0000863110-18-000021.txt : 20180809 0000863110-18-000021.hdr.sgml : 20180809 20180809110115 ACCESSION NUMBER: 0000863110-18-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 57 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180809 DATE AS OF CHANGE: 20180809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARTESIAN RESOURCES CORP CENTRAL INDEX KEY: 0000863110 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 510002090 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18516 FILM NUMBER: 181003971 BUSINESS ADDRESS: STREET 1: 664 CHURCHMANS RD CITY: NEWARK STATE: DE ZIP: 19702 BUSINESS PHONE: 3024536900 MAIL ADDRESS: STREET 1: 664 CHURCHMANS RD CITY: NEWARK STATE: DE ZIP: 19702 10-Q 1 form10q.htm ARTESIAN RESOURCES CORP FILE 10-Q  



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 June 30, 2018

OR

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from  _____  to  _____

Commission file number 000-18516
                                    
ARTESIAN RESOURCES CORPORATION
--------------------------------------------------------------
(Exact 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
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Address of principal executive offices

(302) 453 – 6900
-----------------------------------------------------------
Registrant's telephone number, including area code

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

Yes
No
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes
No
 

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


Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Emerging Growth Company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes
No
 

As of August 6, 2018, 8,360,200 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.





TABLE OF CONTENTS

ARTESIAN RESOURCES CORPORATION
FORM 10-Q

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3
         
     
4
         
     
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20-29
         
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30
         
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30
         
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30
         
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31
         
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31
         
   
31
         
   
31
         
   
31
         
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32
         
Signatures
       

2

PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS

ARTESIAN RESOURCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands)

ASSETS
 
June 30, 2018
   
December 31, 2017
 
Utility plant, at original cost (less accumulated depreciation 2018- $121,890; 2017 - $116,945)
 
$
477,699
   
$
460,502
 
Current assets
               
Cash and cash equivalents
   
216
     
952
 
Accounts receivable (less allowance for doubtful accounts 2018 - $302; 2017 - $288)
   
9,758
     
8,897
 
Income tax receivable
   
261
     
2,353
 
Unbilled operating revenues
   
1,858
     
1,427
 
Materials and supplies
   
1,425
     
1,519
 
Prepaid property taxes
   
4
     
1,795
 
Prepaid expenses and other
   
2,518
     
2,042
 
Total current assets
   
16,040
     
18,985
 
Other assets
               
Non-utility property (less accumulated depreciation 2018 - $726; 2017 - $689)
   
3,864
     
3,882
 
Other deferred assets
   
3,958
     
3,721
 
Total other assets
   
7,822
     
7,603
 
Regulatory assets, net
   
7,424
     
7,549
 
Total Assets
 
$
508,985
   
$
494,639
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Stockholders' equity
               
Common stock
 
$
9,241
   
$
9,215
 
Preferred stock
   
     
 
Additional paid-in capital
   
100,208
     
99,526
 
Retained earnings
   
38,728
     
37,903
 
Total stockholders' equity
   
148,177
     
146,644
 
Long-term debt, net of current portion
   
104,904
     
105,587
 
     
253,081
     
252,231
 
Current liabilities
               
Lines of credit
   
19,433
     
9,610
 
Current portion of long-term debt
   
1,358
     
1,344
 
Accounts payable
   
5,119
     
8,853
 
Accrued expenses
   
3,330
     
2,888
 
Dividends payable
   
2,206
     
 
Overdraft payable
   
474
     
304
 
Accrued interest
   
1,585
     
1,805
 
Customer deposits
   
1,014
     
969
 
Other
   
4,813
     
2,688
 
Total current liabilities
   
39,332
     
28,461
 
                 
Commitments and contingencies
   
     
 
                 
Deferred credits and other liabilities
               
Net advances for construction
   
7,433
     
7,797
 
Regulatory liabilities
   
23,151
     
23,201
 
Deferred investment tax credits
   
517
     
526
 
Deferred income taxes
   
53,660
     
54,137
 
Total deferred credits and other liabilities
   
84,761
     
85,661
 
                 
Net contributions in aid of construction
   
131,811
     
128,286
 
   
$
508,985
   
$
494,639
 
See notes to the condensed consolidated financial statements.
ARTESIAN RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands, except per share amounts)

   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
             
   
2018
   
2017
   
2018
   
2017
 
Operating revenues
                       
Water sales
 
$
17,869
   
$
18,248
   
$
34,514
   
$
35,183
 
Other utility operating revenue
   
1,085
     
1,020
     
2,084
     
2,039
 
Non-utility operating revenue
   
1,284
     
1,234
     
2,546
     
2,469
 
     
20,238
     
20,502
     
39,144
     
39,691
 
                                 
Operating expenses
                               
Utility operating expenses
   
9,038
     
9,588
     
18,121
     
18,494
 
Non-utility operating expenses
   
671
     
662
     
1,334
     
1,349
 
Depreciation and amortization
   
2,541
     
2,329
     
5,109
     
4,648
 
State and federal income taxes
   
1,564
     
1,763
     
2,903
     
3,857
 
Property and other taxes
   
1,185
     
1,170
     
2,468
     
2,364
 
     
14,999
     
15,512
     
29,935
     
30,712
 
                                 
Operating income
   
5,239
     
4,990
     
9,209
     
8,979
 
                                 
Other income, net
                               
   Allowance for funds used during construction (AFUDC)
   
180
     
76
     
268
     
146
 
   Miscellaneous income (expense)
   
8
     
(290
)
   
927
     
293
 
                                 
Income before interest charges
   
5,427
     
4,776
     
10,404
     
9,418
 
                                 
Interest charges
   
1,501
     
1,525
     
3,000
     
3,081
 
                                 
Net income applicable to common stock
 
$
3,926
   
$
3,251
   
$
7,404
   
$
6,337
 
                                 
Income per common share:
                               
Basic
 
$
0.43
   
$
0.35
   
$
0.80
   
$
0.69
 
Diluted
 
$
0.42
   
$
0.35
   
$
0.80
   
$
0.69
 
                                 
Weighted average common shares outstanding:
                               
Basic
   
9,237
     
9,163
     
9,230
     
9,149
 
Diluted
   
9,293
     
9,235
     
9,287
     
9,220
 
                                 
Cash dividends per share of common stock
 
$
0.2387
   
$
0.2317
   
$
0.4739
   
$
0.4600
 

See notes to the condensed consolidated financial statements.

4

ARTESIAN RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)

   
For the Six Months Ended June 30,
 
   
2018
   
2017
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
 
$
7,404
   
$
6,337
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
5,109
     
4,648
 
Deferred income taxes, net
   
(486
)
   
2,145
 
Stock compensation
   
95
     
327
 
AFUDC, equity portion
   
(186
)
   
(99
)
                 
Changes in assets and liabilities:
               
Accounts receivable, net of allowance for doubtful accounts
   
(861
)
   
1,000
 
Income tax receivable
   
2,092
     
(65
)
Unbilled operating revenues
   
(431
)
   
(254
)
Materials and supplies
   
94
     
(41
)
Prepaid property taxes
   
1,791
     
1,666
 
Prepaid expenses and other
   
(478
)
   
(501
)
Other deferred assets
   
(254
)
   
(164
)
Regulatory assets
   
165
     
180
 
Regulatory liabilities
   
(50
)
   
 
Accounts payable
   
(3,734
)
   
(2,128
)
Accrued expenses
   
442
     
1,891
 
Accrued interest
   
(220
)
   
(76
)
Customer deposits and other, net
   
2,172
     
965
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
12,664
     
15,831
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Capital expenditures (net of AFUDC, equity portion)
   
(22,994
)
   
(17,140
)
Proceeds from sale of assets
   
30
     
15
 
NET CASH USED IN INVESTING ACTIVITIES
   
(22,964
)
   
(17,125
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net borrowings (repayments) under lines of credit agreements
   
9,823
     
(1,935
)
Increase in overdraft payable
   
169
     
1,151
 
Net advances and contributions in aid of construction
   
4,076
     
6,008
 
Net proceeds from issuance of common stock
   
612
     
1,057
 
Dividends paid
   
(4,373
)
   
(4,205
)
Debt issuance costs
   
(75
)
   
(148
)
Principal repayments of long-term debt
   
(668
)
   
(557
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
9,564
     
1,371
 
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
   
(736
)
   
77
 
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
   
952
     
226
 
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
216
   
$
303
 
                 
Supplemental Disclosures of Cash Flow Information:
               
Utility plant received as construction advances and contributions
 
$
185
   
$
1,294
 
Interest paid
 
$
3,220
   
$
3,157
 
Income taxes paid
 
$
1,289
   
$
1,278
 

See notes to the condensed consolidated financial statements.

5

 
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. As of June 30, 2018, Artesian Wastewater owned and operated four wastewater treatment facilities, which are permitted to treat approximately 500,000 gallons per day. In August 2016, Artesian Wastewater and Sussex County, a political subdivision of Delaware, entered into an agreement to 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.

On September 27, 2016, Artesian Wastewater entered into a wastewater services agreement with Allen Harim Foods, LLC, or 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 is pending receipt of a construction permit and installation of related on-site improvements by Allen Harim at its facility. 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 million gallons per day, or 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 Northern Sussex Regional Water Recycling 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 by the end of 2018.

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 mgd of water through an intake in the Susquehanna River.

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

PENNSYLVANIA REGULATED SUBSIDIARY

Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, began operations upon receiving recognition as a regulated public water utility by the Pennsylvania Public Utility Commission, or PAPUC, in 2002. It provides water service to a residential community in Chester County.

6

 
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. It designs and builds water and wastewater infrastructure and provides contract water and wastewater services on the Delmarva Peninsula. 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.

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 2022. 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.

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. As of June 30, 2018, approximately 19,500, or 23.8%, of our eligible water customers enrolled in the WSLP Plan, approximately 15,500, or 19.0%, of our eligible enrolled in the SSLP Plan, and approximately 5,200, or 6.4%, of our eligible customers enrolled in the ISLP Plan. Approximately 1,700 non-utility customers enrolled in one of our three protection plans.

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. This facility allows all of our Sussex County, Delaware operations to be housed in one central location.

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 no longer offers development and architectural services to outside third parties. We will continue to provide design and engineering contract services through Artesian Utility.

 
NOTE 2 – BASIS OF PRESENTATION

Basis of Presentation

The unaudited condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required in the financial statements included in the Company's annual report on Form 10-K. Accordingly, these financial statements and related notes should be read in conjunction with the financial statements and related notes in the Company's annual report on Form 10-K for fiscal year 2017 as filed with the Securities and Exchange Commission on March 15, 2018.

The condensed consolidated financial statements include the accounts of Artesian Resources 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 June 30, 2018, the results of operations for the three and six month periods ended June 30, 2018 and June 30, 2017 and the cash flows for the six month periods ended June 30, 2018 and June 30, 2017.

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

7

 
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 regulated contract services based upon tariff rates approved by the Delaware Public Service Commission, or DEPSC, the Maryland Public Service Commission, or MDPSC and the PAPUC.  Regulated contract service revenues consist of water consumption, fixed fees for water and wastewater services including customer and fire protection fees, services charges and a Distribution System Improvement Charge, or DSIC, billed to customers at rates outlined in our tariffs that represent stand-alone selling prices.  Our non-regulated contract revenues consist of Service Line Protection Plan, or SLP Plan, fees, water and wastewater contract operations, and wastewater inspection fees.

Regulated 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) and are adjusted to reflect current changes in water demand on a system-wide basis. 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 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 a DSIC, which is a surcharge 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.

8

 
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 Company expects any reduction in corporate income tax expense resulting from the TCJA will be passed through to customers in the form of reduced tariff rates or approved DSIC rate.  Until a final decision is determined by the DEPSC, recognized DSIC revenue for the first six months of 2018 is being held in reserve (refund liability) and is not reflected in income.  This reserved amount approximates the TCJA impact to Artesian Water's customers.

Accounts receivable from our regulated contract customers 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-regulated 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 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, 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 is completed that serves each lot.  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.

Sales Tax

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

9

 
Disaggregated Revenues

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

(in thousands)
 
Three months ended June 30, 2018
   
Three months ended June 30, 2017
   
Six months ended June 30, 2018
   
Six months ended June 30, 2017
 
Regulated Revenue
                       
     Consumption charges
 
$
11,919
   
$
11,790
   
$
22,638
   
$
22,195
 
     Fixed fees
   
6,447
     
6,102
     
12,853
     
12,302
 
     Service charges
   
167
     
242
     
324
     
514
 
     DSIC
   
800
     
787
     
1,548
     
1,543
 
     Revenue reserved for refund –
          TCJA impact
   
(800
)
   
0
     
(1,548
)
   
0
 
Total Regulated Revenue
 
$
18,533
   
$
18,921
   
$
35,815
   
$
36,554
 
                                 
Non-Regulated Revenue
                               
     Service line protection plans
 
$
996
   
$
950
   
$
1,978
   
$
1,904
 
     Contract operations
   
337
     
327
     
696
     
655
 
     Inspection fees
   
47
     
45
     
56
     
95
 
Total Non-Regulated Revenue
 
$
1,380
   
$
1,322
   
$
2,730
   
$
2,654
 
                                 
Other Operating Revenue
     not in scope of ASC 606
 
$
325
   
$
259
   
$
599
   
$
483
 
                                 
Total Operating Revenue
 
$
20,238
   
$
20,502
   
$
39,144
   
$
39,691
 

Remaining Performance Obligations

As of June 30, 2018 and December 31, 2017, Deferred Revenue – Regulated 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 June 30, 2018 and December 31, 2017, Deferred Revenue – Non-Regulated 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.

Contract Assets and Contract Liabilities

Our contract assets and liabilities consist of the following:

(in thousands)
 
June 30, 2018
   
December 31, 2017
 
Accounts Receivable
           
     Accounts Receivable-Regulated
 
$
5,756
   
$
5,631
 
     Accounts Receivable-Non-Regulated
   
304
     
403
 
Total Accounts Receivable
 
$
6,060
   
$
6,034
 
                 
Contract Assets – Regulated
 
$
2,771
   
$
2,397
 
                 
Deferred Revenue
               
     Deferred Revenue – Regulated
 
$
1,003
   
$
1,053
 
     Deferred Revenue – Non-Regulated
   
221
     
203
 
Total Deferred Revenue
 
$
1,224
   
$
1,256
 
                 
Refund Liability - Regulated
 
$
1,548
   
$
--
 

10

 
For the six months ended June 30, 2018, the Company recognized revenue of $1.1 million from amounts that were included in Deferred Revenue – Regulated at the beginning of the year and revenue of $180,000 from amounts that were included in Deferred Revenue – Non- Regulated 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 increase in the Refund Liability is due to management's best estimate of the most probable ultimate amount of a pending regulatory adjustment related to the TCJA.

NOTE 4 – STOCK COMPENSATION PLANS

On December 9, 2015, the Company's stockholders approved the 2015 Equity Compensation Plan, or the 2015 Plan, that 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 of the Board of Directors, or the Committee. 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 six months ended June 30, 2018, of approximately $48,000 and $95,000 was recorded for restricted stock awards issued in May 2017 and May 2018.  For the three and six months ended June 30, 2017, compensation expense of approximately $293,000 and $327,000 was recorded for restricted stock awards issued in May 2016 and May 2017, as well as unrestricted stock awards issued in June 2017. 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.

On May 2, 2018, 5,000 shares of Class A Non-Voting Common Stock, or 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 Market on May 2, 2018.  On May 3, 2017, 5,000 shares of Class A Stock, were granted as restricted stock awards.  The fair value per share was $38.10, the closing price of the Class A Stock as recorded on the Nasdaq Global Market on May 3, 2017.  On May 4, 2016, 5,000 shares of Class A Stock were granted as restricted stock awards.  The fair value per share was $27.70, the closing price of the Class A Stock as recorded on the Nasdaq Global Market on May 4, 2016.  The restricted shares are subject to a one-year vesting period from the date of each grant.  Prior to their release date, these restricted stock awards may be subject to forfeiture in the event of the recipient's termination of employment.

