Documents have been duly executed and delivered and constitute legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as may be limited by bankruptcy or insolvency laws or similar laws affecting creditors’ rights generally or by general equitable principles.

SECTION 4.15. Full Disclosure. The financial statements referred to in Section 4.03 of this Agreement do not, nor does any other written statement furnished to the Lender by the Company in connection herewith, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein or herein not misleading. There is no fact peculiar to the Company that the Company has not disclosed to the Lender in writing that materially affects adversely nor, so far as the Company now can reasonably foresee, will materially affect adversely the properties, business, prospects, profits or condition (financial or otherwise) of the Company.

SECTION 4.16. Use of Proceeds. None of the transactions contemplated in the Agreement (including, without limitation, the use of proceeds from the Loans) will violate or result in a violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulation issued pursuant thereto, including, without limitation, Regulations G, T and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. The Company does not intend to purchase, with the proceeds of the Loans, any “margin stock” within the meaning of said Regulation G. None of the proceeds from the Loans will be used to purchase, or refinance any borrowing the proceeds of which were used to purchase, any “security” within the meaning of the Securities Exchange Act of 1934, as amended.

SECTION 4.17. ERISA. The consummation of the transactions provided for in the Agreement and compliance by the Company with the provisions thereof will not involve any prohibited transaction within the meaning of ERISA or Section 4975 of the Code. Each “Plan” (as hereinafter defined) complies in all material respects with all applicable statutes and governmental rules and regulations, and (i) no “Reportable Event” (as hereinafter defined) has occurred and is continuing with respect to any Plan, (ii) the Company has not withdrawn from any Plan or instituted steps to do so, and (iii) no steps have been instituted to terminate any Plan. No condition exists or event or transaction has occurred in connection with any Plan that could result in the incurrence by the Company of any material liability, fine or penalty. No Plan maintained by the Company, nor any trust created thereunder, have incurred any “accumulated funding deficiency” as defined in Section 302 of ERISA nor does the present value of all benefits vested under all Plans exceed, as of the last annual valuation date, the value of the assets of the Plans allocable to such vested benefits. The Company does not have any contingent liability with respect to any post-retirement “welfare benefit plans” (as such term is defined in ERISA) except as has been disclosed to the Lender.

SECTION 4.18. Principal Place of Business; Records. The principal place of business and chief executive office of the Company and the place where the records of the Company are kept is at the address of the Company shown in Schedule 8.01 of this Agreement.

SECTION 4.19. Rate Matters. The Company’s current rates for the provision of water services have been approved by all necessary Governmental Authorities, including, without limitation, the Delaware Public Service Commission. There are no pending, nor to the Company’s knowledge, any threatened, proceedings before any Governmental Authority the objective or result of which is or could be to materially reduce or otherwise materially change adversely any of the Company’s rates for the provision of water services or otherwise have a Material Adverse Effect.

SECTION 4.20. System Condition; Water Rights. The Company’s utility facilities reasonably meet present demand in all material respects, are constructed in a good and workmanlike manner, are in good working order and condition, and comply in all material respects with all applicable laws, rules, regulations, orders, codes, and the like. The Company has water rights with such quantities, priorities and qualities as are necessary adequately to service the present and reasonably anticipated needs of its customers. The Company controls, owns, or has access to all such water rights free and clear of the interest of any third party which would individually or in the aggregate materially adversely affect the Company’s intended use thereof and has not suffered or permitted any transfer or encumbrance of such water rights, has not abandoned such water rights, or any of them, and has not done any act or thing which would materially impair or cause a material loss of any such water rights.

SECTION 4.21. [Intentionally Omitted]

SECTION 4.22. Investment Company Act. The Company is not an “investment company” as that term is defined in, or otherwise subject to regulation under, the Investment Company Act of 1940, as amended.

SECTION 4.23. No Default Under Other Agreements. The Company is not in default in any respect under any contract, lease, loan agreement, indenture, mortgage, security agreement or other agreement or obligation to which it is a party or by which any of its properties is bound which default has had or would be reasonably expected to have a Material Adverse Effect.

SECTION 4.24. Indebtedness. As of the Closing Date, the Company has no secured Indebtedness or Off Balance Sheet Indebtedness other than, in each case, as set forth in the Company’s most recent annual report filed on Form 10-K and quarterly report filed on Form 10-Q, in each case as filed with the Securities and Exchange Commission.

SECTION 4.25. Solvency. The Company is and, after the consummation of the transactions contemplated by this Agreement and the other Credit Documents, will be Solvent.

SECTION 4.26. Insurance. The Company maintains insurance for the benefit of the Company with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Company operates.

SECTION 4.27. Franchise, Licenses, Etc. The Company possesses all material franchises, certificates, licenses, permits and other authorizations necessary for the operation of its businesses.

SECTION 4.28. Sanctions. None of the Company, any of its Subsidiaries or, to the knowledge of the Company, any director, officer, employee, agent or affiliate of the Company or any of its Subsidiaries is a Person that is, or is owned or controlled by Persons that are: (A) the subject/target of any sanctions administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the U.S. Department of State, or other relevant sanctions authority (collectively “Sanctions”) or (B) located, organized or resident is a country or territory that is, or whose government is, the subject of Sanctions.

ARTICLE 5

FURNISHING FINANCIAL AND OTHER INFORMATION

The Company hereby covenants and agrees that so long as this Agreement is in effect and until the Loans, together with interest, fees and other monetary obligations hereunder have been paid in full and the Commitment expires or is terminated:

SECTION 5.01. Annual Financial Statements of Company. The Company will furnish, or cause to be furnished, to the Lender as soon as available, and in any event within 120 days after the close of each fiscal year of the Company:

(i) a balance sheet of the Company as of the close of such fiscal year, and

(ii) statements of income, retained earnings and cash flow of the Company for such fiscal year,

in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail and accompanied by an opinion thereon of a firm of independent public accountants of recognized national standing selected by the Company to the effect that the financial statements have been prepared in conformity with generally accepted accounting principles consistently applied and present fairly the financial condition of the Company as of the end of such fiscal year and the results of its operations for the fiscal year then ended and a written statement from such accountants that their examination in connection with such financial statements has been made in accordance with generally accepted auditing standards and auditing procedures as were considered necessary in the circumstances, and, to the extent applicable, disclosing all defaults by the Company in the performance of any obligation or under its certificate of incorporation of which they have obtained knowledge in making the examination necessary to their opinion.

SECTION 5.02. Financial Statements of the Corporation.

(i) Quarterly Statements. As soon as available and in any event within forty five (45) days after the end of each quarterly fiscal period (except the last) of each fiscal year of the Corporation, the Company will deliver to the Lender copies of:

(A) consolidated balance sheets of the Corporation and its subsidiaries as of the close of such quarterly period, and

(B) consolidated statements of income, retained earnings and cash flows of the Corporation and its subsidiaries, for such quarterly period and for the portion of the fiscal year ending with such period,

in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year, all in reasonable detail and certified as presenting fairly the financial condition of the Corporation and its subsidiaries as of the end of such period and the results of their operations for such period, subject to changes resulting from year-end adjustments, by the chief financial officer of the Corporation.

(ii) Annual Statements. As soon as available and in any event within one hundred twenty (120) days after the close of each fiscal year of the Corporation, the Company will deliver to Lender, copies in duplicate of:

(A) consolidated balance sheets of the Corporation and its subsidiaries as of the close of such fiscal year, and

(B) consolidated statements of income, retained earnings and cash flow of the Corporation and its subsidiaries for such fiscal year,

in each case setting forth in comparative form the consolidated figures for the preceding fiscal year, all in reasonable detail and accompanied by an opinion thereon of a firm of independent public accountants of recognized national standing selected by the Corporation to the effect that the consolidated financial statements have been prepared in conformity with GAAP and present fairly the financial condition of the Corporation and its subsidiaries as of the end of such fiscal year and the results of their operations for the fiscal year then ended and a written statement from such accountants that their examination in connection with such financial statements has been made in accordance with generally accepted auditing standards and auditing procedures as were considered necessary in the circumstances, and, to the extent applicable, disclosing all defaults by the Corporation in the performance of any obligation or under its certificate of incorporation of which they have obtained knowledge in making the examination necessary to their opinion.

