NOTE 10

COMMITMENTS AND CONTINGENCIES

Leases

In October 1997, Artesian Water entered into a 33-year operating lease for a parcel of land with improvements located in South Bethany, a municipality in Sussex County, Delaware. The annual lease payments increase each year by the most recent increase in the Consumer Price Index for Urban Workers, CPI-U, as published by the U.S. Department of Labor, Bureau of Labor Statistics. At each eleventh year of the lease term, the annual lease payment shall be determined based on the fair market value of the parcel of land. Rental payments for 2013, 2012 and 2011 were $15,700, $15,400, and $15,300, respectively. The future minimum rental payment as disclosed in the following table is calculated using CPI-U as of October 31, 2013 as well as any adjustments for appraisals conducted to determine the fair market value of the parcel of land.

During 2003, Artesian Resources entered into a 40-year easement agreement to acquire an easement to access, operate, maintain, repair, improve, replace and connect Artesian's water system to a well, including a parcel of land around the well. Easement payments for 2013, 2012 and 2011 were $33,000, $32,000 and $31,000, respectively.

Artesian Wastewater entered into a perpetual agreement for the use of approximately 460 acres of land in Sussex County, Delaware for wastewater disposal. Beginning January 2007, Artesian Wastewater is required to pay a minimum of $40,000 per year for the use of this land. Beginning January 2012, and on each anniversary thereof until January 2027, the fee shall be adjusted upwards by an adjustment factor of two percent. Once disposal operations begin, the monthly fee will be contingent on the average number of gallons of wastewater disposed on the properties. Payments for 2013, 2012 and 2011 were $41,700, $41,000 and $40,000, respectively. The agreement can be terminated by giving 180-day notice prior to the termination date.

Future minimum annual rental payments related to operating leases for the years subsequent to 2013 are as follows:

In thousands
2014	$	71
2015		51
2016		53
2017		54
2018		55
2019 through 2043		1,590
	$	1,874

Interconnections

Artesian Water has one water service interconnection agreement with a neighboring utility, Chester Water Authority, which requires minimum annual purchases. Rates charged under this agreement are subject to change. Effective August 1, 1997, Artesian Water renegotiated the contract with the Chester Water Authority to, among other things, reduce the minimum purchase requirements from 1,459 million gallons to 1,095 million gallons annually, calculated as 3 mgd times the number of calendar days in a year. The agreement is extended through the year 2021.

The minimum annual purchase commitments for all interconnection agreements for 2014 through 2018 and the aggregate total for the years 2019 through 2021, calculated at the noticed rates, are as follows:

In thousands
2014	$	3,780
2015		3,780
2016		3,791
2017		3,780
2018		3,780
2019 through 2021		11,352
	$	30,263

Expenses for purchased water were $4.0 million, $4.0 million, and $3.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Other Commitments

In 2005, Artesian Water entered into a 6-year agreement with Utility Service Co., Inc. to clean and paint tanks from 2006 to 2011 for $1.9 million. In 2011, Artesian Water entered into a 2-year agreement with Southern Corrosion Inc. to clean and paint tanks in 2012 and 2013. Pursuant to the 2-year agreement, the expenditure committed for the years 2012 through 2013 was $623,000. In 2013, Artesian Water entered into a 3-year agreement with Worldwide Industries Corporation to clean and paint tanks in 2014, 2015 and 2016. Pursuant to the 3-year agreement, the expenditure committed for the years 2014 through 2016 is $804,000. Also, in 2011, following the purchase of water assets from Cecil County, Maryland, Artesian Water Maryland assumed two agreements with Utility Service Co., Inc. to clean and paint tanks, these agreements were not renewed upon there expiration in 2013. The tank painting expense for 2013, 2012 and 2011 was $377,000, $403,000, and $344,000.

Budgeted mandatory utility plant expenditures, due to planned governmental highway projects, which require the relocation of Artesian Water's water service mains, expected to be incurred in 2014 through 2018 are as follows:

In thousands
2014	$	1,490
2015		1,430
2016		705
2017		1,055
2018		1,055
	$	5,735

The exact timing and extent of these relocation projects is controlled primarily by the Delaware Department of Transportation.

Litigation

Artesian Resources and its subsidiaries are subject to legal proceedings in the ordinary course of business. Any amounts from such legal proceedings that are probable and reasonably estimable are reflected in the financial statements.

Artesian Water filed a complaint in the United States District Court for the Eastern District of Pennsylvania against Chester Water Authority claiming breach of contract, unjust enrichment and requesting declaratory judgment in relation to an agreement by Chester Water Authority to supply bulk water supplies to Artesian Water. In January and February 2013 trials were held before a judge appointed authority, or Special Master. On October 17, 2013, the Special Master filed preliminary recommendations with the District Court, which include a recommendation that the District Court order Artesian Water to pay to Chester Water Authority amounts withheld. Related to the ongoing litigation with Chester Water Authority, we have approximately $2.6 million and $1.8 million of accrued expenses recorded on our Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012, respectively. These accrued expenses represent the disputed portion of Chester Water Authority's rate increases and have been withheld from payments to Chester Water Authority pending the outcome of the litigation. The Special Master also recommended that a late fee be paid by Artesian Water to Chester Water Authority, although such fee is not within Artesian Water's contract with Chester Water Authority or within any tariff posted by Chester Water Authority. The Special Master rejected Chester Water Authority's counterclaim in his recommendation to the District Court. In November 2013, Artesian Water filed objections to the preliminary recommendations filed by the Special Master. A final judgment will not be entered until the District Court has considered the objections and any responses thereto.