On June 28, 2017, 6,568 shares of Class A Stock were issued as fully vested restricted stock awards. The fair market value per share was $38.06, the closing price of the Class A common stock as recorded on the Nasdaq Global Market on June 28, 2017.

The following summary reflects changes in the shares of Class A Stock underlying options and restricted stock awards for the six months ended June 30, 2018:

11

 
 
 
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, 2018
   
176,802
   
$
19.91
         
$
3,298
     
5,000
     
38.10
 
Granted
   
     
           
     
5,000
   
$
38.51
 
Exercised/vested and released
   
(8,052
)
   
15.77
           
176
     
(5,000
)
   
38.10
 
Expired/cancelled
   
     
           
     
     
 
Outstanding at June 30, 2018
   
168,750
   
$
20.11
     
3.83
   
$
3,150
     
5,000
   
$
38.51
 
                                                 
Exercisable/vested at June 30, 2018
   
168,750
   
$
20.11
     
3.83
   
$
3,150
     
     
 

The total intrinsic value of options exercised during the six months ended June 30, 2018 was approximately $176,000.

There were no unvested option shares outstanding under the 2015 Plan during the six months ended June 30, 2018.

As of June 30, 2018, there was no unrecognized expense related to non-vested option shares granted under the 2015 Plan.  

As of June 30, 2018, there was $160,900 total unrecognized expense related to non-vested awards of restricted shares awarded under the 2015 Plan.  The cost will be recognized over 0.84 years, the remaining vesting period for the restricted stock awards.

NOTE 5 - REGULATORY ASSETS

The Financial Accounting Standards Board, or 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 when they render the services necessary to earn the benefits.  Artesian Water contributed $18,600 to its postretirement benefit plan in the first six months of 2018. These contributions consist of insurance premium payments for medical, dental and life insurance benefits made on behalf of the Company's eligible retired employees.

The 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.

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.

12

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

Expense
Years Amortized
Depreciation and salary studies
5
Delaware rate proceedings
2.5
Maryland rate proceedings
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)
 
   
June 30, 2018
   
December 31, 2017
 
             
Postretirement benefit obligation
 
$
149
   
$
149
 
Deferred income taxes
   
408
     
416
 
Expense of rate and regulatory proceedings
   
56
     
70
 
Debt issuance costs
   
5,878
     
5,965
 
Goodwill
   
299
     
303
 
Deferred acquisition and franchise costs
   
634
     
646
 
   
$
7,424
   
$
7,549
 

NOTE 6 – REGULATORY LIABILITIES

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, MDPSC, and 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 $18,600 to its postretirement benefit plan in the first six months of 2018. 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. The DEPSC authorized an amount to be recorded each year to the liability.  

Pursuant to the enactment of the TCJA on December 22, 2017, the Company adjusted its existing deferred income tax balances as of December 31, 2017 to reflect the decrease in the corporate income tax rate from 34% to 21% (see Note 9).  This resulted in a decrease in the net deferred income tax liability of approximately $23.5 million of which $22.5 million was reclassified as a regulatory liability.  These amounts are 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.  The amount and timing of potential settlements of the established net regulatory liabilities will be determined by the utilities' respective rate regulators.
 
13

 

Regulatory liabilities comprise:
 
 
 
(in thousands)
 
 
 
June 30, 2018
   
December 31, 2017
 
 
           
Postretirement benefit obligation
 
$
112
   
$
112
 
Utility plant retirement cost obligation
   
499
     
549
 
Deferred income taxes (related to TCJA)
   
22,540
     
22,540
 
                 
   
$
23,151
   
$
23,201
 
 

NOTE 7 - 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 June 30,
   
For the Six Months Ended June 30,
 
             
   
2018
   
2017
   
2018
   
2017
 
   
(in thousands)
   
(in thousands)
 
                         
Weighted average common shares outstanding during the period for Basic computation
   
9,237
     
9,163
     
9,230
     
9,149
 
Dilutive effect of employee stock options and awards
   
56
     
72
     
57
     
71
 
                                 
Weighted average common shares outstanding during the period for Diluted computation
   
9,293
     
9,235
     
9,287
     
9,220
 

For the three and six months ended June 30, 2018, 5,000 shares of restricted stock awards were excluded from the calculations of diluted net income per share, respectively.  For the three and six months ended June 30, 2017, 1,400 and 3,400 shares of restricted stock awards were excluded from the calculations of diluted net income per share, respectively.  For the three and six months ended June 30, 2018 and June 30, 2017, 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 June 30, 2018, 8,359,738 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of June 3, 2017, 8,306,073 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 June 30, 2018 and June 30, 2017, the Company issued 11,495 and 42,275 shares of Class A Stock, respectively. For the six months ended June 30, 2018 and June 30, 2017, the Company issued 26,284 and 60,040 shares of Class A Stock, respectively.

Equity per common share was $16.05 and $15.98 at June 30, 2018 and December 31, 2017, respectively. These amounts were computed by dividing common stockholders' equity by the number of shares of common stock outstanding on June 30, 2018 and December 31, 2017, respectively.

14

 
NOTE 8 - 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.  We submitted the required reports to the DEPSC by the March 31, 2018 deadline.  The Company expects any reduction in corporate income tax expense resulting from the TCJA will be passed through to customers in the form of reduced tariff rates or approved DSIC rates.  Until a final decision is determined by the DEPSC, DSIC revenue for the first six months of 2018 is being held in reserve and is not reflected in income. This reserved amount approximates the TCJA impact to Artesian Water's customers.

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
 
DEPSC Approval Date
 
12/20/2016
   
06/19/2018
 
Effective Date
 
01/01/2017
   
07/01/2018
 
Cumulative DSIC Rate
   
4.71
%
   
3.63
%
Net Eligible Plant Improvements – Cumulative Dollars (in millions)
 
$
16.6
   
$
24.7
 
Eligible Plant Improvements – Installed Beginning Date
 
10/01/2014
   
10/01/2014
 
Eligible Plant Improvements – Installed Ending Date
 
10/31/2016
   
04/30/2018
 

The DSIC rate effective July 1, 2018 replaces the DSIC rate effective January 1, 2017.  This reduced rate reflects the TCJA impact to customers, partially offset by eligible plant improvements installed through April 30, 2018.  The cumulative DSIC rate effective July 1, 2018 noted above is under audit with the DEPSC.  For the three and six months ended June 30, 2018 we did not report any earnings in DSIC revenue since the full amount of $800,000 and $1,548,000, respectively, is being held in reserve pending the outcome of the DEPSC's decision regarding the TCJA impact to customers.  For the three and six months ended June 30, 2017, we earned approximately $787,000 and $1,543,000 in DSIC revenue, respectively.

15

 
NOTE 9 – INCOME TAXES

The TCJA makes 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 September 27, 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, or CIAC, for water utilities. The most significant change that impacts Artesian Resources is the reduction of the corporate federal income tax rate from our previous effect 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, which provides guidance to address situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the TCJA in the period in which the TCJA was enacted.  Under the guidance, registrants can report the effects of the TCJA as provisional amounts based on reasonable estimates in those areas in which the accounting is incomplete.  The provisional amounts are subject to adjustment during a measurement period that can extend no longer than one year from the enactment date.  The Company made reasonable estimates in measuring and accounting for the effects of the TCJA, which are reflected in the June 30, 2018 financial statements, however, these estimates could change based on further analysis of the TCJA or further regulatory rulings from the Company’s various Public Service Commissions.

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 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 established two reserves for uncertain tax positions based upon management’s judgment as to the sustainability of these positions related to the methodology for determining the deduction for utility system repairs and the difference in the tax depreciation expense utilizing the half-year convention rather than the mid-quarter convention.

The Company has accrued approximately $7,200 in penalties and interest for the six months ended June 30, 2018. The Company remains subject to examination by federal authorities for the tax years 2015 through 2017 and state authorities for the tax years 2015 through 2017.

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.

16

 
NOTE 10 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instruments 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.

Long-term Financial Liabilities

All of Artesian Resources' outstanding long-term debt as of June 30, 2018 and December 31, 2017 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 are shown below:

In thousands
   
 
June 30, 2018
 
December 31, 2017
 
Carrying amount
 
$
106,262
   
$
106,931
 
Estimated fair value
 
$
106,132
   
$
110,524
 

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 11 – RELATED PARTY TRANSACTIONS

In October 2017, September 2017, and February 2017, Artesian Water entered into agreements in the normal course of business with W.F. Construction, Inc. for work associated with building modifications to water treatment plants.  The amounts of these agreements were approximately $60,000, $36,000 and $100,000, respectively. The owner of W.F. Construction, Inc. is the husband of Mrs. Jennifer Finch, Vice President and Assistant Treasurer of Artesian Resources. No amounts were paid to W.F. Construction, Inc. for the three and six months ended June 30, 2018.  Approximately $44,000 and $87,000 was paid to W.F. Construction, Inc. during the three and six months ended June 30, 2017, respectively. As of June 30, 2018, the Company had no liability to W.F. Construction, Inc.

As set forth in the Charter of the Audit Committee of the Board of Directors of Artesian Resources, 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 2017 related party transactions with W.F. Construction, Inc., the Audit Committee considered the nature of the related person's interest in the transaction; the satisfactory performance of work contracted with the related party prior to our employment of Mrs. Finch; and the material terms of the transaction, including, without limitation, the amount and type of transaction, the importance of the transaction to the related person, the importance of the transaction to the Company and whether the transaction 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.

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NOTE 12 – 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.

NOTE 13 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, 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 a 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. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available This guidance, as well as additional guidance issued in January 2018, provides for certain practical expedients, including permitting the Company to elect not to evaluate land easements that existed prior to implementation and were not previously accounted for as leases. Management is currently evaluating the impact of our pending adoption of the new standard, which includes compiling a list of all contracts that meet the definition of a lease under the new standard and determining the proper classification and accounting treatment of such contracts in order to determine the ultimate impact the new standard will have on our consolidated financial statements.

NOTE 14 - SUBSEQUENT EVENT

On August 8, 2018, Artesian Wastewater and CoBank, ACB, or CoBank, entered into a Master Loan Agreement, or the MLA, and two supplements to the MLA (each a "Supplement"), in which Cobank will loan Artesian Wastewater up to a total principal amount of $12 million.  Artesian Wastewater's obligation to repay the loans under each Supplement is evidenced by a promissory note.  Artesian Wastewater's obligations under the MLA, each Supplement and each promissory note is secured by a: (1) statutory first priority lien on all equity which Artesian Wastewater may now own or hereafter acquire in CoBank; (2) a first priority lien on all real and other personal property of Artesian Wastewater, whether now existing or hereafter acquired; and (3) all proceeds thereof.  In addition, Artesian Wastewater's obligations are guaranteed by Artesian Resources Corporation.  Closing on the debt financing was approved by the Delaware Public Service Commission on June 5, 2018.

Each Supplement sets forth the principal amount, the purpose, the interest rate, the repayment terms and any other terms and conditions applicable to the particular loan.  The first Supplement allows loans in an aggregate principal amount not to exceed $7.5 million to provide long-term financing for approximately 60% of the cost to construct a wastewater disposal facility including a pipeline between the wastewater disposal facility site and the properties of Allen Harim Foods, LLC pursuant to the Process Wastewater Services Agreement dated January 27, 2017, between Artesian Wastewater and Allen Harim Foods, LLC.  The second Supplement allows loans in an aggregate principal amount not to exceed $4.5 million to provide long-term financing for the expansion and upgrade of the Stonewater Wastewater Treatment Facility.

Each Supplement has the same interest rate and payment terms.  Artesian Wastewater agrees to pay interest on the unpaid principal balance of the loans at 5.12% per annum. Interest shall be calculated and paid quarterly in arrears on the thirtieth (30th) day of each of March, June, September and December.  Artesian Wastewater agrees to repay each loan in eighty consecutive quarterly installments, each due on the thirtieth (30th) day of each March, June, September, and December, with the first installment due on March 30, 2019, and the last installment due on December 30,2038. The amount of each installment shall be the same principal amount that would be required to be repaid if the loan was scheduled to be repaid in level installments of principal and interest and such schedule was calculated utilizing 5.12% as the rate accruing on the loan; provided, however, that the last installment of each loan shall be in an amount equal to the then unpaid principal balance of the loan.

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Pursuant to the MLA, Artesian Wastewater agrees to pay to CoBank a broken funding surcharge and agrees to (A) give CoBank not less than three (3) business days' prior notice in the event it desires to repay any loan balance bearing interest at a fixed rate prior to the last day of the fixed rate period; and (B) pay to CoBank a broken funding surcharge in the amount set forth below in the event Artesian Wastewater: (1) repays any fixed rate balance prior to the last day of its fixed rate period (whether such payment is made voluntarily, as a result of an acceleration, or otherwise); (2) converts any fixed rate balance to another fixed rate or to a variable rate prior to the last day of the fixed rate period applicable to such balance; or (3) fails to borrow any fixed rate balance on the date scheduled therefor. The surcharge shall be in an amount equal to the greater of (i) the sum of the present value of: (A) any funding losses imputed by CoBank to have been incurred as a result of such payment, conversion or failure; plus (B) a per annum yield of 1/2 of 1% of the amount repaid, converted or not borrowed for the period such amount was scheduled to have been outstanding at such fixed rate, or (ii) $300.00.

The MLA contains customary default provisions where the loans will become immediately due and payable, referred to as "Events of Default," and two financial covenants applicable to Artesian Wastewater; a debt coverage ratio of not less than 1.25 to 1.00 must be maintained commencing with the fiscal year beginning on January 1, 2019 and ending December 31, 2019, and the ratio of total debt to capitalization ratio cannot be greater than 65%.  The loans shall be redeemed at a price equal to the sum of (i) the aggregate principal amount to be redeemed, and (ii) the interest accrued thereon through the date of redemption.
 
The foregoing summary is qualified in its entirety by reference to the text of the MLA and each Supplement and the Guarantee of Payment, copies of which are filed as Exhibit 4.2 and Exhibit 4.3, respectively, hereto and are incorporated by reference.

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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 which express our "belief", "anticipation" or "expectation," as well as other statements which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, 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, 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, 2017, 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 JUNE 30, 2018

OVERVIEW

Our profitability is primarily attributable to the sale of water. Gross water sales comprise 88.2% of total operating revenues for the six months ended June 30, 2018. Our profitability is also attributed to the various contract operations, water, sewer and internal Service Line Protection 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 Service Line Protection Plans.

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Water Division

Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water services 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 June 30, 2018 we had approximately 85,200 metered water customers in Delaware, an increase of approximately 1,800 compared to June 30, 2017. The number of metered water customers in Maryland totaled approximately 2,300 as of June 30, 2018, a slight increase compared to June 30, 2017. The number of metered water customers in Pennsylvania remained consistent compared to June 30, 2017. For the six months ended June 30, 2018, approximately 3.8 billion gallons of water were distributed in our Delaware systems and approximately 69.2 million gallons of water were distributed in our Maryland systems.