SECTION 5.03. SEC and Other Related Reports. The Company will deliver to the Lender, promptly upon their becoming available, copies of all registration and proxy statements and reports that the Company or the Corporation shall file with the Securities and Exchange Commission or any successor and corresponding Governmental Authority, and copies of such financial statements, reports, proxy statements and returns as it, or the Corporation, shall send to its or their stockholders or to the Trustee or file with any securities exchange.

SECTION 5.04. Requested Information. The Company with reasonable promptness shall furnish the Lender such other data and information as may reasonably be requested.

SECTION 5.05. Officer’s Annual Certificate. Concurrently with delivery of the financial statements referred to in Section 5.01 hereof, the Company will deliver to the Lender a certificate of its President or its Treasurer or Controller in the form attached hereto as Exhibit C.

SECTION 5.06. Inspection. The Company will permit the Lender, or such person or persons as the Lender may designate in writing, to visit and inspect any of the properties of the Company and to examine its books of account and discuss its affairs, finances and accounts with its officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss with the Lender the finances and affairs of the Company), all at such reasonable times and as often as the Lender may desire; provided that, unless a Default or Event of Default exists, the Lender shall bear the cost of any such inspection.

SECTION 5.07. Notice of Default. Promptly after becoming aware thereof, the Company will deliver to the Lender notice of the occurrence of any Default or Event of Default provided; however, that the failure to give such notice shall not affect the Lender’s rights and power to exercise any and all of the remedies specified herein.

SECTION 5.08. Notice of Non-Environmental Litigation. Promptly after the commencement thereof, the Company will deliver to the Lender notice of the commencement of all actions, suits, or proceedings before any court, arbitrator, or Governmental Authority affecting it that, if adversely determined, could have a Material Adverse Effect.

SECTION 5.09. Notice of Environmental Matters. Without limiting the provision of Section 5.08 hereof, promptly after receipt thereof, the Company will deliver to the Lender notice of its receipt of all pleadings, orders, complaints, indictments, or other written communications alleging a condition that would reasonably be expected to require the Company to undertake or to contribute to a cleanup or other response under any Environmental Law, or that seeks material penalties, damages, injunctive relief, or criminal sanctions related to alleged violations of any Environmental Law, or that makes any material claim for personal injury or property damage as a result of environmental factors or conditions or that, if adversely determined, could otherwise have a Material Adverse Effect.

SECTION 5.10. ERISA Reportable Events. Within 10 days after the Company becomes aware of the occurrence of any Reportable Event with respect to the Company, a statement describing such Reportable Event and the actions proposed to be taken in response to such Reportable Event.

ARTICLE 6

COVENANTS

SECTION 6.01. Compliance With Laws and Agreements. The Company will comply with (i) all Applicable Laws of all Governmental Authorities and of any court, arbitrator or grand jury, in respect of the conduct of its business and the ownership of its properties (including, without limitation, applicable statutes, rules, regulations, orders and restrictions relating to equal employment opportunities or Environmental Laws), the violation of which could reasonably be expected to have a Material Adverse Effect; and (ii) all agreements, indentures, mortgages and other instruments to which it is a party or by which it or any of its property is bound, the violation of which could reasonably be expected to have a Material Adverse Effect.

SECTION 6.02. Capitalization. The Company agrees to purchase such equity in the Lender as the Lender may from time to time require in accordance with its Bylaws and Capital Plan (as each may be amended from time to time), except that the maximum amount of equity that the Company may be required to purchase in the Lender in connection with the Loans may not exceed the maximum amount permitted by the Lender’s Bylaws at the time this Agreement is entered into. The rights and obligations of the parties with respect to such equity and any distributions made on account thereof or on account of Borrower’s patronage with CoBank shall be governed by the Lender’s Bylaws and Capital Plan (as each may be amended from time to time). All such investments and all other equities that the Company may now own or hereafter acquire or be allocated in the Lender shall be subject to a statutory first Lien in favor of the Lender. The Lender shall not be obligated to set off or otherwise apply such equities to the Company’s obligations to the Lender.

SECTION 6.03. Licenses, Etc. The Company will duly and lawfully obtain and maintain in full force and effect all licenses, certificates, permits, authorizations, approvals and the like that are material to the conduct of its business or that otherwise may be required by laws, to the extent the failure to do so could have a Material Adverse Effect.

SECTION 6.04. Water Rights. The Company will maintain and procure water rights with such quantities, priorities and qualities as are necessary adequately to serve the present and reasonably anticipated needs of its customers. The Company will continue to control, own or have access to all such water rights free and clear of the interest of any third party, will not suffer or permit any transfer or encumbrance of such water rights, will not abandon such water rights, or any of them, and will not do any act or thing which would impair or cause the loss of such water rights.

SECTION 6.05. Loans and Investments. The Company will not, after the date hereof, make any loan or advance to, invest in, purchase or make any commitment to purchase any commercial paper, stock, bonds, notes, or other securities of any person or entity (each, whether made directly or indirectly, (an “Investment”), other than:

(A) commercial paper maturing not in excess of one year from the date of acquisition and rated “P1” by Moody’s or “A1” by S&P on the date of acquisition;

(B) certificates of deposit in North American commercial banks rated “C” or better by Keefe, Bruyette & Woods, Inc., or “3” or better by Cates Consulting Analysts, maturing not in excess of one year from the date of acquisition;

(C) securities or deposits issued, guaranteed, or fully insured as to payment by the United States government or any agency thereof, and equity or investments in the Lender;

(D) repurchase agreements of any bank or trust company incorporated under the laws of the United States of America or any state thereof and fully secured by a pledge of obligations issued or fully and unconditionally guaranteed by the United States government;

(E) stocks and other voting securities that are not included within the scope of clauses (A) through (D) above and are issued by corporations or other entities not engaged in any business other than the water or wastewater utility business and that are incorporated or organized under the laws of the United State of America or any state thereof; provided that prior to or as a result of such investment the Company holds not less than seventy five percent (75%) of the voting securities of such corporation or entity;

(F) commercial paper, bonds, stocks or other securities that are not included within the scope of clauses (A) through (E) above and are issued by corporations or other entities incorporated or organized under the laws of the United State of America or any state thereof (collectively, “Other Investments”); provided that the aggregate amount (calculated based on cost) of all such Other Investments shall not at any time exceed One Million Dollars ($1,000,000); and

(G) Loans to Artesian Water Maryland, Inc. in an aggregate principal amount not to exceed, at any one time outstanding, $10,000,000.

SECTION 6.06. Guarantees. The Company will not guarantee, assume or otherwise become obligated or liable with respect to the indebtedness or other obligations of any person or entity, other than in the ordinary course of its business.

SECTION 6.07. Mergers; Acquisitions: Etc. The Company will not: (A) merge or consolidate with any other entity unless the Company shall be the continuing and surviving corporation and, after such merger or consolidation, there shall exist no Default or Event of Default; or (B) commence operations under any other name, organization or entity, including any joint venture.

SECTION 6.08. Transfer of Assets. The Company will not sell, transfer, lease, enter into any contract for the sale, transfer or lease of, or otherwise dispose of, any of its assets, except in the ordinary course of its business.

SECTION 6.09. Change in Business. The Company will not engage in any business activity or operation different from or unrelated to its current business activities or operations.

SECTION 6.10. Distributions. The Company will not make, declare or pay, directly or indirectly, any dividend or other distribution of assets to shareholders of the Company, or retire, redeem, purchase or otherwise acquire for value any shares of stock of the Company, if at the time thereof or after giving effect thereto a Default or Event of Default exists or would exist..

SECTION 6.11. Preservation of Existence, Franchise and Assets. The Company will do all things necessary to preserve and keep in full force and effect its existence, rights, franchises and authority. The Company shall generally maintain its properties, real and personal, in good condition, and the Company shall not waste or otherwise permit such properties to deteriorate, reasonable wear and tear excepted.