Wastewater Division

Artesian Wastewater owns wastewater infrastructure and began providing wastewater services in Delaware in July 2005. Artesian Wastewater Maryland, which was incorporated on June 3, 2008, is able to provide regulated wastewater 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.  There has been consistent customer growth over the years.  The number of Delaware wastewater customers totaled approximately 1,950 as of June 30, 2018, an increase of approximately 250, or 15.9%, compared to June 30, 2017.  In addition, Artesian Wastewater entered into a wastewater services agreement with Allen Harim Foods, LLC, or Allen Harim, a large industrial customer, under which service is expected to begin in 2018. The wastewater services agreement with Allen Harim is 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 currently operates wastewater treatment facilities for the town of Middletown, Delaware under a 20-year contract that expires in July 2022. The facilities include two wastewater treatment stations with capacities of up to approximately 2.5 million gallons per day and 250,000 gallons per day, respectively. We also operate a wastewater disposal facility in Middletown in order to support the 2.5 million gallons per day wastewater facility.

In addition to the water and wastewater services described above, 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, materials and labor required to repair or replace participating customers' leaking water service lines up to an annual limit. The SSLP Plan covers all parts, materials 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.  As of June 30, 2018, approximately 19,500, or 23.8%, of our eligible water customers enrolled in the WSLP Plan, approximately 15,500, or 19.0%, of our eligible customers enrolled in the SSLP Plan, and approximately 5,200, or 6.4%, of our eligible customers enrolled in the ISLP Plan.  Approximately 1,700 non-utility customers enrolled in one of our three protection plans.

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. This facility allows all of our Sussex County, Delaware operations to be housed in one central location.

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 no longer offers development and architectural services to outside third parties.  Artesian will continue to provide design and engineering contract services through our Artesian Utility subsidiary.


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Strategic Direction

Our strategy is to significantly increase customer growth, revenues, earnings and dividends by expanding our water, wastewater and Service Line Protection Plan services across the Delmarva Peninsula. We remain focused on providing superior service to our customers and continuously seeking 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. In addition, we believe growth will occur in the Maryland counties on the Delmarva Peninsula. 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 February 23, 2017, Artesian Water entered into an agreement with Fort DuPont Redevelopment and Preservation Corporation for the purchase of existing water assets and for the provision of potable water and fire suppression services.  The Fort DuPont National Historic District, or Fort DuPont, consists of 325-acres and lies between the Delaware River on the east, the Chesapeake and Delaware Canal on the south and the Delaware City Branch Canal to the north and west.  The final purchase price for the water assets consisting of a water treatment plant, storage tank, wells, mains, and other equipment used to provide potable water and fire suppression services to portions of Fort DuPont and the surrounding properties was $852,000. Closing occurred in June 2017.  In connection with the planned future development of Fort DuPont, the parties intend to design, build and operate a state of the art, cost effective, safe and reliable water system that will include both new water assets as well as improvements and upgrades to the existing water assets.  The water system can be expanded to meet the needs of the planned 600 residential units as well as new commercial customers, in addition to water service currently provided to the Governor Bacon Health Center and National Guard facilities.

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.

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 feel 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.

Artesian Wastewater entered into agreements that will provide growth opportunities and will utilize our larger regional wastewater facilities.  In August 2016, Artesian Wastewater and Sussex County, a political subdivision of Delaware, entered into an agreement to 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.

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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 is pending receipt of a construction permit and installation of related on-site improvements by Allen Harim.  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 million gallons per day 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 Northern Sussex Regional Water Recycling 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 by the end of 2018.

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 Service Line Protection 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.

Regulatory Matters

Our water and wastewater utility operations are subject to regulation by their respective state regulatory commissions, which have broad administrative power and authority to regulate rates charged for service, determine franchise areas and conditions of service, approve acquisitions, authorize the issuance of securities and oversee other matters. The profitability of our utility operations is influenced, to a great extent, by the timeliness and adequacy of rate allowances we are granted by the respective regulatory commissions or authorities in the states in which we operate.

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
 
DEPSC Approval Date
 
12/20/2016
   
06/19/2018
 
Effective Date
 
01/01/2017
   
07/01/2018
 
Cumulative DSIC Rate
   
4.71
%
   
3.63
%
Net Eligible Plant Improvements – Cumulative Dollars (in millions)
 
$
16.6
   
$
24.7
 
Eligible Plant Improvements – Installed Beginning Date
 
10/01/2014
   
10/01/2014
 
Eligible Plant Improvements – Installed Ending Date
 
10/31/2016
   
04/30/2018
 


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The DSIC rate effective July 1, 2018 replaces the DSIC rate effective January 1, 2017.  This reduced rate reflects the TCJA impact to customers, partially offset by eligible plant improvements installed through April 30, 2018.  The cumulative DSIC rate effective July 1, 2018 noted above is under audit with the DEPSC.   For the three and six months ended June 30, 2018 we did not report any earnings in DSIC revenue since the full amount of $800,000 and $1,548,000, respectively, is being held in reserve pending the outcome of the DEPSC’s decision regarding the TCJA impact to customers.  For the three and six months ended June 30, 2017, we earned approximately $787,000 and $1,543,000 in DSIC revenue, respectively.

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 June 30, 2018 Compared to the Three Months Ended June 30, 2017.

Operating Revenues

Revenues totaled $20.2 million for the three months ended June 30, 2018, $0.3 million, or 1.3%, less than revenues for the three months ended June 30, 2017. Water sales revenue decreased $0.4 million, or 2.1%, for the three months ended June 30, 2018 from the corresponding period in 2017, primarily due to a decrease in DSIC related to earnings being held in reserve pending the final determination of the potential rate relief due to customers as a result of the TCJA.  This decrease is partially offset by an increase in customer charges from customer growth and an increase in overall water consumption. We realized 88.3% and 89.0% of our total operating revenue for the three months ended June 30, 2018 and June 30, 2017, respectively, from the sale of water.

Other utility operating revenue increased approximately $0.1 million, or 6.5%, for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The increase is primarily due to an increase in wastewater revenue from customer growth, partially offset by a decrease in water service charges.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, decreased $0.5 million, or 4.6%, for the three months ended June 30, 2018, compared to the same period in 2017. 

Utility operating expenses decreased $0.5 million, or 5.7%, for the three months ended June 30, 2018 over the same period in 2017. The decrease is primarily related to the following.

·
Payroll, employee benefit costs and related expenses decreased $0.5 million due to a decrease in equity compensation awards and timing of compensation.

·
Purchased water expense decreased $0.1 million, primarily due to more water purchased in 2017 during relocation of a major transmission main in our northern New Castle County, Delaware water system due to state highway construction.

·
Repair and maintenance expense increased $0.1 million, primarily due to the painting of an elevated water storage tank in our Cecil County, Maryland system.  This increase is partially offset by a decrease related to the timing of expenses related to the maintenance of water treatment equipment, specifically carbon filter replacements, in our Delaware water system.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 53.8% for the three months ended June 30, 2018, compared to 55.7% for the three months ended June 30, 2017.

Depreciation and amortization expense increased $0.2 million, or 9.1%, 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 $0.2 million, or 11.3%, primarily due to the reduction in the Federal corporate income tax rate by the TCJA signed into law on December 22, 2017.

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Other Income, Net

Other income, net increased $0.4 million, primarily due to a pledge made in 2017 to a non-profit entity in Delaware to support the state’s economic development effort.  A similar pledge was not made in 2018.

Net Income

Our net income applicable to common stock increased $0.7 million, primarily due to a decrease in utility operating expenses and a pledge made in 2017 to a non-profit entity in Delaware to support the state’s economic development effort.


Results of Operations – Analysis of the Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017.

Operating Revenues

Revenues totaled $39.1 million for the six months ended June 30, 2018, $0.6 million, or 1.4%, less than revenues for the six months ended June 30, 2017. Water sales revenue decreased $0.7 million, or 1.9%, for the six months ended June 30, 2018 from the corresponding period in 2017, primarily due to a decrease in DSIC related to earnings being held in reserve pending the final determination of the potential rate relief due to customers as a result of the TCJA.  This decrease is partially offset by an increase in overall water consumption and an increase in customer charges from customer growth. We realized 88.2% and 88.6% of our total operating revenue for the six months ended June 30, 2018 and June 30, 2017, respectively, from the sale of water.

Non-utility operating revenue increased approximately $0.1 million, or 3.1%, for the six months ended June 30, 2018 compared to the same period in 2017. The increase is primarily due to an increase in Service Line Protection Plan revenue.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, decreased $0.3 million, or 1.3%, for the six months ended June 30, 2018, compared to the same period in 2017. 

Utility operating expenses decreased $0.4 million, or 2.0%, for the six months ended June 30, 2018 over the same period in 2017. The decrease is primarily related to the following.

·
Payroll, employee benefit costs and related expenses decreased $0.4 million due to a decrease in equity compensation awards and timing of compensation.

·
Purchased water expense decreased $0.2 million, primarily due to more water purchased in 2017 during relocation of a major transmission main in our northern New Castle County, Delaware water system due to state highway construction.

·
Repair and maintenance expense increased $0.2 million, primarily due to the painting of an elevated water storage tank in our Cecil County, Maryland system.  This increase is partially offset by a decrease related to the timing of expenses related to the maintenance of water treatment equipment, specifically carbon filter replacements, in our Delaware water system.

Property and other taxes increased $0.1 million, or 4.4%, 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.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 56.0% for the six months ended June 30, 2018, compared to 55.9% for the six months ended June 30, 2017.

Depreciation and amortization expense increased $0.5 million, or 9.9%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.


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Federal and state income tax expense decreased $1.0 million, or 24.7%, primarily due to the reduction in the Federal corporate income tax rate by the TCJA signed into law on December 22, 2017.

Other Income, Net

Other income, net increased $0.7 million, primarily due to an increase in the amount of the annual patronage refund from CoBank, ACB, related to the refinancing of the Series O and Series Q First Mortgage bonds in January 2017.  The annual patronage has been equal to 1.00% of the average line of credit and loan volume outstanding.  In addition, a pledge was made in 2017 to a non-profit entity in Delaware to support the state’s economic development effort.  A similar pledge was not made in 2018.

Interest Charges

Interest expense decreased $0.1 million, primarily due to the refinancing of the Series P First Mortgage bond in January 2018, reducing the interest rate from 6.58% to 4.71%.  This decrease is partially offset by an increase in interest charges due to an increase in borrowing under lines of credit.

Net Income

Our net income applicable to common stock increased $1.1 million, primarily due to an increase in the amount of the annual patronage refund from CoBank, ACB and reduced utility operating expenses, federal and state income taxes and interest expense.


LIQUIDITY AND CAPITAL RESOURCES

Overview

Our primary sources of liquidity for the six months ended June 30, 2018 were $12.7 million of cash provided by operating activities, $9.8 million from lines of credit borrowings, $4.1 million in net contributions and advances from developers and $0.6 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 $23.0 million in capital expenditures during the first six months of 2018 compared to $17.1 million invested during the same period in 2017. During the first six months of 2018, we invested approximately $4.4 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 $4.5 million to enhance or improve existing treatment facilities and replace aging wells and pumping equipment to better serve our customers.  We invested $1.3 million for equipment purchases, computer hardware and software upgrades and transportation equipment. Developers financed $2.0 million for the installation of water mains and hydrants for the first six months in 2018 compared to $2.3 million for the first six months of 2017. We invested $1.5 million to upgrade and automate our meter reading equipment. We invested approximately $0.6 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 $8.7 million was invested in wastewater projects in Delaware, of which $8.2 million was invested in the ongoing 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.


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 short-term borrowings. 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 capital markets as necessary. We believe that internally generated funds along with existing credit facilities will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements. 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.

26

 
The Tax Cuts and Jobs Act

On December 22, 2017, the TCJA was signed into law. We are in the process of analyzing the TCJA and its overall impact on the Company. The TCJA reduces the federal corporate tax rate to 21 percent from 35 percent, among other things. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the TCJA is uncertain.  However, based on its preliminary assessment of the reduction in the federal corporate tax rate, the Company currently expects that its 2018 effective tax rate will be reduced and will result in overall lower tax expense beginning in 2018.  Such estimate is based on management’s current assumptions with respect to, among other things, the Company’s earnings, state income tax levels and tax deductions. The Company’s actual effective tax rate in 2018 may differ from management’s estimate.  The TCJA also includes certain other provisions specifically related to the public utility industry, including the exclusion from utilizing bonus depreciation.  The impact with respect to provisions specifically related to the public utility industry or to corporate taxpayers in general may also impact our future financial performance, including our results of operations, cash flows and liquidity, which impacts will largely be determined through future regulatory proceedings.

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. We submitted the required reports to the DEPSC by the March 31, 2018 deadline. The Company expects any reduction in corporate income tax expense resulting from the TCJA will be passed through to customers in the form of reduced tariff rates or approved DSIC rates.  Until a final decision is determined by the DEPSC, DSIC revenue for the first six months of 2018 is being held in reserve and is not reflected in income. This reserved amount approximates the TCJA impact to Artesian Water’s customers.

Lines of Credit

At June 30, 2018, 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 June 30, 2018, there was $30.6 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 24, 2019 or any date on which Citizens demands payment. The Company expects to renew this line of credit.

At June 30, 2018, 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 June 30, 2018, there was $10.0 million of available funds under this line of credit. The interest rate for borrowings under this line is LIBOR plus 1.50%. The term of this line of credit expires on July 20, 2019. We expect 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
 
$
19,433
   
$
--
   
$
--
   
$
--
 

Long-Term Debt

Artesian Water's trust indentures, which set certain criteria for the issuance of new long-term debt, limit long-term debt, including the short-term portion thereof, to 66⅔% of total capitalization. Our debt to total capitalization, including the short-term portion thereof, was 47.6% at June 30, 2018. In addition, our revolving line of credit with CoBank contains 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, guaranty certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions, transfer certain assets, change our business or incur additional indebtedness.  In addition, this line of credit requires us to abide by certain financial covenants and ratios. As of June 30, 2018, we were in compliance with these covenants.

27


 
We expect to fund our activities for the next 12 months using our available cash balances and bank credit lines, plus projected cash generated from operations.


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)
 
$
5,378
   
$
10,680
   
$
10,566
   
$
143,409
   
$
170,033
 
State revolving fund loans (principal and interest)
   
1,002
     
2,005
     
1,611
     
3,865
     
8,483
 
Operating leases
   
77
     
114
     
119
     
1,298
     
1,608
 
Unconditional purchase obligations
   
3,824
     
7,659
     
1,928
     
--
     
13,411
 
Tank painting contractual obligation
   
426
     
213
     
--
     
--
     
639
 
Total contractual cash obligations
 
$
10,707
   
$
20,671
   
$
14,224
   
$
148,572
   
$
194,174
 

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.  The state revolving fund loan obligation has an amortizing mortgage payment payable over a 20-year period, and will be refinanced as future securities are issued. Both the long-term debt and the state revolving fund loan 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.

On January 18, 2017, Artesian Water and CoBank entered into a Bond Purchase Agreement relating to the issue and sale by the Company to CoBank of a $40 million principal amount First Mortgage Bond, Series T, or the Series T Bond, due December 20, 2036, or the Series T Maturity Date.  The Series T Bond was issued pursuant to the Company’s Indenture of Mortgage dated as of July 1, 1961, as amended and supplemented by supplemental indentures, including the Twenty-Second Supplemental Indenture dated as of January 18, 2017 from the Company to Wilmington Trust Company, as Trustee.  The Indenture is a first mortgage lien against substantially all of the Company’s utility plant.  The proceeds from the sale of the Series T Bond were used to prepay indebtedness of the Company under two existing First Mortgage Bonds: Series O, principal amount $20 million with interest rate of 8.17% and related prepayment costs of $4.5 million; and Series Q, principal amount $15.4 million with interest rate of 4.75%.  The DEPSC approved the issuance of the Series T Bond on December 20, 2016.  The DEPSC also approved deferral of the prepayment costs associated with the First Mortgage Bond, Series O and the previously deferred debt related costs associated with the First Mortgage Bonds, Series O and Series Q.

The Series T Bond carries an annual interest rate of 4.24% through and including the Series T Maturity Date. Interest is payable on June 30th and December 31st of each year, beginning June 30, 2017, until the Company’s obligation with respect to the payment of principal, premium (if any) and interest shall be discharged. Overdue payments shall bear interest as provided in the Twenty-Second Supplemental Indenture. The terms of the Series T Bond also include certain limitations on the Company’s indebtedness.

On January 24, 2018, Artesian Water Maryland signed an interconnection agreement with the Town of North East that has a “take or pay” clause requiring us to purchase a minimum of 35,000 gallons per day of water that shall commence on the first day of the month following the date on which the interconnection is completed.  The interconnection completion date is expected to occur during the third quarter of 2018.

On January 31, 2018, Artesian Water and CoBank entered into a Bond Purchase Agreement relating to the issue and sale by the Company to CoBank of a $25 million principal amount First Mortgage Bond, Series U, or the Series U Bond, due January 31, 2038, or the Series U Maturity Date.  The Series U Bond was issued pursuant to the Company’s Indenture of Mortgage dated as of July 1, 1961, as amended and supplemented by supplemental indentures, including the Twenty-Third Supplemental Indenture, dated as of January 31, 2018 from the Company to Wilmington Trust Company, as Trustee.  The Indenture is a first mortgage lien against substantially all of the Company’s utility plant.  The proceeds from the sale of the Series U Bond together with other funds of the Company, were used to pay in full at maturity indebtedness of the Company under those certain First Mortgage Bonds, Series P.  The DEPSC approved the issuance of the Series U Bond on December 21, 2017.

The Series U Bond carries an annual interest rate of 4.71% through and including the Series U Maturity Date. Interest is payable on January 30th, April 30th, July 30th and October 30th in each year and on the Series U Maturity Date, beginning April 30, 2018 until the Company’s obligation with respect to the payment of principal, premium (if any) and interest shall be discharged.  Overdue payments shall bear interest as provided in the Twenty-Third Supplemental Indenture. The term of the Series U Bond also includes certain limitations on the Company’s indebtedness.

28

 
On August 8, 2018, Artesian Wastewater and CoBank entered into a Master Loan Agreement, or the MLA, and two supplements to the MLA, in which Cobank will loan Artesian Wastewater up to a total principal amount of $12 million (see Note 14).  Artesian Wastewater agrees to pay interest on the unpaid principal balance of the loans at 5.12% per annum. Interest shall be calculated and paid quarterly in arrears on the thirtieth (30th) day of each of March, June, September and December.  Artesian Wastewater agrees to repay each loan in eighty consecutive quarterly installments, each due on the thirtieth (30th) day of each March, June, September, and December, with the first installment due on March 30, 2019, and the last installment due on December 30, 2038. The amount of each installment shall be the same principal amount that would be required to be repaid if the loan was scheduled to be repaid in level installments of principal and interest and such schedule was calculated utilizing 5.12% as the rate accruing on the loan; provided, however, that the last installment of each loan shall be in an amount equal to the then unpaid principal balance of the loan.  Closing on the debt financing was approved by the Delaware Public Service Commission on June 5, 2018.  The foregoing summary is qualified in its entirety by reference to the text of the MLA and each Supplement and the Guarantee of Payment, copies of which are filed as Exhibit 4.2 and Exhibit 4.3, respectively, hereto and are incorporated by reference.

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.


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.

Critical Accounting Assumptions, Estimates and Policies; Recent Accounting Standards

This discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2017 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, 2017. 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, 2017. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2017 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2017.

Information concerning our implementation and the impact of recent accounting standards issued by the Financial Accounting Standards Board is included in the notes to our 2017 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2017 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 six months of 2018 that had a material impact on our financial condition, liquidity or results of operations.


29


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, 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 June 30, 2018 were approximately $19.4 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 a multi-year supply contract, at a fixed price.

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.


PART II - OTHER INFORMATION


ITEM 1 – LEGAL PROCEEDINGS

On April 3, 2018 Wetherby, LLC filed a complaint against Artesian Resources Corporation and Artesian Wastewater Management, Inc., or the Defendants, in United States District Court for the District of Delaware, or the Court.  The complaint alleged that the Defendants have engaged in monopolization and/or attempted monopolization in violation of Section 2 of the Sherman Antitrust Act in connection with negotiating the terms upon which Artesian Wastewater Management, Inc. might provide wastewater services to a proposed development in Sussex County, Delaware.  The complaint sought the following relief: a permanent injunction requiring Defendants to provide wastewater services; a declaration that the Defendants are a monopoly; a declaration that the Defendants’ actions violate Section 2 of the Sherman Act; actual damages in an amount to be proved at trial, but not less than $10 million; treble damages under the Clayton Act, and the cost of suit, including reasonable attorneys’ fees; and such other relief as the Court deemed just and proper.  We believed the claims were without merit and defended the suit vigorously. On May 15, 2018, the Court sent notice that Wetherby, LLC withdrew, with prejudice, its claims against the Defendants.

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 assure 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.

30


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, 2017, 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.


31

 
ITEM 6 - EXHIBITS

Exhibit No.
Description
 
 
Interest Rate Lock Agreement, dated as of May 7, 2018, by and between Artesian Wastewater Management, Inc. and CoBank, ACB.  Incorporated by reference to Exhibit 4.1 filed with the Company’s Form 8-K filed on May 10, 2018.
   
Master Loan Agreement, dated as of August 8, 2018, by and between Artesian Wastewater Management, Inc. and CoBank, ACB.*
   
Guarantee of Payment, dated as of August 8, 2018, by and between Artesian Resources Corporation and CoBank, ACB.*
   
Certification of Chief Executive Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*
 
 
Certification of Chief Financial Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*
 
 
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 June 30, 2018 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

32






 
EX-31.1 2 exhibit31-1.htm EXHIBIT 31.1


 
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 June 30, 2018 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:  August 9, 2018
    /s/ DIAN C. TAYLOR
 
Dian C. Taylor
 
Chief Executive Officer (Principal Executive Officer)
EX-31.2 3 exhibit31-2.htm EXHIBIT 31.2




 
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 June 30, 2018 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:  August 9, 2018
   /s/ DAVID B. SPACHT
 
David B. Spacht
 
Chief Financial Officer (Principal Financial and Accounting Officer)
EX-32 4 exhibit32.htm EXHIBIT 32



 
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 March 31, 2018 (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:  August 9, 2018
 
 
 
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.
EX-4.2 5 exhibit4-2.htm MASTER LOAN AGREEMENT
$12,000,000 MULTIPLE ADVANCE TERM LOAN FACILITY FROM
COBANK, ACB
TO
ARTESIAN WASTEWATER MANAGEMENT



MLA No. RX1447

MASTER LOAN AGREEMENT

THIS MASTER LOAN AGREEMENT (this “Agreement”) is entered into as of August 8, 2018, between ARTESIAN WASTEWATER MANAGEMENT, INC., a corporation organized and existing under the laws of the State of Delaware (the “Company”), and CoBANK, ACB, a federally chartered instrumentality of the United States (“CoBank”).
BACKGROUND

From time to time, CoBank may make loans and extend other types of credit to or for the account of the Company (each, a “Loan”).  In order to facilitate the making of Loans, the parties desire to enter into a master agreement. Such is the purpose of this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE 1
DEFINITIONS AND RULES OF INTERPRETATION
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 shall apply to this Agreement.
ARTICLE 2
THE SUPPLEMENTS
SECTION 2.01          Supplements. In the event the Company desires to borrow from CoBank and CoBank is willing to lend to the Company, the parties will enter into a supplement to this Agreement (each a “Supplement”).  Each Supplement will set forth CoBank’s commitment to make a Loan or Loans to the Company, the amount of the Loan(s), the purpose of the Loan(s), the interest and/or fee provisions applicable to the Loan(s), the repayment terms of the Loan(s), and any other terms and conditions applicable to the particular Loan(s).  Each Loan will be governed by the terms and conditions contained in this Agreement and in the Supplement.  In the absence of a Supplement hereto duly executed by CoBank, CoBank shall have no obligation to make a Loan to the Company under this Agreement. []
SECTION 2.02          Notice and Manner of Borrowing.  Except as otherwise provided in a Supplement: (A) Loans will be made available on any Business Day upon the written, telephonic, or, if provided by separate agreement between the parties, electronic request of an officer or employee of the Company; provided, however that any request made telephonically shall, if required by CoBank, be promptly confirmed in writing; (B) requests for Loans must be received by CoBank not later than 12:00 Noon Mountain Time on the date the Loan is to be made; and (C) Loans will be made available by wire transfer of immediately available funds to such account or accounts as may be authorized by the Company on forms supplied or approved by CoBank.
SECTION 2.03          Promissory Notes.  The Company’s obligation to repay the Loan(s) made under each Supplement shall be evidenced by a promissory note in form and content acceptable to CoBank (each, as amended or restated from time to time, a “Promissory Note”).
SECTION 2.04          Security and Guarantees.
(A)          Security. The Company’s obligations under the Credit Documents shall be secured by a: (1) statutory first priority Lien on all equity which the Company may now own or hereafter acquire in CoBank; (2) a first priority Lien on all real and other personal property of the Company (other than property specially excepted by CoBank in writing), whether now existing or hereafter acquired; and (3) all proceeds thereof (collectively, the “Collateral”).  The Company agrees to take such steps (including the execution and recording of such instruments and documents) as CoBank may from time to time reasonably require in order to enable CoBank to obtain, perfect and maintain its Lien on the Collateral.
(B)          Guarantee of Payment. In addition to the above, the Company’s obligations under the Credit Documents shall be guaranteed by Artesian Resources Corporation (the “Guarantor”) pursuant to a continuing guarantee of payment in form and content acceptable to CoBank (as amended or restated from time to time, the “Guaranty”).
SECTION 2.05          CoBank Books and Records.  CoBank will keep a record of: (A) the date and amount of each Loan; (B) the interest rate elections and/or interest rates applicable to all Loans, and the effective dates of all changes thereto; (C) all fees and expenses due and payable to CoBank hereunder and under the other Credit Documents; and (D) the date and amount of all principal, interest, and fees paid by the Company to CoBank hereunder and under the other Credit Documents.  To the extent permitted by applicable Law, such record (and all computer printouts thereof) shall be presumed correct absent proof of error as to the obligations of the Company therein recorded; provided, that the failure of CoBank to maintain such record, or any error therein, shall not in any manner affect the obligation of the Company to repay (with applicable interest) any Loan hereunder in accordance with the terms of this Agreement and the other Credit Documents.
SECTION 2.06          Business Days.  Notwithstanding the terms of any Supplement, Promissory Note, or other Credit Document, if any date on which principal, interest, fees, or other amount is due and payable 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 on the amount thereof until paid.
SECTION 2.07          Method of Payment.  The Company shall make all payments to CoBank under this Agreement and the other Credit Documents by wire transfer of immediately available funds or, if specified by separate agreement between the Company and CoBank, by automated clearing house or other similar cash handling processes.  Wire transfers shall be made to ABA No. 307088754 for advice to and credit of “CoBANK” (or to such other account as CoBank may direct by notice).  In the event that the Company intends to make any payment on a date other than a scheduled payment date, then the Company shall give CoBank telephonic notice no later than 12:00 Noon Mountain Time of its intent to pay by wire, and funds received after 3:00 P.M. Mountain Time shall, in CoBank’s discretion, be credited on the next Business Day.  The Company agrees that CoBank shall not be obligated to present any Promissory Note for payment as a condition for receiving payment thereon.
ARTICLE 3
CONDITIONS PRECEDENT
SECTION 3.01          Conditions to this Agreement and Initial Supplements.   This Agreement and the Supplements  hereto dated as of the date of this Agreement (the “Initial Supplements”) are subject to the following conditions precedent (which in the case of instruments and documents, must be in form and content acceptable to CoBank):
(A)          This Agreement.  CoBank and the Company shall have duly executed and delivered this Agreement.
(B)          The Initial Supplement and Promissory Note. CoBank and the Company shall have duly executed and delivered the Initial Supplements hereto, and the Company shall have duly executed and delivered the Promissory Notes evidencing the Company’s obligation to repay the Loans made under the Initial Supplements hereto.
(C)          Secretary’s Certificate.  CoBank shall have received a certificate of the Secretary or Assistant Secretary of the Company dated as of the date of this Agreement (or as of such other date as may be acceptable to CoBank) attaching and certifying as to each of the following (which certificate and attachments must be in form and content acceptable to CoBank):  (1) the resolutions of the Company’s board of directors authorizing the execution and delivery of this Agreement, the Initial Supplements hereto, the Promissory Notes related thereto, and all Credit Documents contemplated hereby or by the Initial Supplements (collectively, the “Initial Credit Documents”); (2) a certificate of incumbency setting forth the names and true ink signatures of each officer of the Company authorized to sign the Initial Credit Documents; (3) a copy of the certificate of incorporation of the Company, as amended to the date of this Agreement, certified by the Secretary of State (or equivalent) of the State of Delaware within thirty (30) days of the date of this Agreement; (4) a certificate issued by the Secretary of State (or equivalent) of Delaware dated within thirty days of the date of this Agreement (or within such other number of days as may be agreeable to CoBank), attesting to the good standing of the Company in such state; and (5) the bylaws of the Company, as amended to the date of this Agreement.
(D)          Guaranty and Related Documents.  CoBank shall have received: (1) a duly executed Guaranty; (2) a certificate of the Secretary or Assistant Secretary of the Guarantor dated as of the date of this Agreement (or as of such other date as may be acceptable to CoBank) attaching and certifying as to each of the following (which certificate and attachments must be in form and content acceptable to CoBank):  (1) the resolutions of the Guarantor’s board of directors authorizing the execution and delivery of the Guaranty; (2) a certificate of incumbency setting forth the names and true ink signatures of each officer of the Guarantor authorized to sign the Guaranty; (3) a copy of the certificate of incorporation of the Guarantor, as amended to the date of this Agreement, certified by the Secretary of State (or equivalent) of the Guarantor’s state of incorporation or formation within thirty (30) days of the date of this Agreement; (4) a certificate issued by the Secretary of State of the State of Delaware dated within thirty days of the date of this Agreement (or within such other number of days as may be agreeable to CoBank), attesting to the good standing of the Guarantor in such state; and (5) the bylaws of the Guarantor, as amended to the date of this Agreement.
(E)          Consents and Approvals.  CoBank shall have received such evidence as CoBank may reasonably require that all filings, consents and approvals required to be obtained by the Company and the Guarantor in order for the Company and the Guarantor to be able to enter into the Initial Credit Documents to which it is a party and in order for the Company to be able to construct the project being financed with the Initial Credit Documents, have been obtained, are in full force and effect, and are final and not subject to appeal, including any approvals required to be obtained by the Company from the Public Service Commission of the State of Delaware.
(F)          Opinion of Counsel.  CoBank shall have received an opinion of counsel to the Company and the Guarantor (which opinion and counsel must be acceptable to CoBank).
(G)          Fees and Other Charges.  CoBank shall have received all fees or other charges provided for herein.
(H)          Insurance.  CoBank shall have received such evidence as CoBank may require that the Company is in compliance with Section 6.14 hereof (including the flood insurance requirements thereof).
(I)          Officer’s Certificate.  CoBank shall have received an original certificate from an officer of the Company acceptable to CoBank dated as of the date hereof and in form and substance acceptable to CoBank.
SECTION 3.02          Conditions to Each New Supplement.  CoBank’s obligation to make the initial Loan under each Supplement executed after the date hereof (which, for the avoidance of doubt, does not include the Initial Supplements), is subject to the following conditions precedent (which in the case of instruments and documents, must be in form and content acceptable to CoBank):
(A)          Supplement.  CoBank and the Company shall have duly executed and delivered the Supplement.
(B)          Promissory Note.  CoBank shall have received an original Promissory Note, duly executed by the Company.
(C)          Other Loan Documents. CoBank shall have received duly executed originals of all other Credit Documents contemplated by the Supplement.
(D)          Security.  (1) The Company and CoBank shall have entered into a supplemental mortgage in form and content reasonably satisfactory to CoBank (the “Supplemental Mortgage”); and (2) CoBank shall have received such evidence as may be satisfactory to CoBank that (a) the Supplemental Mortgage and one or more UCC-1 financing statements or amendments to the existing UCC-1 financing statements have been recorded in each place required by Law in order for the Mortgage, as supplemented by the Supplemental Mortgage, to accord CoBank a duly perfected and recorded Lien on the Collateral as security for the additional obligations then being incurred; (b) there are no tax, judgment, or other Liens on the Collateral, other than Liens permitted by this Agreement and the Mortgage; and (c) to the extent permitted by Law, all taxes and recording fees arising in connection with the new Credit Documents have been paid in full.
(E)          Secretary’s Certificate. CoBank shall have received a certificate of the Secretary or Assistant Secretary of the Company, and each other Person, if any, (other than CoBank) that is party to the Credit Documents, dated as of the date of the Credit Documents then being executed (or as of such other date as may be acceptable to CoBank), attaching and certifying as to each of the following (which certificate and attachments must be in form and content acceptable to CoBank): (1) the resolutions of the Company’s board of directors (or, if applicable, the board of directors or other governing body of such other Person) authorizing the execution and delivery of the Credit Documents then being entered into in connection with such Supplement; (2) a certificate of incumbency setting forth the names and true ink signatures of each officer of the Company (and, if relevant, each other Person) authorized to sign such Credit Documents; (3) the certificate of incorporation of the Company (and, if relevant, each other Person that is a party to any of the Credit Documents), as amended to the date of the Supplement; (4) a certificate issued by the Secretary of State (or equivalent) of the Company’s state of incorporation or formation (or, if relevant, of each other Person that is a party to the Credit Documents) dated within thirty days of the date of the Supplement (or within such other number of days as may be agreeable to CoBank), attesting to the good standing of the Company (or such other Person) in such state; (5) the bylaws of the Company (and, if relevant, each other Person), as amended to the date of the Supplement; and (6) such other instruments and documents as CoBank may require.
(F)          Consents and Approvals.  CoBank shall have received such evidence as CoBank may reasonably require that all consents and approvals that are required to be obtained by the Company and each other Person in connection with the Credit Documents or the project or activity then being financed, have been obtained and are in full force and effect, including any approvals required to be obtained from the Public Service Commission of the State of Delaware.
(G)          Fees and Other Charges.  CoBank shall have received any fees or other charges provided for herein or in such Supplement.
(H)          Insurance.  CoBank shall have received such evidence as CoBank may require that the Company is in compliance with Section 6.14 hereof (including the flood insurance requirements thereof) and any additional requirements set forth in such Supplement.
(I)          Opinion of Counsel.  CoBank shall have received a duly executed original opinion of counsel to the Company (which opinion and counsel must be reasonably acceptable to CoBank).
(J)          Officer’s Certificate. CoBank shall have received an original certificate from an officer of the Company acceptable to CoBank dated as of the date of the Supplement and in form and substance acceptable to CoBank.
(K)          Other Matters.  CoBank shall have received such additional certificates and other documents as CoBank shall have required, and all legal matters incident to the consummation of the transactions contemplated by the Supplement shall be reasonably satisfactory to CoBank and its counsel in all respects.
SECTION 3.03          Conditions to Each Loan. CoBank’s obligation under each Supplement to make any Loan to the Company thereunder, including the initial Loan thereunder, is subject to the conditions that: (A) each of the representations and warranties made or deemed made by the Company herein, in the Supplement, and in each other Loan Document, shall be true and correct in all material respects as of the date of the Loan; and (B) the Company shall have satisfied all conditions precedent set forth in the Supplement.  Without limiting clause (A) above, CoBank’s obligation under a Supplement to make any Loan to the Company thereunder is subject to the condition precedent that no Default or Event of Default shall have occurred and be continuing.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
To induce CoBank to enter into each Supplement hereto and make each Loan to the Company thereunder, the Company represents and warrants that, except as provided below or in any officer certificate delivered in connection with the Supplement:
SECTION 4.01          Organizations and Good Standing.  The Company: (A) is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware; (B) is duly qualified to do business and is in good standing in each jurisdiction in which the transaction of its business makes such qualification necessary; and (C) has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, and to enter into and perform the Credit Documents to which it is a party.
SECTION 4.02          Ownership and Subsidiaries.  The Company is owned 100% by the Guarantor and has no Subsidiaries.
SECTION 4.03          Financial Statements.
(A)          The Financial Statements 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 and the Guarantor as of the dates thereof and the results of their operations and changes in its financial position for the periods covered thereby.
(B)          Since the date of the Annual Financial Statements: (1) there has been no material adverse change in the condition (financial or otherwise), business or operations of the Company or the Guarantor from that presented in the Annual Financial Statements; and (2) except as may have arisen in the ordinary course or as may have been disclosed in any officer’s certificate submitted in connection with such Supplement, there are no liabilities of the Company or the Guarantor, fixed or contingent, which are material but not reflected in the Annual Financial Statements.
(C)          All budgets, projections, feasibility studies, and other similar documentation submitted by the Company to CoBank in connection with such Supplement were based upon assumptions that were reasonable at such time and 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 the officer’s certificate furnished in connection with a Supplement or pursuant to Section 5.05, 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.  Except for Liens in favor of CoBank there are no Liens on any property of the Company other than Permitted Encumbrances.
SECTION 4.07          Title to Properties.  The Company has good title to all its property and assets reflected in its Annual Financial Statements (other than property or assets subsequently disposed of in the normal and ordinary course of business).
SECTION 4.08          Consents and Approvals. Except for such as shall have been made or obtained and are in full force and effect, no filing with and no consent, permission, authorization, order or license or other action of or by any Governmental Authority or of any party to any agreement to which the Company is a party or by which it or any of its property may be bound or affected (collectively, “Consents”), is necessary in connection with (A) the execution, delivery, performance or enforcement of the Credit Documents; and (B) the project, acquisition, or other activity being financed with the proceeds of the Credit Documents, other than Consents which are customarily obtained at a later date (such as occupancy permits).
SECTION 4.09          Calamities, Strikes, etc.  Since December 31, 2017, 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 any 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 (other than the Lien created by the Credit Documents), 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 Guarantor 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 CoBank by the Company in connection herewith, contain at the time made 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 CoBank 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 by this Agreement or any Supplement (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 applicable Supplement 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 CoBank.
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 8.02 of this Agreement.
SECTION 4.19          Rate Matters.  The Company’s current rates for the provision of wastewater 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.  The Company’s utility’s 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 wastewater operating, discharge, and other permits that are necessary adequately to service the present and reasonably anticipated needs of its customers (other than permits to be obtained in the ordinary course of business upon completion of any project being financed by CoBank under a Supplement).
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 AgreementsThe 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 date of the Supplement, the Company has no Indebtedness other than Indebtedness permitted by this Agreement or the other Credit Documents.
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 are required by Section 6.14 hereof.  In addition, effective upon execution and delivery of the Mortgage, all policies insuring the Collateral have endorsements thereto naming CoBank as mortgagee and loss payee as required by Section 6.14 hereof.
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 all commitments have expired or been terminated:
SECTION 5.01          Annual Financial Statements of Company.  The Company will furnish, or cause to be furnished, to CoBank as soon as available, and in any event within 120 days after the close of each fiscal year of the Company:
(i)          a Company prepared balance sheet of the Company as of the close of such fiscal year, and
(ii)          Company prepared 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 prepared in conformity with GAAP consistently applied.
SECTION 5.02          Financial Statements of the Guarantor.
(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 Guarantor, the Company will deliver to CoBank copies of:
(A)          consolidated balance sheets of the Guarantor and its subsidiaries as of the close of such quarterly period, and
(B)          consolidated statements of income, retained earnings and cash flows of the Guarantor 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 prepared in conformity with GAAP consistently applied.