SECTION 6.12.Books and Records. The Company will keep complete and accurate books and records of its transactions in accordance with good accounting practices on the basis of GAAP (including the establishment and maintenance of appropriate reserves).

SECTION 6.13.Payment of Taxes and Other Indebtedness. The Company will pay, settle or discharge (a) all taxes, assessments and governmental charges or levies imposed upon it, or upon its income or profits, or upon any of its properties, before they shall become delinquent, (b) all lawful claims (including claims for labor, materials and supplies) which, if unpaid, might give rise to a Lien upon any of its properties, and (c) all of its other Indebtedness as it shall become due (to the extent such repayment is not otherwise prohibited by this Agreement); provided, however, that the Company shall not be required to pay any such tax, assessment, charge, levy, claim or Indebtedness which is being contested in good faith by appropriate proceedings and as to which adequate reserves therefore have been established in accordance with GAAP, unless the failure to make any such payment (i) would give rise to an immediate right to foreclose or collect on a Lien securing such amounts or (ii) would have or would reasonably be expected to have a Material Adverse Effect.

SECTION 6.14.Insurance. The Company will at all times maintain in full force and effect insurance (including worker’s compensation insurance, liability insurance, casualty insurance and business interruption insurance) with responsible and reputable insurance companies in such amounts, covering such risks and liabilities and with such deductibles or self-insurance retentions as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Company operates. The Company agrees to deliver to CoBank such proof of compliance with this Section as Lender may from time to time require.

SECTION 6.15. Performance of Obligation. The Company will perform in all material respects all of its obligations under the terms of all material agreements, indentures, mortgages, security agreements or other debt instruments to which it is a party or by which it is bound.

SECTION 6.16. Audits/Inspections. Upon reasonable prior notice and during normal business hours, the Company will permit representatives appointed by the Lender, including, without limitation, employees of the Lender, independent accountants, agents, attorneys, and appraisers, to visit and inspect the Company’s property, including its books and records, its accounts receivable and inventory, the Company’s facilities and its other business assets, and to make photocopies or photographs thereof and to write down and record any information such representative obtains and shall permit the Lender or its representatives to investigate and verify the accuracy of information provided to the Lender and to discuss all such matters with the officers, employees and representatives of the Company.

SECTION 6.17 .Nature of Business. The Company will not alter the character of its business from that of a water or wastewater utility company.

SECTION 6.18. Arm’s-Length Transactions. The Company will not enter into any transaction or series of transactions, whether or not in the ordinary course of business, with any officer, director or Affiliate other than on terms and conditions substantially as favorable to the Company as would be obtainable in a comparable arm’s-length transaction with a Person other than an officer, director or Affiliate.

SECTION 6.19. Fiscal Year; Organization Documents. The Company will not (a) change its fiscal year or (b) change its form of organization from a corporation organized under the laws of the State of Delaware.

SECTION 6.20. Liens. The Company will not contract, create, incur, assume or permit to exist any Lien with respect to any of its property or assets of any kind (whether real or personal, tangible or intangible), whether now owned or after acquired, except for the Lien of the Indenture and Liens permitted by the Indenture.

SECTION 6.21. Indebtedness. The Company will not, nor will it permit any of its Subsidiaries to incur, assume, guarantee or in any other manner become liable, with respect to:

(A) Short-Term Debt (including Company Obligations) in excess of, at any one time outstanding, $40,000,000.

(B) Funded Indebtedness in excess of, at any one time outstanding, 66.67% of Total Permanent Capital of the Company and its consolidated subsidiaries.

SECTION 6.22. EBITDA to Total Interest Expense Ratio. The Company and its consolidated subsidiaries, if any, will have at the end of each fiscal year of the Company, an EBITDA to Total Interest Expense Ratio of not less than 2.50 to 1.00.

SECTION 6.23. Sanctions, Etc. The Company will not, directly or indirectly, use the proceeds of the loans, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person, to fund any activities or business of or with any person, or in any country or territory, that, at the time of such funding, is, or whose government is, the subject of any sanctions administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control, the U.S. Department of State, or other relevant sanctions authority. In addition, the Company agrees that: (1) it will not become a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order, or knowingly engage in any dealings or transactions with any such Person; and (2) no part of the proceeds of the loans will be used, directly or indirectly, in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any person in violation of any applicable anti-corruption law.

ARTICLE 7

EVENTS OF DEFAULT

SECTION 7.01. Events of Default. An Event of Default shall exist upon the occurrence of any of the following specified events (each an “Event of Default”):

(A) Payment. The Company shall default in the payment when due of any principal of any of the Loans or in the payment when due of any interest on the Loans or of any fees or other amounts owing hereunder or under any of the other Credit Documents.

(B) Representations. Any representation, warranty or statement made or deemed to be made by the Company herein, in any of the other Credit Documents, or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove untrue in any material respect on the date as of which it was deemed to have been made.

(C)Certain Covenants. The failure by the Company to perform or comply with any covenant or agreement set forth in this Agreement (excluding Sections 2.02, 5.07, 5.08, 5.09, 6.21, and 6.22), and such failure continues for thirty (30) days after written notice thereof shall have been delivered by the Lender to the Company;

(D)Other Covenants. The failure by the Company to perform or comply with Sections 2.02, 5.07, 5.08, 5.09, 6.21 or 6.22 of this Agreement.

(E) Cross-Default. The occurrence of any event of default under, or lapse of or failure on the part of the Company to observe, keep, or perform any covenant or agreement contained in any other Credit Document or any other agreement between the Company and the Lender, including, without limitation, any guaranty, loan agreement, security agreement, pledge agreement, indenture, mortgage or other agreement.

(F) Other Indebtedness. The Company should fail to pay when due any indebtedness to any other Person for borrowed money or any long-term obligation for the deferred purchase price of property (including any capitalized lease), or any other event occurs which, under any agreement or instrument relating to such indebtedness or obligation, has the effect of accelerating or permitting the acceleration of such indebtedness or obligation, whether or not such indebtedness or obligation is actually accelerated or the right to accelerate is conditioned on the giving of notice, the passage of time, or otherwise.

(G) Judgment. The rendering against the Company of a judgment for the payment of moneys in excess of Five Hundred Thousand Dollars ($500,000) and the continuance of such judgment unsatisfied and without stay of execution thereon for a period of forty-five (45) days after the entry of such judgment, or the continuance of such judgment unsatisfied for a period of forty-five (45) days after the termination of any stay of execution thereon entered within such first mentioned forty-five (45) days.

(H) Bankruptcy, etc. The occurrence of any of the following with respect to the Company (i) a court or governmental agency having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoint a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or for any part of its property or order the winding up or liquidation of its affairs; or (ii) an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect is commenced against the Company and such petition remains unstayed and in effect for a period of 60 consecutive days; or (iii) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any substantial part of its property or make any general assignment for the benefit of creditors; or (iv) the Company shall become insolvent or shall admit in writing its inability to pay its debts generally as they become due or any action shall be taken by the Company in furtherance of any of the aforesaid purposes.

(I) ERISA. The occurrence of any of the following events or conditions if the same, individually or in the aggregate, would be reasonably expected to result in a liability of an amount greater than or equal to $500,000: (A) any “accumulated funding deficiency,” as such term is defined in Section 302 of ERISA and Section 412 of the Code, whether or not waived, shall exist with respect to any Plan, or any Lien shall arise on the assets of the Company or any ERISA Affiliate in favor of the PBGC or a Plan; (B) a Termination Event shall occur with respect to a Single Employer Plan, which is, in the reasonable opinion of the Lender, likely to result in the termination of such Plan for purposes of Title IV of ERISA; (C) a Termination Event shall occur with respect to a Multiemployer Plan or Multiple Employer Plan, which is, in the reasonable opinion of the Lender, likely to result in (i) the termination of such Plan for purposes of Title IV of ERISA, or (ii) the Company or any ERISA Affiliate incurring any liability in connection with a withdrawal from, reorganization of (within the meaning of Section 4241 of ERISA), or insolvency (within the meaning of Section 4245 of ERISA) of such Plan; or (D) any prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) or breach of fiduciary responsibility shall occur which would be reasonably expected to subject the Company or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or 502(1) of ERISA or Section 4975 of the Code, or under any agreement or other instrument pursuant to which the Company or any ERISA Affiliate has agreed or is required to indemnify any person against any such liability.