(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 Guarantor, the Company will deliver to CoBank, copies in duplicate of:
(A)          consolidated balance sheets of the Guarantor and its subsidiaries as of the close of such fiscal year, and
(B)          consolidated statements of income, retained earnings and cash flow of the Guarantor 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 the consolidating schedules related thereto and an opinion thereon of a firm of independent certified public accountants of recognized national standing selected by the Guarantor to the effect that the consolidated financial statements have been prepared in conformity with GAAP and present fairly the financial condition of the Guarantor 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 Guarantor 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 CoBank, promptly upon their becoming available, copies of all registration and proxy statements and reports that the Company or the Guarantor 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 the Company, or the Guarantor, shall send to its or their stockholders or file with any securities exchange.
SECTION 5.04          Requested Information.  The Company with reasonable promptness shall furnish to CoBank 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 CoBank a certificate of its President or its Treasurer or Chief Financial Officer in the form attached hereto as Exhibit B.
SECTION 5.06          Inspection.  The Company will permit CoBank, or such person or persons as CoBank 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 CoBank the finances and affairs of the Company), all at such reasonable times and as often as CoBank may desire; provided that, unless a Default or Event of Default exists, CoBank shall bear the cost of any such inspection.
SECTION 5.07          Notice of Default.  Promptly after becoming aware thereof, the Company will deliver to CoBank notice of the occurrence of any Default or Event of Default.
SECTION 5.08          Notice of Non-Environmental Litigation.  Promptly after the commencement thereof, the Company will deliver to CoBank 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 CoBank 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, the Company will deliver to CoBank a statement describing such Reportable Event and the actions proposed to be taken in response to such Reportable Event.
ARTICLE 6          
COVENANTS
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 all commitments have expired or been terminated:
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 CoBank as CoBank 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 CoBank in connection with a particular Loan may not exceed the maximum amount permitted by the CoBank’s Bylaws at the time the Supplement relating to that Loan is entered into or such Loan is renewed or refinanced by CoBank. The rights and obligations of the parties with respect to such equity and any distributions made on account thereof or on account of Company’s patronage with CoBank shall be governed by the CoBank’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 CoBank  shall be subject to a statutory first Lien in favor of CoBank. CoBank shall not be obligated to set off or otherwise apply such equities to the Company’s obligations to CoBank.
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          Wastewater Rights.  The Company will maintain and procure all wastewater operating, discharge, and other permits that are necessary to serve the present and reasonably anticipated needs of its customers.
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 CoBank;
(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; and
(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).
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.
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 the business of providing wastewater services to its customers.
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.  In addition, in the event any property of the Company is located in a flood zone, the Company will maintain such flood insurance as may be required by CoBank in accordance with law.  The Company agrees to deliver to CoBank such proof of compliance with this Section as CoBank 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          [Reserved]
SECTION 6.17          [Reserved]
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 Mortgage and Liens permitted by the Mortgage.
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 any Indebtedness, except for:  (A) debt to CoBank; (B) accounts payable to trade creditors incurred in the ordinary course of business; (C) current operating liabilities (other than for borrowed money) incurred in the ordinary course of business; and (D) debt to the Guarantor subordinated to all Company Obligations pursuant to the Guaranty, and debt to other Persons approved by CoBank, provided, however, that  Indebtedness to such other Persons is subordinated to all Company Obligations pursuant to a subordination agreement in form and content acceptable to CoBank.
SECTION 6.22          Debt Service Coverage Ratio.  Commencing with the fiscal year beginning on January 1, 2019 and ending December 31, 2019, and for each fiscal year thereafter, the Company will have a Debt Service Coverage Ratio of not less than 1.25 to 1.00.
SECTION 6.23          Total Debt to Capitalization Ratio.  The Company will have at the end of each fiscal year of the Company, a Total Debt to Total Capitalization Ratio of not greater than 65%.
SECTION 6.24          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.
SECTION 6.25          Post-Closing Items.  On or before November 30, 2018 , the Company agrees to:
(A)          Mortgage. Enter into a mortgage and security agreement in the form and content acceptable to CoBank (as amended or restated from time to time, the “Mortgage”) granting to CoBank a first priority Lien on the Collateral;
(B)          Proof of Recoding, Etc.  Furnish to CoBank such evidence as may be satisfactory to CoBank that: (a) the Mortgage and one or more UCC-1 financing statements in form and content acceptable to CoBank have been recorded in each place required by law in order to render effective the Lien of the Mortgage; (b) all taxes and fees arising in connection therewith or in connection with the Loans contemplated hereby have been paid; (c) there are no Liens on any property of the Company other than Liens permitted by this Agreement or the Mortgage; and (d) the Company is in compliance with all insurance requirements contained in the Mortgage and Section 6.14 of this Agreement; and
(C)          Post-Closing Opinion of Counsel.  Furnish to CoBank an opinion of counsel to the Company (which opinion and counsel must be reasonably acceptable to CoBank) to the effect that: (a) the mortgage lien granted pursuant to the Mortgage creates in favor of CoBank a valid  lien on: (1) the real property described in the Mortgage (except that any after acquired property provision contained in the Mortgage will not give rise to a perfected lien on subsequently acquired real property or interests therein (other than fixtures) without recordation of an instrument specifically describing such real property and the interests of the CoBank in such real property and subjecting such interest to the lien created under the Mortgage); and (2) the personal property described in the Mortgage in which a Lien can be obtained under the Uniform Commercial Code in the State of Delaware; (b) UCC-1 financing statements in proper form have been duly filed in all places as are required by law in order to perfect the Lien of the Mortgage on that portion of the Collateral in which a Lien can be perfected by filing a UCC-1 financing statement; (c) the Mortgage and all other necessary filings have been duly filed in such places as are required by law in order to perfect the mortgage lien of the CoBank on the real property described in the Mortgage (except that any after acquired property provision contained in the Mortgage will not give rise to a perfected lien and subsequently acquired real property or interests therein without recordation of an instrument specifically describing such real property and the interests of the CoBank in such real property and subjecting such interests to the lien created under the Mortgage); and (d) no transfer, excise, mortgage, intangible, documentary stamp or other similar taxes are or will be payable to any governmental authority in the State of Delaware upon the execution, delivery, recording or filing of the Mortgage, or the creation of the indebtedness and obligations evidenced or secured thereby, except for nominal recording fees.
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 made or 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 5.07, 5.08, 5.09, 6.21, 6.22, and 6.23), and such failure continues for thirty (30) days after written notice thereof shall have been delivered by CoBank to the Company;
(D)          Other Covenants. The failure by the Company to perform or comply with Sections 5.07, 5.08, 5.09, 6.21, 6.22, or 6.23 of this Agreement or to use the proceeds of any Loan for a purpose other than the purpose(s) set forth in the Supplement relating to the Loan.
(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 CoBank, 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 CoBank, 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 CoBank, 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)          Events Relating To Guarantor. The Guaranty shall, at any time, cease to be in full force and effect, or shall be revoked or declared null and void, or the validity or enforceability thereof shall be contested by the Guarantor, or the Guarantor shall deny any further liability or obligation thereunder, or shall fail to perform its obligations thereunder, or any representation or warranty set forth therein shall be breached, or the Guarantor shall breach or be in default under the terms of any other agreement with CoBank (including any loan agreement or security agreement), or a default set forth in Subsections (F) through (I) hereof shall occur with respect to the Guarantor.
SECTION 7.02          Acceleration; Remedies.  Upon the occurrence and during the continuance of a Default or an Event of Default, CoBank 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 CoBank, CoBank may, by written notice to the Company, take any of the following actions:
(A)          Termination of Commitments.  Declare all commitments  terminated whereupon the commitments shall be immediately terminated; provided, however, that upon the occurrence of an Event of Default under Section 7.01(H) hereof, all commitments 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 CoBank pursuant to Section 7.02 (or after the commitments 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 CoBank 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 CoBank in connection with administering and enforcing the rights of CoBank under the Credit Documents;
SECOND, to payment of any fees or surcharges owed to CoBank;
THIRD, to the payment of all accrued interest payable to the CoBank hereunder and under the Supplements and Promissory Notes;
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          Broken Funding Surcharge.  Notwithstanding the terms of any  Supplement or Promissory Note, the Company agrees to: (A) give CoBank not less than three (3) Business Days’ prior notice in the event it desires to repay any Loan balance bearing interest at a fixed rate prior to the last day of the fixed rate period; and (B) pay to CoBank a broken funding surcharge in the amount set forth below in the event the Company: (1) repays any fixed rate balance prior to the last day of its fixed rate period (whether such payment is made voluntarily, as a result of an acceleration, or otherwise); (2) converts any fixed rate balance to another fixed rate or to a variable rate prior to the last day of the fixed rate period applicable to such balance; or (3) fails to borrow any fixed rate balance on the date scheduled therefor.  The surcharge shall be in an amount equal to the greater of (i) the sum of the present value of: (A) any funding losses imputed by CoBank to have been incurred as a result of such payment, conversion or failure; plus (B) a per annum yield of ½ of 1% of the amount repaid, converted or not borrowed for the period such amount was scheduled to have been outstanding at such fixed rate, or (ii) $300.00. Such surcharge shall be determined and calculated in accordance with methodology established by CoBank, a copy of which will be made available upon request.  Notwithstanding the foregoing, in the event of a conflict between the provisions of this subsection and of the broken funding charge section of a forward fix agreement between CoBank and the Company, the provisions of the forward fix agreement shall control.
SECTION 8.02          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 8.02 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 executed in counterparts (and by different parties in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single agreement. In addition, if authorized by CoBank, Credit Documents may be delivered by electronic means 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 CoBank. CoBank 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, unless otherwise provided herein or authorized by CoBank in writing, may not be used for any other purpose.
(D)          Reliance by CoBank.  CoBank shall be entitled to rely and act upon any notices (including telephonic notices of borrowing and interest elections) 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 CoBank from all losses, costs, expenses and liabilities resulting from the reliance by CoBank on each notice given by or on behalf of the Company. All telephonic notices to and other communications with CoBank may be recorded by CoBank, and the Company hereby consents to such recording.
SECTION 8.03          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, CoBank 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 CoBank, any deposits (general or special), and any other indebtedness at any time held or owing by CoBank (whether or not due) to or for the credit or the account of the Company against the Company Obligations irrespective of whether CoBank shall have made any demand hereunder and although such  Company Obligations, or any of them, may be contingent or unmatured; provided, however, that CoBank 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 signatory hereto and a lender hereunder.
SECTION 8.04          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 CoBank. 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, CoBank may at any time, without the consent of, or notice to, the Company, sell participations to any Person (each , a “Participation Purchaser”) in all or a portion of CoBank’s rights and/or obligations under this Agreement and the other Credit Documents (including all or a portion of the commitments 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) CoBank’s obligations under this Agreement shall remain unchanged, (iii) CoBank shall remain solely responsible to the  Company for the performance of such obligations and (iv) the Company and CoBank shall continue to deal solely and directly with CoBank in connection with CoBank’s rights and obligations under this Agreement.  Any agreement or instrument pursuant to which CoBank sells such a participation shall provide that CoBank 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 CoBank 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 signatory hereto and a lender hereunder, provided such Participation Purchaser agrees to share any amount received in excess of its pro rata share with CoBank and all other Participation Purchasers.
(C)          Nonrestricted Assignments.  CoBank 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 Promissory Notes) to secure obligations of CoBank, 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 CoBank from any of its obligations hereunder or substitute any such pledgee or assignee for CoBank as a party hereto.
(D)          Information.  CoBank may furnish any information concerning the  Company in the possession of CoBank from time to time to Participation Purchasers (including prospective Participation Purchasers).
SECTION 8.05          No Waiver; Remedies Cumulative.  No failure or delay on the part of CoBank in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Company and CoBank 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 CoBank 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 CoBank to any other or further action in any circumstances without notice or demand.
SECTION 8.06          Payment of Expenses, Etc.
(A)          The  Company agrees (i) to pay or reimburse CoBank 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 CoBank), and (ii) to pay or reimburse CoBank 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 CoBank and the cost of independent public accountants and other outside experts retained by CoBank. All amounts due under this Section 8.06(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 any other Credit Document, and will hold CoBank 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 8.06 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) any 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 8.06(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 any commitment provided under a Supplement and the repayment, satisfaction or discharge of all Company Obligations.
(C)          Payments Free of Taxes.  Any and all payments by or on account of any Company Obligation to CoBank 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) CoBank 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 8.07          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 CoBank 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 of any Loan, 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 any 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 any commitment);
(E)          release the  Company from its obligations under the Credit Documents;
(F)          amend, modify or waive any provision of this Section 8.07, or Sections 7.01(A), 8.03, 8.04 or 8.06; 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.
Any amendment or restatement hereto or hereof shall be applicable to all Supplements, regardless of when executed, and each Supplement shall be deemed to incorporate all of the provisions hereof.
SECTION 8.08          Counterparts.  This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument.
SECTION 8.09          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 8.10          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 any commitment made under a Supplement.
SECTION 8.11          Governing LawTHIS 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 8.02, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of CoBank to serve process in any other manner permitted by law.
SECTION 8.12          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 8.13          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 8.14          Further Assurances.  The Company agrees, upon the request of CoBank, 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 8.15          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 8.16          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 CoBank and it shall have been executed by the  Company and CoBank, and thereafter this Agreement shall be binding upon and inure to the benefit of the  Company and CoBank 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 all commitments made under the Supplements shall have expired or have 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 CoBank, 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 CoBank in connection therewith shall be deemed included as part of the  Company Obligations.
SECTION 8.17          Confidentiality.  CoBank 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), CoBank 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 8.17, 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 8.17 or (ii) has been available or becomes available to CoBank 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 CoBank’s or its Affiliates’ portfolio in connection with ratings issued with respect to CoBank or its Affiliates. For the purposes of this Section 8.17, “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 8.17 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 CoBank 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 CoBank 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 8.18          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 Master Loan Agreement to be duly executed and delivered as of the date first above written.
ARTESIAN WASTEWATER MANAGEMENT, INC.

By:                     
Name:                     
Title:                     


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 clause hereof, and shall be deemed to include all exhibits, schedules, and amendments hereto.
Annual Financial Statements” shall mean: (1) in the case of the Initial Credit Documents, the Company prepared annual financial statements of the Company for the year ended December 31, 2017 and the annual audited financial statements of the Guarantor for the year ending December 31, 2017; (2) in the case of each subsequent Supplement, the latest annual financial statements furnished to CoBank under Sections 5.01 and 5.02(ii) hereof prior to the date of the Supplement.
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 Dayshall 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 CoBank is closed for business.
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.
Collateral” shall have the meaning set forth in Section 2.04(A) hereof.
Company” means Artesian Wastewater Management, Inc.
Company Obligations” means, without duplication, all of the obligations of the Company to CoBank, whenever arising, under this Agreement, the Supplements, the Promissory Notes 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.
“Consents” has the meaning specified in Section 4.08 hereof.
Credit Documents” means this Agreement, the Supplements, the Promissory Notes, the Mortgage, and all instruments or documents executed or furnished in connection with this Agreement, any Supplement, or any Promissory Note, including the Mortgage, the Guaranty, and all officer certificates, opinions, and financial statements furnished hereunder or thereunder (as each may be amended or restated from time to time).
Debt Service Coverage Ratio shall mean the ratio of: (1) net income (after taxes and after eliminating any gain or loss on sale of assets or other extraordinary gain or loss), plus depreciation expense, non-cash income taxes, amortization expense, and interest expense, minus non-cash patronage, and non-cash income from Subsidiaries and/or joint ventures, and minus grant income; to (2) all principal payments due within the period on all Long Term Debt plus interest expense (all as calculated for the Company on an unconsolidated basis for the applicable fiscal year in accordance with GAAP consistently applied or the appropriate standards of the regulatory agency having jurisdiction over the Company).
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: (1) in the case of principal, 2% per annum in excess of the rates otherwise in effect on such principal; and (2) in the case of other sums owing hereunder or under any other Credit Documents, the CoBank Base Rate plus 2% per annum.
Dollars and “$” means dollars in lawful currency of the United States of America.
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.
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.
Financial Statements” shall mean: (1) in the case of the Initial Credit Documents, (a) the Company prepared balance sheets of the Company for the year ended December 31 in each of the years 2016 and 2017 and the related Company prepared statements of income, retained earnings and cash flows for the years ended on said dates, copies of all of which have been furnished to CoBank; and (b) the annual audited financing statements for Guarantor and its consolidated subsidiaries for the fiscal years ending on December 31, 2016 and December 31, 2017, copies of which have been delivered to CoBank, and (2) in the case of each subsequent Supplement, (a) the latest annual and the most recent quarterly Company prepared financial statements of the Company furnished to CoBank under Section 5.01 prior to the date of the Supplement; and (b) the most recent annual audited financial statements of the Guarantor furnished to CoBank under Section 5.02(ii) hereof and, if more recent than those statements, the most recent quarterly financial statements of the Guarantor furnished under Section 5.02(i) hereof.
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.
Guarantor” shall have the meaning set forth in Section 2.04(B) hereof.
Guaranty Obligations” means, with respect to any Person, without duplication, any obligation (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 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 8.06(B).
Indemnities” means, collectively, CoBank and its respective Affiliates, directors, officers, employees, counsel, agents and attorneys- in-fact.
Initial Credit Documents” shall have the meaning set forth in Section 3.01(C) hereof.
Initial Supplements” shall have the meaning set forth in Section 3.01 hereof
 “Investment” shall have the meaning set forth in Section 6.05 hereof.
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).
Loan or Loans” shall have the meaning set forth in the Background clause to this Agreement.
Long-Term Debt means, for the Company, the sum of (1) all Indebtedness for borrowed money, (2) obligations that are evidenced by notes, bonds, debentures or similar instruments, and (3)  that portion of obligations with respect to capital leases or other capitalized agreements that are properly classified as a liability on the balance sheet in conformity with GAAP or that are treated as operating leases under regulations applicable to them but that otherwise would be required to be capitalized under GAAP, in each case having a maturity of more than one year from the date of its creation or having a maturity within one year from such date but that is renewable or extendible, at the Company’s option, to a date more than one year from such date or that arises under a revolving credit or similar agreement that obligates the lender(s) to extend credit during a period of more than one year from such date, including all current maturities in respect of such indebtedness whether or not required to be paid within one year from the date of its creation.
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 CoBank hereunder or thereunder.
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.
Mortgage” shall have the meaning set forth in Section 6.25 hereof.
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.
Net Worth means total assets less total liabilities, both as determined in accordance with GAAP consistently applied, except that in determining Total Capitalization, contributions in aid of construction, advances for construction, customer deposits, or similar items reducing rate base calculations will be excluded.
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 CoBank sells a participation as specified in Section 8.04(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 mean:

(A)          Liens for taxes or assessments or other governmental charges or levies that are not delinquent;

(B)          Liens in favor of mechanics, landlords, material suppliers, warehouses, carriers, and like persons that secure obligations that are not past due or if past due: (1) no foreclosure or other action to enforce the Liens have been commenced or, if commenced, have been stayed; and (2) reserves have been established and are maintained on the books of the Company in an amount equal at all times to amount secured by the Lien;

(C)          Deposits and pledges made under workers’ compensation, unemployment insurance, Social Security, or similar legislation (other than ERISA);

(D)          Deposits and pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), public and statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, or other similar obligations, in each case arising in the ordinary course of business;

(E)          Judgment and similar Liens arising in connection with court or other dispute resolution proceedings, provided that no Event of Default arises under Section 7.01(G) of this Agreement and such Lien is stayed and subordinate to the Lien of the Mortgage; and

(F)          Easements, rights-of-way, restrictions, and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use, and enjoyment by the Company of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto.

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.
Promissory Note shall have the meaning set forth in Section 2.03 hereof.
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.
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.
Supplemental Mortgage” shall have the meaning set forth in Section 3.02(D) hereof.
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 Capitalization” shall mean total Indebtedness plus Net Worth.
Total Debt to Total Capitalization Ratio shall mean a ratio of total Indebtedness to the Total Capitalization.
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 CoBank 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 or any Supplement to the renewal of a Commitment shall not be construed as obligating CoBank to renew a Commitment, and no obligation to renew a Commitment shall arise unless contained in a writing signed by CoBank.
Conflict.  In the event of any direct, explicit conflict between the terms of this Agreement and the terms set forth in a Supplement, the terms set forth in the applicable Supplement shall prevail; provided, however, that it is expected by the parties that any direct, explicit conflict be preceded with the words “notwithstanding Section <> of the MLA” (or words of similar import or words indicating that the MLA is being amended); it being understood that the MLA contains terms applicable to the Supplements (such as default interest, acceleration, and other provisions) that conflict the terms of a Supplement, and such additional terms shall not be deemed to fall within the meaning of this rule.
Defined Terms.  Capitalized terms used in a Supplement or a Promissory Note and not defined therein shall have the meanings set forth in this MLA.

EXHIBIT B

FORM OF ANNUAL COMPLIANCE CERTIFICATE

TO:          COBANK, ACB
FROM:          ARTESIAN WASTEWATER MANAGEMENT, INC.
DATE:          _______________, 20____
SUBJECT:
COMPLIANCE CERTIFICATE FOR FISCAL PERIOD ENDING ON ____________________, 20___.
Reference is hereby made to that certain Master Loan Agreement dated as of August 8, 2018 (the “Credit Agreement”), between ARTESIAN WASTEWATER MANAGEMENT, INC. (the “Company”) and COBANK, ACB (“CoBank”). 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, in accordance with GAAP consistently applied.
In addition to the above, attached hereto is a certificate calculating the financial covenants set forth in Sections 6.22 and 6.23 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 the 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 Chief Financial Officer.