(J) Indenture. An “Event of Default” (as defined in the Indenture) shall exist.

SECTION 7.02. Acceleration; Remedies. Upon the occurrence and during the continuance of a Default or an Event of Default, the Lender shall have no obligation to make any Loan to the Company and may discontinue doing so at any time without prior notice. In addition, upon the occurrence of an Event of Default and at any time thereafter unless and until such Event of Default has been waived by the Lender, the Lender may, by written notice to the Company, take any of the following actions:

(A) Termination of Commitments. Declare the Commitment terminated whereupon the Commitment shall be immediately terminated provided, however, that upon the occurrence of an Event of Default under Section 7.01(H) hereof, the Commitment shall automatically terminate without the need to provide notice of any kind, which is hereby waived by the Company.

(B) Acceleration of Loans. Declare the unpaid amount of all Company Obligations to be due whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company; provided, however, that upon the occurrence of an Event of Default under Section 7.01(H) hereof, the Company Obligations shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company.

(C) Enforcement of Rights. Enforce any and all rights and interests created and existing under the Credit Documents, including, without limitation, all rights of set-off.

(D) Other Rights. Exercise all other rights provided in this Agreement, any other Credit Document, or under law.

In addition to the foregoing, upon the occurrence and during the continuance of an Event of Default the unpaid principal balance of the Loans, together with any overdue payments of interest, fees or other charges hereunder, shall automatically accrue interest at the Default Rate.

SECTION 7.03. Application of Payments After Event of Default. Notwithstanding any other provisions of this Agreement, after the exercise of any remedies by the Lender pursuant to Section 7.02 (or after the Commitment shall automatically terminate and the Loans (with accrued interest thereon) and all other amounts under the Credit Documents shall automatically become due and payable in accordance with the terms of such Section), all amounts collected or received by the Lender on account of amounts outstanding under any of the Credit Documents shall be applied as follows:

FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including without limitation reasonable Attorney Costs) of the Lender in connection with enforcing the rights of the Lender under the Credit Documents;

SECOND, to payment of any fees or surcharges owed to the Lender;

THIRD, to the payment of all accrued interest payable to the Lender hereunder;

FOURTH, to the payment of the outstanding principal amount of the Loans;

FIFTH, to all other obligations which shall have become due and payable under the Credit Documents and not repaid pursuant to clauses “FIRST” through “FOURTH” above; and

SIXTH, to the payment of the surplus, if any, to whoever may be lawfully entitled to receive such surplus.

In carrying out the foregoing, amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category.

ARTICLE 8

MISCELLANEOUS

SECTION 8.01. Notices and Other Communications; Facsimile Copies

(A)General. Unless otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including by facsimile transmission). All written notices and all other communications expressly permitted hereunder to be given by telephone shall be made to the applicable address, facsimile number, electronic mail address or telephone number specified for such Person on Schedule 8.01 or to such other address, facsimile number, electronic mail address or telephone number as shall be designated by such party in a notice to the other parties. All such notices and other communications shall be deemed to be given or made upon the earlier to occur of (i) actual receipt by the relevant party hereto and (ii) (A) if delivered by hand or by courier, when signed for by or on behalf of the relevant party hereto; (B) if delivered by facsimile, when sent and receipt has been confirmed by telephone; and (C) if delivered by electronic mail (which form of delivery is subject to the provisions of subsection (C) below), when delivered.

(B)Effectiveness of Facsimile Documents and Signatures. Credit Documents may be transmitted and/or signed by facsimile. The effectiveness of any such documents and signatures shall, subject to applicable law, have the same force and effect as manually-signed originals and shall be binding on the Company and the Lender. The Lender may also require that any such documents and signatures be confirmed by a manually-signed original thereof; provided, however, that the failure to request or deliver the same shall not limit the effectiveness of any facsimile document or signature.

(C)Limited Use of Electronic Mail. Electronic mail and internet and intranet websites may be used only to distribute routine communications, such as financial statements and other information as provided in Sections 5.01 through 5.04, and to distribute Credit Documents for execution by the parties thereto, and may not be used for any other purpose.

(D)Reliance by Lender. The Lender shall be entitled to rely and act upon any notices (including telephonic notices of borrowing and interest elections) purportedly given by or on behalf of the Company even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. The Company shall indemnify the Lender from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Company. All telephonic notices to and other communications with the Lender may be recorded by the Lender, and the Company hereby consents to such recording.

SECTION 8.02. Rights of Set-Off. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default and the commencement of remedies described in Section 7.02, the Lender is authorized at any time and from time to time, without presentment, demand, protest or other notice of any kind (all of which rights being hereby expressly waived), to hold, set-off and appropriate and apply any and all proceeds of any equity in the Lender, any deposits (general or special), and any other indebtedness at any time held or owing by the Lender (whether or not due) to or for the credit or the account of the Company against the Company Obligations irrespective of whether the Lender shall have made any demand hereunder and although such Company Obligations, or any of them, may be contingent or unmatured; provided, however, that the Lender shall not be obligated to effect any such setoff. The Company hereby agrees that any Person purchasing a participation in the Loans and Commitments hereunder pursuant to Section 8.03 may exercise all rights of set-off with respect to its participation interest as fully as if such Person were a Lender hereunder.

SECTION 8.03. Successors and Assigns

(A)Generally. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Company may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Lender. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participation Purchasers to the extent provided in subsection (B) of this Section and, to the extent expressly contemplated hereby, the Indemnities) any legal or equitable right, remedy or claim under or by reason of this Agreement.

(B)Participations. Without limiting the foregoing, the Lender may at any time, without the consent of, or notice to, the Company, sell participations to any Participation Purchaser in all or a portion of the Lender’s rights and/or obligations under this Agreement (including all or a portion of the Commitment and/or the Loans); provided that (i) if such sale is other than to a Farm Credit System

Institution, such sale shall be subject to the Company’s consent, which shall not be unreasonably withheld or delayed, (ii) the Lender’s obligations under this Agreement shall remain unchanged, (iii) the Lender shall remain solely responsible to the Company for the performance of such obligations and (iv) the Company and the Lender shall continue to deal solely and directly with the Lender in connection with the Lender’s rights and obligations under this Agreement. Any agreement or instrument pursuant to which the Lender sells such a participation shall provide that the Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that the Lender will not, without the consent of the Participation Purchaser, agree to any amendment, waiver or other modification described in Section 8.06 that directly affects such Participation Purchaser. To the extent permitted by law, each Participation Purchaser also shall be entitled to the benefits of Section 8.02 as though it were a Lender, provided such Participation Purchaser agrees to share any amount received in excess of its pro rata share with the Lender and all other Participation Purchasers.

(C)Nonrestricted Assignments. The Lender may at any time pledge or assign a security interest in all or any portion of its rights under the Credit Documents (including under the Note) to secure obligations of such Lender, including any pledge or assignment to secure obligations arising in connection with the issuance of notes by the Federal Farm Credit Banks Funding Corporation; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

(D)Information. The Lender may furnish any information concerning the Company in the possession of such Lender from time to time to Participation Purchasers (including prospective Participation Purchasers).

SECTION 8.04.No Waiver; Remedies Cumulative. No failure or delay on the part of the Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Company and the Lender shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which the Lender would otherwise have. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Lender to any other or further action in any circumstances without notice or demand.

SECTION 8.05.Payment of Expenses, Etc.

(A)The Company agrees (i) to pay or reimburse the Lender for all costs and expenses incurred in connection with the preparation, negotiation and execution of this Agreement and the other Credit Documents and any amendment, waiver, consent or other modification of the provisions hereof and thereof (whether or not the transactions contemplated hereby or thereby are consummated), and the consummation and administration of the transactions contemplated hereby and thereby, including all Attorney Costs (including, without limitation, the reasonable fees and expenses of Sherman & Howard L.L.C., special counsel to the Lender), and (ii) to pay or reimburse the Lender for all costs and expenses incurred in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or the other Credit Documents (including all such costs and expenses incurred during any “workout” or restructuring in respect of the Company Obligations and during any legal proceeding, including any bankruptcy or insolvency proceeding of the Company), including all Attorney Costs. The foregoing costs and expenses shall include all search, filing, recording, title insurance and appraisal charges and fees and taxes related thereto, and other out-of-pocket expenses incurred by the Lender and the cost of independent public accountants and other outside experts retained by the Lender. All amounts due under this Section 8.05(A) shall be payable within ten Business Days after written notice is provided to the Company demanding payment therefor. In addition, the Company will pay all taxes (including interest and penalties) that may be payable in respect of the execution and delivery of this Agreement or any other Credit Documents or of any amendment of, or waiver or consent under or with respect to, this Agreement or the Note, and will hold the Lender harmless against any loss or liability resulting from nonpayment or delay in payment of any such tax. The obligations of the Company under this Section 8.05 shall survive the payment of the Loans.

(B) Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify and hold harmless the Indemnities from and against any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time be imposed on, incurred by or asserted against any such Indemnitee in any way relating to or arising out of or in connection with (a) the execution, delivery, enforcement, performance or administration of any Credit Document or any other agreement, letter or instrument delivered in connection with the transactions contemplated thereby or the consummation of the transactions contemplated thereby, (b) the Commitment or any Loan, (c) any actual or alleged presence or release of hazardous materials on or from any property currently or formerly owned or operated by the Company, any Subsidiary of the Company, or any liability resulting from any actual or alleged violation of Environmental Laws related in any way to the Company, any Subsidiary of the Company or (d) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation or proceeding) and regardless of whether any Indemnitee is a party thereto (all the foregoing, collectively, the “Indemnified Liabilities”), in all cases, whether or not caused by or arising, in whole or in part, out of the negligence of the Indemnitee; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses or disbursements are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. No Indemnitee shall be liable for any indirect or consequential damages relating to this Agreement or any other Credit Document or arising out of its activities in connection herewith or therewith (whether before or after the Closing Date). All amounts due under this Section 8.05(B) shall be payable within ten Business Days after written notice is provided to the Company demanding payment therefor. The agreements in this Section shall survive the termination of the Commitment and the repayment, satisfaction or discharge of all the other Company Obligations.

(C) (C) Payments Free of Taxes. Any and all payments by or on account of any Company Obligation to Lender under any Credit Document shall be made without deduction or withholding for any taxes, except as required by Applicable Law. If any Applicable Law requires the deduction or withholding of any tax from any such payment by the Company, then: (1) the Company shall be entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with Applicable Law; and (2) the sum payable by the Company shall be increased as necessary so that after such deduction or withholding has been made (including such deductions and withholdings applicable to additional sums payable under this Section) Lender receives an amount equal to the sum it would have received had no such deduction or withholding been made. The Company’s obligations under this Section shall survive the repayment, satisfaction or discharge of all Company Obligations.

SECTION 8.06. Amendments, Waivers and Consents. Neither this Agreement, nor any other Credit Document nor any of the terms hereof or thereof may be amended, changed, waived, discharged or terminated unless such amendment, change, waiver, discharge or termination is in writing and signed by the Lender and the Company; provided that no such amendment, change, waiver, discharge or termination shall without the consent of each Participation Purchaser affected thereby:

(A)extend the Maturity Date, or postpone or extend the time for any payment or prepayment of principal;

(B)reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) thereon or fees or other amounts payable hereunder;

(C)reduce or waive the principal amount of any Loan;

(D)increase or extend the Commitment (it being understood and agreed that a waiver of any Default or Event of Default shall not constitute a change in the terms of the Commitment);

(E)release the Company from its obligations under the Credit Documents;

(F)amend, modify or waive any provision of this Section 8.06, or Sections 7.01(A), 8.02, 8.03 or 8.05; or

(G)consent to the assignment or transfer by the Company of any of its rights and obligations under (or in respect of) the Credit Documents.

SECTION 8.07.Counterparts. This Agreement may be executed in any number of counterparts, each of which where so executed and delivered shall be an original, but all of which shall constitute one and the same instrument.

SECTION 8.08.Headings. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement.

SECTION 8.09. Survival of Indemnification and Representations and Warranties . All indemnities set forth herein and all representations and warranties made herein shall survive the execution and delivery of this Agreement, the making of the Loans, and the repayment of the Loans and other Company Obligations and the termination of the Commitment hereunder.

SECTION 8.10.Governing Law. THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE. The Company irrevocably consents to the service of process out of any competent court in any action or proceeding with respect to this Agreement by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address for notices pursuant to Section 8.01, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of the Lender to serve process in any other manner permitted by law.

SECTION 8.11.Waiver of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY.

SECTION 8.12.Severability. If any provision of any of the Credit Documents is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions.

SECTION 8.13.Further Assurances. The Company agrees, upon the request of the Lender, to promptly take such actions, as reasonably requested, as are necessary to carry out the intent of this Agreement and the other Credit Documents.

SECTION 8.14.Entirety. This Agreement together with the other Credit Documents represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Credit Documents or the transactions contemplated herein and therein.

SECTION 8.15.Binding Effect; Continuing Agreement.

(A) This Agreement shall become effective at such time as all of the conditions set forth in Section 3.01 have been satisfied or waived by the Lender and it shall have been executed by the Company and the Lender, and thereafter this Agreement shall be binding upon and inure to the benefit of the Company and the Lender and their respective successors and assigns.

(B) This Agreement shall be a continuing agreement and shall remain in full force and effect until all Loans, interest, fees and other Company Obligations have been paid in full and the Commitment expires or has been terminated. Upon termination, the Company shall have no further obligations (other than the indemnification provisions that survive) under the Credit Documents; provided that should any payment, in whole or in part, of the Company Obligations be rescinded or otherwise required to be restored or returned by the Lender, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, then the Credit Documents shall automatically be reinstated and all amounts required to be restored or returned and all costs and expenses incurred by the Lender in connection therewith shall be deemed included as part of the Company Obligations.

SECTION 8.16.Confidentiality. The Lender agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential); (b) to the extent requested by any regulatory authority; (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process (provided, in the event of any disclosure pursuant to this clause (c), the Lender shall promptly notify the Company of its disclosure of such Information); (d) to any other party to this Agreement; (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder; (f) subject to an agreement containing provisions substantially the same as those of this Section 8.16, to (i) any Participation Purchaser in, or any prospective Participation Purchaser in, any of its rights or obligations under this Agreement or (ii) any direct or indirect contractual counterparty or prospective counterparty (or such contractual counterparty’s or prospective counterparty’s professional advisor) to any credit derivative transaction relating to obligations of the Company; (g) with the consent of the Company; (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section 8.16 or (ii) has been available or becomes available to the Lender on a nonconfidential basis from a source other than the Company; or (i) to the National Association of Insurance Commissioners or any other similar organization or any nationally recognized rating agency that requires access to information about a Lender’s or its Affiliates’ portfolio in connection with ratings issued with respect to such Lender or its Affiliates. For the purposes of this Section 8.16, “Information” means all information received from the Company relating to the Company or its Subsidiaries or business. Any Person required to maintain the confidentiality of Information as provided in this Section 8.16 shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. Notwithstanding anything herein to the contrary, “Information” shall not include, and the Lender and the Company may disclose to any and all Persons, without limitation of any kind, any information with respect to the “tax treatment” and “tax structure” (in each case, within the meaning of Treasury Regulation Section 1.6011-4) of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the Lender or the Company relating to such tax treatment and tax structure; provided that with respect to any document or similar item that in either case contains information concerning the tax treatment or tax structure of the transaction as well as other information, this sentence shall only apply to such portions of the document or similar item that relate to the tax treatment or tax structure of the Loans and transactions contemplated hereby.