SCHEDULE 8.02

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 Wastewater Management, Inc.
664 Churchmans Road
Newark, DE 19702
Facsimile: (302) 453-6957
E-Mail: dspacht@artesianwater.com
 jfinch@artesianwater.com
Attention: Chief Financial Officer



Loan No. RX1447T1

SUPPLEMENT TO MASTER LOAN AGREEMENT
($7,500,000 Multiple Advance Term Loan Facility)

THIS SUPPLEMENT TO MASTER LOAN AGREEMENT (this “Supplement”) is entered into as of August 8, 2018, between ARTESIAN WASTEWATER MANAGEMENT, INC., a corporation organized and existing under the laws of the State of Delaware (the “Company”), and CoBANK, ACB, a federally chartered instrumentality of the United States (“CoBank”), and supplements the Master Loan Agreement dated as of August 8, 2018, between the Company and CoBank (as amended or restated from time to time, the “MLA”).
SECTION 1.          The Commitment.  On the terms and conditions set forth in the MLA and this Supplement, CoBank agrees to make loans (the “Loans”) to the Company from time to time during the period set forth below, in an aggregate principal amount not to exceed $7,500,000 (the “Commitment”).  Under the Commitment, amounts borrowed and later repaid may not be reborrowed.
SECTION 2.          Purpose.  The purpose of the Commitment is to provide long-term financing for approximately 60% of the cost to construct a wastewater disposal facility including a pipeline between the Company’s wastewater disposal facility site and the properties of Allen Harim Foods, LLC (“AHF”) (the “Project”) pursuant to the Process Wastewater Services Agreement dated January 27, 2017, between the Company and AHF (as amended or restated from time to time, the “Contract”).
SECTION 3.          Term of Commitment. The term of the Commitment shall be from the date when all conditions precedent set forth herein and the MLA shall have been satisfied up to (but not including) 12:00 Noon on December 28, 2018, or such later date as CoBank may, in its sole discretion, authorize in writing.
SECTION 4.          Availability.   The Loans will be made available as provided in Section 2.02 of the MLA; provided, that, for the avoidance of doubt, CoBank agrees that the full Commitment may be borrowed by the Company in a single Loan.
SECTION 5.          Interest.  The Company agrees to pay interest on the unpaid principal balance of the Loans at 5.12% per annum.  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 principal installment is repaid shall, if received before 11:00 AM Mountain Time, be excluded. Interest shall be calculated and paid quarterly in arrears on the thirtieth (30th) day of each of March, June, September and December.
SECTION 6.          Underwriting Fee.   None [Waived by CoBank].
SECTION 7.          Repayment.  The Company agrees to repay each Loan in eighty (80) consecutive quarterly installments, each due on the thirtieth (30th) day of each March, June, September, and December, with the first installment due on March 30, 2019, and the last installment due on December 30, 2038. The amount of each installment shall be the same principal amount that would be required to be repaid if the Loan was scheduled to be repaid in level installments of principal and interest and such schedule was calculated utilizing 5.12% as the rate accruing on the Loan; provided, however, that the last installment of each Loan shall be in an amount equal to the then unpaid principal balance of the Loan.
SECTION 8.          Prepayment.  Subject to Section 8.01 of the MLA, the Company may prepay the Loans in whole or in part upon three (3) Business Day’s prior written notice.  All partial prepayments shall be applied to the Loans in the inverse order of their maturity.
SECTION 9.          Promissory Note.  The Company’s obligation to repay the Loans shall be evidenced by a promissory note in substantially the form attached hereto as Exhibit A (the “Promissory Note”).
SECTION 10.          Security.  The Company’s obligations hereunder, under the MLA, and under the Promissory Note shall be secured as provided in Section 2.04(A) of the MLA. In addition, the Company’s obligations shall be guaranteed by the Guarantor as provided in Section 2.04(B) of the MLA.
SECTION 11.          Conditions Precedent.  CoBank’s obligation to make the initial Loan hereunder is subject to the conditions precedent set forth in Section 3.01 and Section 3.03 of the MLA. Without limiting Section 3.01 of the MLA, CoBank’s obligation to make the initial Loan hereunder is subject to the condition precedent that CoBank receive such evidence as it may reasonably require that the Company has obtained all permits and other authorizations required to commence construction of the Project.
SECTION 12.          Additional Affirmative Covenants.  In addition to the affirmative covenants set forth in the MLA, the Company agrees that:
(A)          Compliance with Contract. It will comply in all material respects with the Contract; and
(B)          Notice. It will furnish to CoBank, promptly after learning of same, notice of: (1) the occurrence of any breach, default, or event of default by the Company or AHF under the Contract; and (2) the commencement of any material litigation, arbitration or like proceeding by the Company or AHF involving the Contract or the Project.
SECTION 13. Additional Event of Default.  In addition to the Events of Default set forth in Article 8 of the MLA, the Company agrees that in the event the Company fails to timely comply with any provision of Section 12(A) hereof and such failure continues for thirty (30) days after written notice thereof is delivered by CoBank to the Company or in the event the Company fails to timely comply with Section 12(B) hereof, then such failure shall constitute an Event of Default under Article 8 of the MLA (and the MLA is hereby deemed amended to so provide).
SECTION 14.          Counterparts and Electronic Delivery. This Supplement may be executed in counterparts (and by different parties in different counterparts), each of which shall constitute an original, and all of which when taken together shall constitute a single agreement. In addition, this Supplement may be delivered by electronic means.

(Signature Page(s) Follow)



IN WITNESS WHEREOF, the parties have caused this Supplement to be executed by their duly authorized officers as of the date shown above.


CoBANK, ACB



By:          

Name: ______________________________

Title:          


ARTESIAN WASTEWATER MANAGEMENT, INC.


By:          

Name: ______________________________

Title:          

























(Signature Page to Supplement to Master Loan Agreement No. RX1447T1)


EXHIBIT A
Loan No. RX1447T1

PROMISSORY NOTE
ARTESIAN WASTEWATER MANAGEMENT, INC.


$7,500,000          August 8, 2018

FOR VALUE RECEIVED, ARTESIAN WASTEWATER MANAGEMENT, INC. (the “Maker”) promises to pay to COBANK, ACB (the “Payee”) or its assigns in U.S. dollars and in immediately available funds, the principal sum of SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS AND 00/100 CENTS ($7,500,000) in eighty (80) consecutive quarterly installments, each in an amount and each due and payable on the dates provided in the “Supplement” (as hereinafter defined).  The undersigned also promises to pay to the Payee interest on the unpaid principal balance hereof in like money at the rates of interest, at the times, and calculated in the manner set forth in the “Supplement” and the “Master Loan Agreement” (both as hereinafter defined).  For purposes hereof, the term:  (1) “Supplement” shall mean that certain Supplement To Master Loan Agreement ($7,500,000 Capital Expenditures Facility) dated as of August 8, 2018, and numbered RX1447T1, as such Supplement may be amended or restated from time to time; and (2) “Master Loan Agreement” shall mean that certain Master Loan Agreement dated August 8, 2018, and numbered RX1447, as that agreement may be amended or restated from time to time.
Subject to the payment of a premium calculated in accordance with Section 8.01 of the Master Loan Agreement, the Maker may, on three (3) Business Day’s prior written notice, prepay this Promissory Note in whole or in part, together with accrued interest on the amount thereof. All partial prepayments shall be applied in the manner set forth in the Supplement.
Notwithstanding any other provision hereof: (1) if any date on which principal and interest are due is not a Business Day, then such payment shall be made on the next Business Day and interest on any principal amount not paid on the original installment due date shall continue to accrue until such payment is made; (2) if any installment of interest or principal is not paid when due, then such installment shall be due and payable on demand; and (3) upon the occurrence of an “Event of Default” (as defined in the Master Loan Agreement) until such Event of Default shall have been waived or cured in a manner satisfactory to CoBank, interest on the unpaid principal balance hereof shall accrue at 2% per annum in excess of the rate(s) of interest that would otherwise be in effect.
Payments on this Promissory Note shall be made as provided in Section 2.07 of the Master Loan Agreement.  The Maker agrees that the Payee shall not be obligated to present this Promissory Note for payment.
This Promissory Note is given to evidence one or more loans made by the Payee to the Maker under the Master Loan Agreement and the Supplement, and is the Promissory Note referred to in the Master Loan Agreement and the Supplement.  Capitalized terms used herein and not defined herein shall have the meanings given to those terms in the Master Loan Agreement or in the Supplement.
This Promissory Note is secured as provided in the first sentence of Section 2.04 of the Master Loan Agreement.  In addition, this Promissory Note is guaranteed as provided in Section 2.04(B) of the MLA. Upon the occurrence of an Event of Default under the Master Loan Agreement (as modified by the Supplement), the principal amount hereof, together with accrued interest hereon and any premium owing under Section 8.01 of the Master Loan Agreement, may be declared to be due and payable in the manner, upon the conditions, and with the effect provided in the Master Loan Agreement.
The Payee will keep a record of: (A) the unpaid principal balance hereof; (B) the interest rate(s) applicable to the unpaid principal balance hereof and the effective dates of any changes thereto; (C) all fees and expenses due and payable hereunder; and (D) the date and amount of all principal, interest, and fees paid by the Maker. To the extent permitted by applicable Law, such record (and all computer printouts thereof) shall be presumed correct absent manifest error as to the obligations of the Maker therein recorded; provided, that the failure of Payee to maintain such record, or any error therein, shall not in any manner affect the obligation of the Company to repay (with applicable interest) any loan in accordance with the terms of this Note, the Supplement, and the Master Loan Agreement.
The Maker hereby waives presentment for payment, demand, protest and notice of dishonor and nonpayment of this Promissory Note, and all defenses on the grounds of delay or of any extension of time for the payment hereof which may be hereafter given by the holder or holders hereof, and it is specifically agreed that the obligations of the Maker shall not be affected or altered to the prejudice of the holder or holders hereof by reason of the assumption of payment of the same by any other person or entity.
Except to the extent governed by Federal law, this Promissory Note shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to choice of law doctrine.

(Signature on Next Page)


ARTESIAN WASTEWATER MANAGEMENT, INC.


By:          

Name: ____________________________________

Title:          























(Signature page to Promissory Note RX1447T1)


Loan No. RX1447T2


SUPPLEMENT TO MASTER LOAN AGREEMENT
($4,500,000 Multiple Advance Term Loan Facility)

THIS SUPPLEMENT TO MASTER LOAN AGREEMENT (this “Supplement”) is entered into as of August 8, 2018, between ARTESIAN WASTEWATER MANAGEMENT, INC., a corporation organized and existing under the laws of the State of Delaware (the “Company”), and CoBANK, ACB, a federally chartered instrumentality of the United States (“CoBank”), and supplements the Master Loan Agreement dated as of August 8, 2018, between the Company and CoBank (as amended or restated from time to time, the “MLA”).
SECTION 1.          The Commitment.  On the terms and conditions set forth in the MLA and this Supplement, CoBank agrees to make loans (the “Loans”) to the Company from time to time during the period set forth below, in an aggregate principal amount not to exceed $4,500,000 (the “Commitment”).  Under the Commitment, amounts borrowed and later repaid may not be reborrowed.
SECTION 2.          Purpose.  The purpose of the Commitment is to provide long-term financing for the expansion and upgrade of the Stonewater Wastewater Treatment Facility.
SECTION 3.          Term of Commitment.  The term of the Commitment shall be from the date when all conditions precedent set forth herein and the MLA shall have been satisfied up to (but not including)  December 28, 2018, or such later date as CoBank may, in its sole discretion, authorize in writing.
SECTION 4.          Availability.  The Loans will be made available as provided in Section 2.02 of the MLA; provided, that, for the avoidance of doubt, CoBank agrees that the full Commitment may be borrowed by the Company in a single Loan.
SECTION 5.          Interest.  The Company agrees to pay interest on the unpaid principal balance of the Loans at 5.12% per annum.  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 principal installment is repaid shall, if received before 11:00 AM Mountain Time, be excluded. Interest shall be calculated and paid quarterly in arrears on the thirtieth (30th) day of each of March, June, September and December.
SECTION 6.          Underwriting Fee.  None.  [Waived by CoBank].
SECTION 7.          Repayment.  The Company agrees to repay each Loan in eighty (80) consecutive quarterly installments, each due on the thirtieth (30th) day of each March, June, September, and December, with the first installment due on March 30, 2019, and the last installment due on December 30, 2038. The amount of each installment shall be the same principal amount that would be required to be repaid if the Loan was scheduled to be repaid in level installments of principal and interest and such schedule was calculated using 5.12% as the rate of interest accruing on the Loan; provided, however, that the last installment of each Loan shall be in an amount equal to the then unpaid principal balance of the Loan.
SECTION 8.          Prepayment.  Subject to Section 8.01 of the MLA, the Company may prepay the Loans in whole or in part upon three (3) Business Day’s prior written notice.  All partial prepayments shall be applied to the Loans in the inverse order of their maturity.
SECTION 9.          Promissory Note.  The Company’s obligation to repay the Loans shall be evidenced by a promissory note in substantially the form attached hereto as Exhibit A (the “Promissory Note”).
SECTION 10.          Security.  The Company’s obligations hereunder, under the MLA, and under the Promissory Note shall be secured as provided in Section 2.04(A) of the MLA. In addition, the Company’s obligations shall be guaranteed by the Guarantor as provided in Section 2.04(B) of the MLA.
SECTION 11.          Conditions Precedent.  CoBank’s obligation to make the initial Loan hereunder is subject to the conditions precedent set forth in Section 3.01 and Section 3.03 of the MLA. . Without limiting Section 3.01 of the MLA, CoBank’s obligation to make the initial Loan hereunder is subject to the condition precedent that CoBank receive such evidence as it may reasonably require that the Company has obtained all permits and other authorizations required to commence construction of the Project.
SECTION 12.          Counterparts and Electronic Delivery. This Supplement may be executed in counterparts (and by different parties in different counterparts), each of which shall constitute an original, and all of which when taken together shall constitute a single agreement. In addition, this Supplement may be delivered by electronic means.

(Signature Page(s) Follow)


IN WITNESS WHEREOF, the parties have caused this Supplement to be executed by their duly authorized officers as of the date shown above.


CoBANK, ACB



By:          

Name: ______________________________

Title:          


ARTESIAN WASTEWATER MANAGEMENT, INC.


By:          

Name: ______________________________

Title:          

























(Signature Page to Supplement to Master Loan Agreement No. RX1260T2)


EXHIBIT A
Loan No. RX1447T2


PROMISSORY NOTE
ARTESIAN WASTEWATER MANAGEMENT, INC.


$4,500,000          August 8, 2018

FOR VALUE RECEIVED, ARTESIAN WASTEWATER MANAGEMENT, INC. (the “Maker”) promises to pay to COBANK, ACB (the “Payee”) or its assigns in U.S. dollars and in immediately available funds, the principal sum of FOUR MILLION FIVE HUNDRED THOUSAND DOLLARS AND 00/100 CENTS ($4,500,000) in eighty (80) consecutive quarterly installments, each in an amount and each due and payable on the dates provided in the “Supplement” (as hereinafter defined).  The undersigned also promises to pay to the Payee interest on the unpaid principal balance hereof in like money at the rates of interest, at the times, and calculated in the manner set forth in the “Supplement” and the “Master Loan Agreement” (both as hereinafter defined).  For purposes hereof, the term:  (1) “Supplement” shall mean that certain Supplement To Master Loan Agreement ($4,500,000 Capital Expenditures Facility) dated as of August 8, 2018, and numbered RX1447T2, as such Supplement may be amended or restated from time to time; and (2) “Master Loan Agreement” shall mean that certain Master Loan Agreement dated August 8, 2018, and numbered RX1447, as that agreement may be amended or restated from time to time.
Subject to the payment of a premium calculated in accordance with Section 8.01 of the Master Loan Agreement, the Maker may, on three (3) Business Day’s prior written notice, prepay this Promissory Note in whole or in part, together with accrued interest on the amount thereof. All partial prepayments shall be applied in the manner set forth in the Supplement.
Notwithstanding any other provision hereof: (1) if any date on which principal and interest are due is not a Business Day, then such payment shall be made on the next Business Day and interest on any principal amount not paid on the original installment due date shall continue to accrue until such payment is made; (2) if any installment of interest or principal is not paid when due, then such installment shall be due and payable on demand; and (3) upon the occurrence of an “Event of Default” (as defined in the Master Loan Agreement) until such Event of Default shall have been waived or cured in a manner satisfactory to CoBank, interest on the unpaid principal balance hereof shall accrue at 2% per annum in excess of the rate(s) of interest that would otherwise be in effect.
Payments on this Promissory Note shall be made as provided in Section 2.07 of the Master Loan Agreement.  The Maker agrees that the Payee shall not be obligated to present this Promissory Note for payment.
This Promissory Note is given to evidence one or more loans made by the Payee to the Maker under the Master Loan Agreement and the Supplement, and is the Promissory Note referred to in the Master Loan Agreement and the Supplement. Capitalized terms used herein and not defined herein shall have the meanings given to those terms in the Master Loan Agreement or in the Supplement.
This Promissory Note is secured as provided in the first sentence of Section 2.04 of the Master Loan Agreement.  In addition, this Promissory Note is guaranteed as provided in Section 2.04(B) of the MLA. Upon the occurrence of an Event of Default under the Master Loan Agreement (as modified by the Supplement), the principal amount hereof, together with accrued interest hereon and any premium owing under Section 8.01 of the Master Loan Agreement, may be declared to be due and payable in the manner, upon the conditions, and with the effect provided in the Master Loan Agreement.
The Payee will keep a record of: (A) the unpaid principal balance hereof; (B) the interest rate(s) applicable to the unpaid principal balance hereof and the effective dates of any changes thereto; (C) all fees and expenses due and payable hereunder; and (D) the date and amount of all principal, interest, and fees paid by the Maker. To the extent permitted by applicable Law, such record (and all computer printouts thereof) shall be presumed correct absent manifest error as to the obligations of the Maker therein recorded; provided, that the failure of Payee to maintain such record, or any error therein, shall not in any manner affect the obligation of the Company to repay (with applicable interest) any loan in accordance with the terms of this Note, the Supplement, and the Master Loan Agreement.
The Maker hereby waives presentment for payment, demand, protest and notice of dishonor and nonpayment of this Promissory Note, and all defenses on the grounds of delay or of any extension of time for the payment hereof which may be hereafter given by the holder or holders hereof, and it is specifically agreed that the obligations of the Maker shall not be affected or altered to the prejudice of the holder or holders hereof by reason of the assumption of payment of the same by any other person or entity.
Except to the extent governed by Federal law, this Promissory Note shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to choice of law doctrine.

(Signature on Next Page)


ARTESIAN WASTEWATER MANAGEMENT, INC.


By:          

Name: ____________________________________

Title:          






















(Signature page to Promissory Note RX1447T2)


EX-4.3 6 exhibit4-3.htm GUARANTEE OF PAYMENT


GUARANTEE OF PAYMENT

THIS GUARANTEE OF PAYMENT (“Guaranty”) is executed as of the 8th day of August, 2018, by ARTESIAN RESOURCES CORPORATION, a Delaware corporation (the “Guarantor”) to COBANK, ACB, a federally chartered instrumentality of the United States (“Lender”).

BACKGROUND

Concurrently herewith, Artesian Wastewater Management, Inc. (the “Borrower”), a Delaware corporation and a wholly-owned subsidiary of the Guarantor, and Lender are entering into, among other agreements, the following, each dated as of August 8, 2018: (1) a Master Loan Agreement; (2) a Supplement to the Master Loan Agreement ($7,500,000 Multiple Advance Term Loan); and (3) a Supplement to the Master Loan Agreement ($4,500,000 Multiple Advance Term Loan Facility).  Pursuant to those documents, Lender has agreed (subject to the terms and conditions therein) to make loans to the Borrower. One of the conditions precedent to the Lender’s obligation to make those loans, is that the Guarantor enter into this Guaranty.  The Guarantor will derive substantial direct and indirect benefits from the loans, and therefore the Guarantor has agreed to enter into this Guaranty.

NOW, THEREFORE, in order to induce Lender to extend credit to the Borrower and for good and valuable other consideration, the receipt and sufficiency of which are hereby acknowledged, the Guarantor agrees as follows:

1.          Guarantee of Payment. The Guarantor hereby unconditionally and irrevocably guarantees to Lender the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all indebtedness, obligations and liabilities of the Borrower to Lender, whether now existing or hereafter incurred, arising under the “Loan Documents” (as hereinafter defined), including, but not limited to, those under or arising out of or in connection with any loans, advances,  letters of credit, indemnities,  or any other kind of contract or agreement under which the Company may be indebted to Lender in any manner under the Loan Documents, whether for principal, interest, fees, surcharges, expenses or otherwise.  For ease of reference:  (i) all such indebtedness, obligations and liabilities under the MLA or the other Loan Documents shall hereinafter be collectively referred to as the "Guaranteed Obligations"; and (ii) all instruments, documents and agreements evidencing or relating to the Guaranteed Obligations (including the MLA and any Supplements thereto, promissory notes, security agreements, mortgages and deeds of trust executed in connection therewith) shall hereinafter collectively be referred to as the "Loan Documents."   Without limiting the foregoing, the term: (1) “Loan Documents” shall include, but shall not be limited to: (a) the Master Loan Agreement (as amended, amended and restated, supplemented or otherwise modified from time to time in accordance with its provisions, the “MLA”), dated as of August 8, 2018, between the Borrower and Lender; (b) all “Supplements” (as such term is defined in the MLA) issued under and pursuant to the MLA, whenever executed, including, without limitation, the Supplement to Master Loan Agreement ($7,500,000 Multiple Advance Term Loan Facility) dated as of August 8, 2018, and numbered RX1447T1, and the Supplement to Master Loan Agreement ($4,500,000 Multiple Advance Term Loan Facility) dated as of August 8, 2018 and numbered RX1447T2; (c) all “Promissory Notes” (as such term is defined in the MLA) issued under and pursuant to the MLA or any Supplement thereto, whenever executed, including, without limitation, the Promissory Notes dated as of August 8, 2018, and numbered RX1447T1 and RX1447T2; (d) all other loan and loan related documentation (including, without limitation, the “Mortgage” (and defined in the MLA) and all other security documentation) executed at any time in connection with the MLA and any Supplements thereto; and (e) all amendments to and restatements of the foregoing; and (2) “Guaranteed Obligations” shall include, but shall not be limited to, all indebtedness, obligations and liabilities of the Borrower to Lender arising under the: (a)    MLA; (b) the Supplement To Master Loan Agreement ($7,500,000 Multiple Advance Term Loan Facility) dated as of August 8, 2018, and numbered RX1447T1; (c) the Supplement to Master Loan Agreement ($4,500,000 Multiple Advance Term Loan Facility) dated as of August 8, 2018 and numbered RX1447T2; and (d) the Promissory Notes dated as of August 8, 2018, and numbered RX1447T1 and RX1447T2 (as each may be amended or restated from time to time), including the obligation to pay principal, interest, fees, costs, surcharges, premiums, and other amounts arising thereunder.

2.          Nature of Liability.

2.1          This is a continuing guarantee of payment and performance, and not a guaranty of collection.  The liability of Guarantor to Lender is separate and independent of the Guaranteed Obligations or of any liability of Borrower thereunder and any liability of any other guarantors of the Guaranteed Obligations.  This is a continuing guarantee and Guarantor acknowledges and agrees that the Guarantor’s obligations hereunder shall cover Guaranteed Obligations incurred on the date hereof and at any time in the future.  If an Event of Default (as defined in the MLA or any other Loan Document) has occurred and any applicable cure period has expired, then Lender shall have the right to declare the Guaranteed Obligations immediately due and payable in full, regardless of whether Lender has accelerated all or any part of Borrower's indebtedness and regardless of whether Lender is prohibited from accelerating such indebtedness as a result of a bankruptcy, reorganization or like proceeding involving the Borrower. Without limiting the generality of the foregoing, if the Borrower should at any time (i) become insolvent, (ii) make a general assignment for the benefit of creditors, (iii) petition for or be subject to a receivership proceeding, or (iv) be subject to a petition in bankruptcy or any insolvency or reorganization proceeding, whether voluntary or involuntary, then Lender shall have the right to declare the Guaranteed Obligations hereunder immediately due and payable in full, regardless of whether Lender has accelerated (or is permitted to accelerate) all or any part of Guaranteed Obligations, and Lender shall have the right to demand and to collect from Guarantor payment in full of the Guaranteed Obligations hereunder, including all principal, interest, fees and charges, whether or not then due and payable by Borrower. In addition, in the event the Borrower fails to make any payment due to Lender under the Loan Documents, Lender shall also have the right to make a partial demand hereunder in the amount of the defaulted payment or any part thereof and at a later date make one or more additional demands for payment hereunder (whether for all or a portion of the balance of the same defaulted payment, another defaulted payment, or the entire Guaranteed Obligations), all without relieving Guarantor of its obligations hereunder; it being understood that until all Guaranteed Obligations are actually, finally, indefeasibly and unconditionally paid, performed or satisfied in full in accordance with the applicable terms of the Loan Documents, multiple demands may be made hereunder. In addition, the Lender may make a partial demand for payment hereunder with or without terminating the Lender’s commitment to extend additional Guaranteed Obligations to the Borrower.

2.2          The obligations of the Guarantor hereunder will remain in full force and effect and be enforceable until the Guaranteed Obligations are actually, finally, indefeasibly and unconditionally paid, performed or satisfied in full in accordance with the applicable terms of the Loan Documents.  If, on account of the federal Bankruptcy Code, as amended, or any other debtor relief law (whether statutory, common law, case law or otherwise) of any jurisdiction whatsoever, now or hereafter in effect, that may be or become applicable, Borrower will be or is relieved of or fails to perform any of the Guaranteed Obligations, Guarantor will nevertheless be and remain fully liable to pay or perform all Guaranteed Obligations pursuant to this Guaranty.  If the Guaranteed Obligations are partially paid or discharged for any reason, including voluntary payment or prepayment accepted by Lender, application of insurance proceeds or condemnation awards, permitted additional financing or refinancing, or sale of any collateral  pledged by Borrower for the Guaranteed Obligations or a portion thereof (the “Collateral”), with or without the consent or cooperation of Lender, this Guaranty will nevertheless remain in full force and effect, and Guarantor will remain liable for all remaining Guaranteed Obligations, even though there may be rights that Guarantor might have had against Borrower that are destroyed or diminished by the exercise of any remedy or right by Lender, or as the result of any inaction by Lender.

2.3          If at any time all or any part of any payment made by the Borrower or the Guarantor or received by Lender from the Borrower or the Guarantor under or with respect to the Guaranteed Obligations or this Guaranty is or must be rescinded or returned for any reason whatsoever (including, but not limited to, the insolvency, bankruptcy or reorganization of Guarantor or Borrower), then the obligations of Guarantor hereunder will, to the extent of the payment rescinded or returned, be deemed to have continued in existence, notwithstanding such previous payment made by Borrower or Guarantor, or receipt of payment by Lender, and the obligations of Guarantor hereunder will continue to be effective or be reinstated, as the case may be, as to such payment, all as though such previous payment had never been made.

2.4          Specifically, to the maximum extent permitted by applicable law, this Guaranty and Guarantor’s liability hereunder will in no way be affected or impaired by reason of the happening from time to time of any of the following, whether or not any such event has occurred with or without notice to or consent of Guarantor:

(1)          the waiver, compromise, settlement, termination or other release of the performance or observance by Borrower or Guarantor of any or all of the respective provisions, covenants, terms or conditions contained in the Loan Documents or this Guaranty;

(2)          any failure, omission, delay or lack on the part of Lender to enforce, assert or exercise any right, power or remedy conferred on Lender in the Loan Documents or this Guaranty in accordance with their terms or the inability of Lender to enforce any provision of the Loan Documents or this Guaranty for any reason, or any other act or omission on the part of Lender;

(3)          the transfer, assignment or mortgaging, or the purported transfer, assignment or mortgaging, of all or any part of the Collateral, or the invalidity, unenforceability or termination for any reason whatsoever (other than performance) of any Loan Document or any provision, covenant, term or condition thereof or any right or remedy thereunder or any defect in the title of the Collateral or any part thereof or any loss of possession, use or operation of the Collateral or any part thereof by Borrower;

(4)          the modification or amendment (whether material or otherwise) of any provision, covenant, term or condition in any Loan Document;

(5)          the voluntary or involuntary liquidation, dissolution, sale of all or substantially all of the assets, marshalling of assets and liabilities, receivership, conservatorship, insolvency, bankruptcy, discharge, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar proceedings affecting, Borrower or any of its assets or any allegation or contest of the validity of this Guaranty or any Loan Document in any such proceeding;

(6)          the surrender or impairment of any Collateral as security for the performance or observance of any of the Guaranteed Obligations;

(7)          any failure of Guarantor or Borrower to perform and observe any provision, covenant, term or condition, or to discharge any duty or obligation, arising out of or connected with the Guaranty or any Loan Document or the occurrence or pendency of any “Event of Default” (as defined in any Loan Document) or any proceedings or actions as a result of, or attendant upon, such Event of Default;

(8)          the inability of Guarantor or Borrower to enforce any provision of any Loan Document for any reason;

(9)          the failure to give notice to Guarantor or Borrower of the occurrence of any default under this Guaranty or any of the Loan Documents;

(10)          the disposition by Guarantor of any ownership interest in Borrower or any permitted and permissible change, restructuring or termination of the organizational structure, ownership or existence of Borrower or of Guarantor;

(11)          any set-off, counterclaim, reduction, or diminution of any Guaranteed Obligations, or any defense or discharge of any kind or nature whatsoever (other than performance), which Guarantor or Borrower may have or assert against Lender; or

(12)          any other circumstance (other than full payment and performance of all Guaranteed Obligations) that might otherwise constitute a legal or equitable defense or discharge of Guarantor under this Guaranty or of Borrower under any of the Loan Documents.

3.          Specific Waivers by Guarantor.  To the fullest extent permitted by applicable law, Guarantor hereby waives and agrees not to assert or take advantage of (as a defense or set-off or otherwise):

(a)          Any right to require Lender to proceed against Borrower or any other person or to proceed against or exhaust any Collateral or other security held by Lender at any time or to pursue any other remedy in Lender’s power or under any other agreement before proceeding against Guarantor hereunder;

(b)          The defense of any statute of limitations or statute of repose or of laches in any action hereunder;

(c)          Any defense that may arise by reason of the incapacity, lack of authority, death or disability of any other person or persons or the failure of Lender to file or enforce a claim against the estate (in administration, bankruptcy or any other proceeding) of any other person or persons;

(d)          Any failure on the part of Lender to ascertain the extent or nature of the Collateral or any insurance or other rights with respect thereto, or the liability of any party liable for the Loan Documents or the Guaranteed Obligations;

(e)          Demand, presentment for payment, notice of nonpayment, protest, notice of protest and all other notices of any kind, or the lack of any thereof, including, without limiting the generality of the foregoing, notice of the existence, creation or incurring of any new or additional Guaranteed Obligations or of any action or non-action on the part of Borrower, Lender, any endorser or creditor of Borrower or of Guarantor or on the part of any other person whomsoever under this or any other instrument in connection with any Guaranteed Obligations held by or due to Lender;

(f)          Any defense based upon an election of remedies by Lender;

(g)          Any right or claim or right to cause a marshalling of the assets of Guarantor;

(h)          Any principle or provision of law, statutory or otherwise, which is or might be in conflict with the terms and provisions of this Guaranty;

(i)          Any duty on the part of Lender to disclose to Guarantor any facts Lender may now or hereafter know about Borrower or the Collateral, regardless of whether Lender has reason to believe that any such facts materially increase the risk beyond that which Guarantor intends to assume or has reason to believe that such facts are unknown to Guarantor or has a reasonable opportunity to communicate such facts to Guarantor, it being understood and agreed that Guarantor is fully responsible for being and keeping informed of the financial condition of Borrower, of the condition of the Collateral and of any and all circumstances bearing on the risk that liability may be incurred by Guarantor hereunder;

(j)          Any lack of notice of disposition or of any manner of disposition of any Collateral;

(k)          Failure to properly record any document or any other lack of due diligence by Lender in creating or perfecting a security interest in or collection, protection or realization upon any Collateral or in obtaining reimbursement or performance from any person or entity now or hereafter liable for the Loan Documents or any obligation secured thereby;

(l)          The inaccuracy of any representation or other provision contained in any Loan Document;

(m)          Any sale or assignment of the Loan Documents, in whole or in part;

(n)          Any sale or assignment by Borrower of the Collateral, or any portion thereof or interest therein, whether or not consented to by Lender;