SECTION 8.17. USA PATRIOT ACT. CoBank hereby notifies the Company that pursuant to the requirements of the USA Patriot Act (Title III of Publ. 107 56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies the Company, which information includes the name and address of the Company and other information that will allow CoBank to identify the Company in accordance with the Act.

[Remainder of Page Intentionally Left Blank]

Each of the parties hereto has caused a counterpart of this Second Amended and Restated Revolving Credit Agreement to be duly executed and delivered as of the date first above written.

BORROWER:

ARTESIAN WATER COMPANY, INC.

By:

Name:

Title:

LENDER:

CoBANK, ACB

By:

Name:

Title:

EXHIBIT A

DEFINITIONS AND RULES OF INTERPRETATION

SECTION 1.01 Definitions. As used in the Agreement, any amendment thereto, or in any other Credit Document, the following terms shall have the following meanings:

“Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (a) to vote 10% or more of the securities having ordinary voting power for the election of directors of such corporation or (b) to direct or cause direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. “Agreement” shall have the meaning set forth in the introductory paragraph hereof.

“Agreement” shall have the meaning set forth in the introductory clause hereof, and shall be deemed to include all amendments hereto.

“Applicable Law” means all laws, rules, regulations, codes, and ordinances applicable to the Person, conduct, transaction, covenant or contract in question.

“Attorney Costs” means all reasonable fees and disbursements of any law firm or other external counsel.

“Banking Day” shall mean a day that is both a Business Day and a day on which dealings between banks are carried on in U.S. dollar deposits in the London interbank market.

“Business Day” means any day other than a Saturday, a Sunday, a legal holiday or a day on which the Lender is closed for business.

“Capital Stock” means (a) in the case of a corporation, all classes of capital stock of such corporation, (b) in the case of a partnership, partnership interests (whether general or limited), (c) in the case of a limited liability company, membership interests and (d) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person.

“Closing Date” means the date hereof.

“CoBank” shall have the meaning set forth in the introductory clause hereof, and shall include its successors and assigns.

“CoBank Base Rate” shall mean the rate of interest established by CoBank from time to time as its CoBank Base Rate, which rate is intended by CoBank as a reference rate and not its lowest rate. The CoBank Base Rate will change on the effective date of each change in the rate.

“Code” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder.

“Commitment” shall have the meaning set forth in Section 2.01.

“Company” means Artesian Water Company, Inc.

“Company Obligations” means, without duplication, all of the obligations of the Company to the Lender, whenever arising, under this Agreement, the Note or any of the other Credit Documents, including, without limitation, the obligation to pay principal, interest, fees, surcharges, premiums, expense, and other amounts owing hereunder.

“Corporation” shall have the meaning set forth in Section 4.01 hereof.

“Credit Documents” means this Agreement, the Note, and all other related agreements and documents issued or delivered hereunder or thereunder or pursuant hereto or thereto.

“Default” means any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default.

“Default Rate” shall mean the CoBank Base Rate plus 2% per annum.

“Dollars” and “$” means dollars in lawful currency of the United States of America.

“EBITDA To Total Interest Expense Ratio” shall mean a ratio of: (1) operating revenues minus operating expenses for the fiscal year, plus depreciation and amortization expenses for such fiscal year; to (2) total interest expense for such fiscal year (all as calculated on a consolidated basis in accordance with GAAP consistently applied). For the avoidance of doubt, in calculating operating expenses, interest expense and income taxes will not be included.

“Environmental Laws” means any current or future legal requirement of any Governmental Authority pertaining to (a) the protection of health, safety, and the indoor or outdoor environment, (b) the conservation, management, or use of natural resources and wildlife, (c) the protection or use of surface water and groundwater or (d) the management, manufacture, possession, presence, use, generation, transportation, treatment, storage, disposal, release, threatened release, abatement, removal, remediation or handling of, or exposure to, any hazardous or toxic substance or material or (e) pollution (including any release to land surface water and groundwater) and includes, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 USC 9601 et seq., Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendment of 1984, 42 USC 6901 et seq., Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977,33 USC 1251 et seq., Clean Air Act of 1966, as amended, 42 USC 7401 et seq., Toxic Substances Control Act of 1976, 15 USC 2601 et seq., Hazardous Materials Transportation Act, 49 USC App. 1801 et seq., Occupational Safety and Health Act of 1970, as amended, 29 USC 651 et seq., Oil Pollution Act of 1990, 33 USC 2701 et seq., Emergency Planning and Community Right-to-Know Act of 1986, 42 USC 11001 et seq., National Environmental Policy Act of 1969, 42 USC 4321 et seq., Safe Drinking Water Act of 1974, as amended, 42 USC 300(f) et seq., any analogous implementing or successor law, and any amendment, rule, regulation, order, or directive issued thereunder.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto, as interpreted by the rules and regulations thereunder, all as the same may be in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections.

“ERISA Affiliate” means an entity, whether or not incorporated, which is under common control with the Company or any of its Subsidiaries within the meaning of Section 4001(a)(14) of ERISA, or is a member of a group which includes the Company or any of its Subsidiaries and which is treated as a single employer under Sections 414(b), (c), (m), or (0) of the Code.

“Eurocurrency Liabilities” shall have meaning as set forth in Regulation D.

“Event of Default” has the meaning specified in Section 7.01.

“Financial Officer” means any one of the chief financial officer, the chief accounting officer, the Vice President, Finance or the Senior Vice President, Finance and Planning of the Company.

“Funded Indebtedness” shall mean all bonds, debentures and other evidence of indebtedness of the Company and its Subsidiaries, secured or unsecured, for money borrowed but excluding (i) indebtedness maturing on demand or within one year from the date incurred and not renewable or extendable at the option of the debtor, (ii) indebtedness of the Company to any Subsidiary and any indebtedness of a Subsidiary to the Company, and (iii) indebtedness that has been called for redemption and for the payment of which monies have been irrevocably deposited with a trustee. Funded Indebtedness shall be calculated on a consolidated basis, excluding all intercompany items, in accordance with GAAP consistently applied and shall include the portion of bonds, notes or other indebtedness maturing, or required to be redeemed, within one year from the date as of which Funded Indebtedness is being determined, provided that for purposes of computations under this Agreement, capitalized lease obligations shall be excluded from Funded Indebtedness.

“GAAP” means generally accepted accounting principles in the United States applied on a consistent basis.

“Governmental Authority” means any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body.

“Guaranty Obligations” means, with respect to any Person, without duplication, any obligations (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (a) to purchase any such Indebtedness or other obligation or any property constituting security therefore, (b) to advance or provide funds or other support for the payment or purchase of such Indebtedness or obligation or to maintain working capital, solvency or other balance sheet condition of such other Person (including, without limitation, maintenance agreements, comfort letters, take or pay arrangements, put agreements or similar agreements or arrangements) for the benefit of the holder of Indebtedness of such other Person, (c) to lease or purchase property, securities or services primarily for the purpose of assuring the owner of such Indebtedness or (d) to otherwise assure or hold harmless the owner of such Indebtedness or obligation against loss in respect thereof. The amount of any Guaranty Obligation hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Obligation is made.

“Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, or upon which interest payments are customarily made, (c) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person to the extent of the value of such property (other than customary reservations or retentions of title under agreements with suppliers entered into in the ordinary course of business), (d) all obligations, other than intercompany items and trade payables incurred in the ordinary course of business, of such Person issued or assumed as the deferred purchase price of property or services purchased by such Person which would appear as liabilities on a balance sheet of such Person, (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on, or payable out of the proceeds of production from, property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (f) all Guaranty Obligations of such Person, (g) the principal portion of all obligations of such Person under (i) capital lease obligations and (ii) Off Balance Sheet Indebtedness, (h) all obligations of such Person to repurchase any securities which repurchase obligation is related to the issuance thereof, including, without limitation, obligations commonly known as residual equity appreciation potential shares, (i) all net principal obligations of such Person in respect of interest rate protection agreements, foreign currency exchange agreements, commodity purchase or option agreements or other interest or exchange rate or commodity price hedging agreements, (j) the maximum amount of all performance and standby letters of credit issued or bankers’ acceptances facilities created for the account of such Person and, without duplication, all drafts drawn thereunder (to the extent unreimbursed), and (k) the aggregate amount of uncollected accounts receivable of such Person subject at such time to a sale of receivables (or similar transaction) regardless of whether such transaction is effected without recourse to such Person or in a manner that would not be reflected on the balance sheet of such Person in accordance with GAAP .

“Indemnified Liabilities” has the meaning set forth in Section 8.05(B).

“Indemnities” means, collectively, the Lender and its respective Affiliates, directors, officers, employees, counsel, agents and attorneys- in-fact.

“Indenture” means that certain Indenture of Mortgage dated as of July 1, 1961 between the Company (successor to the Corporation) and Wilmington Trust Company, as Trustee as the same may from time to time be supplemented, modified, amended, renewed, extended or consolidated.

“Interest Period” means a period commencing on the date the LIBOR Option is to take effect (including continuations and conversions) and ending on the numerically corresponding day in the next calendar month or the month that is 2, 3, 6, or 9 months thereafter, as the case may be; provided, however, that: (i) in the event such ending day is not a Banking Day, such period shall be extended to the next Banking Day unless such next Banking Day falls in the next calendar month, in which case it shall end on the preceding Banking Day; and (ii) if there is no numerically corresponding day in the ending month, then such period shall end on the last Banking Day in the relevant month.

“Investment” shall have the meaning set forth in Section 6.05 hereof.

“Lender” means CoBank, ACB, together with its successors and assigns.

“LIBOR” shall mean the rate (rounded upward to the nearest sixteenth and adjusted for reserves required on Eurocurrency Liabilities for banks subject to Regulation D or required by any other federal law or regulation) quoted by the ICE Benchmark Administration ( “ICE”) at 11:00 a.m. London time 2 Banking Days before the commencement of the Interest Period for the offering of U.S. dollar deposits in the London interbank market for the Interest Period designated by the Company, as published by Bloomberg or another major information vendor listed on ICE’s official website.

“LIBOR Balance” shall mean a balance bearing interest at the LIBOR Option.

“LIBOR Option” shall have the meaning set forth in Section 2.04(A)(2).

“Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance, lien (statutory or otherwise), preference, priority or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the Uniform Commercial Code as adopted and in effect in the relevant jurisdiction or other similar recording or notice statute, and any lease in the nature thereof).

“Loans” shall have the meaning set forth in Section 2.01 hereof.

“Material Adverse Effect” means a material adverse effect on (a) the operations, business, assets, or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, (b) the ability of the Company to perform its obligations under this Agreement or (c) the validity or enforceability of this Agreement, any of the other Credit Documents, or the rights and remedies of the Lender hereunder or thereunder.

“Maturity Date” shall have the meaning set forth in Section 2.01.

“Moody’s” means Moody’s Investors Service, Inc., or any successor or assignee of the business of such company in the business of rating securities.

“Multiemployer Plan” means a Plan covered by Title IV of ERISA which is a multiemployer plan as defined in Section 3(37) or 4001(a)(3) of ERISA.

“Multiple Employer Plan” means a Plan covered by Title IV of ERISA, other than a Multiemployer Plan, which the Company or any ERISA Affiliate and at least one employer other than the Company or any ERISA Affiliate are contributing sponsors.

“Note” shall have the meaning set forth in Section 2.08 hereof, as amended, modified, supplemented or replaced from time to time.

“OFAC” shall have the meaning set forth in Section 4.28 hereof.

“Off Balance Sheet Indebtedness” means any obligation of a Person that would be considered indebtedness for tax purposes but is not set forth on the balance sheet of such Person, including, but not limited to, (a) any synthetic lease, tax retention operating lease, off balance sheet loan or similar off-balance sheet financing product of such Person, (b) the aggregate amount of uncollected accounts receivables of such Person subject at such time to a sale of receivables (or similar transaction) and (c) obligations of any partnership or joint venture that is recourse to such Person.

“Other Investments” shall have the meaning set forth in Section 6.05(F) hereof.

“Participation Purchaser” means any Person (other than a natural person or the Company or any of the Company’s Affiliates or Subsidiaries) to whom a Lender sells a participation as specified in Section 8.03(B).

“PBGC” means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA and any successor thereto.

“Permitted Encumbrances” shall have the meaning set forth in the Indenture.

“Person” means any individual, partnership, joint venture, firm, corporation, association, trust, limited liability company or other enterprise (whether or not incorporated), or any government or political subdivision or any agency, department or instrumentality thereof

“Plan” means any employee benefit plan (as defined in Section 3(3) of ERISA) which is covered by ERISA and with respect to which the Company or any ERISA Affiliate is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an “employer” within the meaning of Section 3(5) of ERISA.

“Regulation D, O, T, U or X” means Regulation D, O, T, U or X, respectively, of the Board of Governors of the Federal Reserve System as from time to time in effect, any amendment thereto and any successor to all or a portion thereof

“Reportable Event” means a “reportable event” as defined in Section 4043 of ERISA with respect to which the notice requirements to the PBGC have not been waived.

“S&P” means Standard & Poor’s Ratings Services, a division of McGraw Hill, Inc., or any successor or assignee of the business of such division in the business of rating securities.

“Sanctions” shall have the meaning set forth in Section 4.28 hereof.

“Short-Term Debt” means debt of the Company that matures within one year of the date created.

“Single Employer Plan” means any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan or a Multiple Employer Plan.

“Solvent” means, with respect to the Company as of a particular date, that on such date (a) the Company is able to pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (b) the Company does not intend to, and does not believe that it will, incur debts or liabilities beyond the Company’s ability to pay as such debts and liabilities mature in their ordinary course, (c) the Company is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which the Company’s assets would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which the Company is engaged or is to engage and (d) the fair value of the assets of the Company, taken as a whole on a going concern basis, is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of the Company. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed as the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.

“Subsidiary” means, as to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not, at the time, any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (b) any partnership, association, joint venture, limited liability company or other entity in which such Person directly or indirectly through Subsidiaries has more than 50% equity interest at any time.

“Termination Event” means (a) with respect to any Single Employer Plan, the occurrence of a Reportable Event or the substantial cessation of operations (within the meaning of Section 4062(e) of ERISA), (b) the withdrawal of the Company or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a substantial employer (as such term is defined in Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan, (c) the distribution of a notice of intent to terminate or the actual termination of a Plan pursuant to Section 4041 (a)(2) or 4041A of ERISA, (d) the institution of proceedings to terminate or the actual termination of a Plan by the PBGC under Section 4042 of ERISA, (e) any event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or (f) the complete or partial withdrawal of the Company or any ERISA Affiliate from a Multiemployer Plan.

“Total Assets” means all assets of the Company and its consolidated Subsidiaries as shown on its most recent annual audited consolidated balance sheet, as determined in accordance with GAAP.

“Total Permanent Capital” shall mean, with respect to the Company and its Subsidiaries: (i) the sum of the par or stated value of all outstanding capital stock of the Company and all paid-in premiums thereon; (ii) all surplus, including capital and earned surplus but not including surplus from any revaluation of the Company’s assets after December 31, 2008; (iii) the minority interest (if any) in consolidated Subsidiaries, but not including any earned surplus of Subsidiaries prior to the date of acquisition of such Subsidiaries; and (iv) all Funded Indebtedness of the Company and such Subsidiaries. Total Permanent Capital shall be calculated on a consolidated basis, excluding all intercompany items, and in accordance with GAAP consistently applied.

“Variable Rate Option” shall have the meaning set forth in Section 2.04(A)(1).

RULES OF INTERPRETATION

SECTION 2.01 Rules of Interpretation. The following rules of interpretation shall apply to the Agreement, the other Credit Documents and all amendments to either of the foregoing:

Accounting Terms. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lender hereunder shall be prepared, in accordance with GAAP applied on a consistent basis.

Number. All terms stated in the singular shall include the plural, and all terms stated in the plural shall include the singular.

Including. The term “including” shall be construed as meaning “including, but not limited to”.

Default. The expression “while any Default or Event of Default shall have occurred and be continuing” (or like expression) shall be deemed to include the period following any acceleration of the Company Obligations (unless such acceleration is rescinded).

References in this Agreement to “Articles”, “Sections”, “Schedules” or “Exhibits” shall be to Articles, Sections, Schedules or Exhibits of or to this Agreement unless otherwise specifically provided.

Renewal of Commitment. References in the Agreement to the renewal of the Commitment shall not be construed as obligating the Lender to renew the Commitment, and no obligation to renew the Commitment shall arise unless contained in a writing signed by the Lender.

EXHIBIT B

FORM OF PROMISSORY NOTE

SECOND AMENDED AND RESTATED

PROMISSORY NOTE

$20,000,000.00 Denver, Colorado

[ ], 2019

FOR VALUE RECEIVED, ARTESIAN WATER COMPANY, INC., a Delaware corporation (the “Company”), HEREBY PROMISES TO PAY to CoBank, ACB (“CoBank”), or its assigns, in lawful money of the United States and in immediately available funds, on the “Maturity Date” (as defined in the Revolving Credit Agreement referred to below) the principal amount of TWENTY MILLION AND NO/100 DOLLARS ($20,000,000.00), or, if less, the aggregate unpaid principal amount of all Loans (as defined in the Revolving Credit Agreement referred to below) made by CoBank to the Company pursuant to the Revolving Credit Agreement and outstanding on the Maturity Date, whichever is less. The Company also promises to pay interest on the unpaid principal balance of the Loans for the period such balance is outstanding in like money, at the rates of interest, at the times, and calculated in the manner, set forth in the Revolving Credit Agreement. All payments made hereunder shall be made at the times and in the manner set forth in the Revolving Credit Agreement.

The Company hereby authorizes CoBank to endorse on a schedule to this Note: (i) the amount of all Loans; (ii) the interest rate elections made with respect thereto; and (iii) all payments of principal and interest in respect of such Loans, which endorsements, absent proof of error, shall be conclusive as to the outstanding principal amount of, and accrued and unpaid interest on, the Loans; provided however, that the failure to make such notation with respect to any Loan or payment shall not limit or otherwise affect the obligation of the Company under the Revolving Credit Agreement or this Note.

This is the Note referred to in that certain Second Amended and Restated Revolving Credit Agreement, dated as of [ ], 2019, by and between the Company and CoBank, as amended from time to time (the “Revolving Credit Agreement”), to evidence the Loans made by CoBank thereunder, all of the terms and provisions of which are hereby incorporated by reference. All capitalized terms used herein and not defined herein shall have the meanings given to them in the Revolving Credit Agreement.

The Revolving Credit Agreement provides for the acceleration of the maturity of principal upon the occurrence of an Event of Default and for prepayments on the terms and conditions specified therein.

The Company hereby waives presentment for payment, demand, notice of protest, notice of dishonor, and any other notice or formality with respect to this Note, and all defenses on the ground of delay or of any extension of time for payment hereof which may, without obligation, hereafter be given by the holder hereof.

Except to the extent governed by applicable federal law, this Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of Delaware, without reference to choice of law doctrine.

ARTESIAN WATER COMPANY, INC.

By:

Name:

Title:

SCHEDULE TO REVOLVING CREDIT NOTE

EXHIBIT C

FORM OF ANNUAL COMPLIANCE CERTIFICATE

TO: COBANK, ACB

FROM: ARTESIAN WATER COMPANY, INC.

DATE: _______________, 20____

SUBJECT:

COMPLIANCE CERTIFICATE FOR FISCAL PERIOD ENDING ON ____________________, 20___.

Reference is hereby made to that certain Second Amended and Restated Revolving Credit Agreement dated as of [ ], 2019 (the “Credit Agreement”), between ARTESIAN WATER COMPANY, INC. (the “Company”) and COBANK, ACB (“Lender”). Capitalized terms used in this certificate and not defined herein shall have the meanings given to those terms in the Credit Agreement.

I am the _______________________________¹ of the Company and am furnishing this Certificate to you pursuant to Section 5.05 of the Credit Agreement.

Attached hereto are the annual financial statements required by Section 5.01 of the Credit Agreement. The undersigned hereby certifies that the annual financial statements present fairly, in all material respects, the financial conditions and results of operations of the Company and its consolidated Subsidiaries in accordance with GAAP consistently applied.

In addition to the above, attached hereto is a certificate calculating the financial covenants set forth in Sections 6.21 and 6.22 of the Credit Agreement. The undersigned hereby certifies that the financial covenants were calculated in a manner consistent with the requirements of the Credit Agreement.

I hereby certify that a review in reasonable detail of the activities of Company during the period covered by the financial statements attached hereto has been made or caused to be made under my supervision and that [please check one of the following boxes and, if the second box is checked, complete the information required thereunder]:

[ ] Such review has not disclosed the existence during or at the end of the period covered by the financial statements of any condition or event which constitutes a Default or an Event of Default;

[ ] Such review has disclosed the existence of the following Default(s) and/or Event(s) of Default [specify the nature and period of existence thereof and what action the Company has taken, is taking and proposes to take with respect thereto]: ___________________________________________________.

(Signature)

(Print Name)

________________________________

(Title)

¹ Must be from the President, Treasurer or Controller.

ARTESIAN WATER COMPANY, INC.

FINANCIAL COVENANT CERTIFICATE

For fiscal year ending on _______________

The undersigned hereby certifies to COBANK, ACB that set forth below are: (1) the financial ratios that the Company was required to achieve for the fiscal year end covered by this Certificate; and (2) the actual results achieved by the Company:

RATIO	Required	Achieved
Short Term Debt CoBank: $_____________ Other Lenders: $_____________	Not greater than $40,000,000
Ratio of EBITDA to Total Interest Expense: EBITDA: $___________ Total Interest Expense: $________	Not less than 2.50 to 1.00
Funded Indebtedness to Total Permanent Capital: Funded Indebtedness: $___________ Total Permanent Capital: $___________	Not greater than 66.7 of Total Permanent Capital

All of the above ratios were calculated in accordance with the terms of the Credit Agreement.

ARTESIAN WATER COMPANY, INC.

By:

Its:	Chief Financial Officer

SCHEDULE 4.04

LITIGATION

None

SCHEDULE 8.01

WRITTEN NOTICE AND TELEPHONIC COMMUNICATIONS

If to CoBank, to:

CoBank, ACB

6340 S. Fiddlers Green Circle

Greenwood Village, Colorado 80111

Facsimile: (303) 740-4002

E-Mail: bervin@cobank.com

Attention: Energy & Water Group

If to Artesian, to:

Artesian Water Company, Inc.

664 Churchmans Road

Newark, DE 19702

Facsimile: (302) 453-6957

E-Mail: dspacht@artesianwater.com

Attention: Chief Financial Officer

Part I	-	Financial Information:

Item 1	-	Financial Statements	Page(s)

		Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited)	3

		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited)	4

		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)	5 - 6

		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months period ended September 30, 2019 and 2018 (unaudited)	7 - 8

		Notes to the Condensed Consolidated Financial Statements	9 - 23

Item 2	-	Management's Discussion and Analysis of Financial Condition and Results of Operations	24 - 31

Item 3	-	Quantitative and Qualitative Disclosures about Market Risk	31

Item 4	-	Controls and Procedures	32

Part II	-	Other Information	32

Item 1	-	Legal Proceedings	32

Item 1A	-	Risk Factors	32

Item 2	-	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3		Defaults Upon Senior Securities	32

Item 4		Mine Safety Disclosures	32

Item 5		Other Information	32

Item 6	-	Exhibits	33

Signatures