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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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 belief regarding our reliance on outside engineering firms, 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, 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, the reclassification on our balance sheet regarding our utility plant, 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, 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, such as changes in weather, changes in our contractual obligations, changes in government policies, the timing and results of our rate requests, 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 representation of the Company's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q. RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2014 OVERVIEW Our profitability is primarily attributable to the sale of water. Gross water sales comprise 89.5% of total operating revenues for the nine months ended September 30, 2014. Our profitability is also attributed to the various contract operations, water and sewer 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 revenues are our primary source of revenues, we continue to seek growth opportunities to provide wastewater service 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, 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 and sewer Service Line Protection Plans. Water Division Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water service to residential, commercial, industrial, governmental, municipal and utility customers. Increases in the number of customers contribute to increases, or help to offset any intermittent decreases, in our operating revenue. The Town of Middletown, which is one of our municipal customers and is located in southern New Castle County, Delaware, has nearly doubled in population since 2001, and population growth in this area is expected to continue for some time as a result of ongoing and future residential construction. As population growth continues in Middletown and other areas in Delaware, we believe that the demand for water will increase, thereby contributing to an increase in our operating revenues. As of September 30, 2014, we had approximately 80,500 metered water customers in Delaware, an increase of approximately 1,000 compared to September 30, 2013. The number of metered water customers in Maryland totaled 2,250 as of September 30, 2014, an increase of approximately 50 compared to 2013. The number of metered water customers in Pennsylvania remained consistent with 2013. For the nine months ended September 30, 2014, approximately 5.8 billion gallons of water were distributed in our Delaware systems and approximately 89.0 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 wastewater customers are billed a flat monthly fee, which contributes to providing a revenue stream unaffected by weather. 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, in southern New Castle County, 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 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. 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. Our relationship with Middletown has given us the opportunity to create the Artesian Water Resource Management Partnership, or AWRMP, to encourage and support the use of reclaimed water for agricultural irrigation and other needs. Using reclaimed water to irrigate farm fields can save the Delmarva region millions of gallons of groundwater each day. The AWRMP's first project in Middletown saves up to three million gallons of water per day during the peak growing season. Through the AWRMP initiative, Artesian will provide planning, engineering and technical expertise and help bring together the various state, local and private partners needed for water recycling project approvals. Artesian Utility operates the Water Service Line Protection Plan, or WSLP Plan, and the Sewer Service Line Protection Plan, or SSLP Plan. Artesian Resources initiated the WSLP Plan in March 2005. 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 WSLP Plan was expanded in the second quarter of 2008 to include maintenance or repair to customers' sewer lines. 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. Also, in the second quarter of 2010, the WSLP Plan and SSLP Plan were extended to include non-utility customers of Artesian Resources. As of September 30, 2014, approximately 18,400, or 26.0%, of our eligible water customers signed up for the WSLP Plan, approximately 13,500, or 19.0%, of our eligible customers signed up for the SSLP Plan and approximately 1,000 non-customer participants signed up for either the WSLP Plan or SSLP Plan. 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 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. 13 --------------------------------------------------------------------------------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 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. 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 are currently 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 municipalities 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 since 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 completed an agreement with Georgetown, Delaware in July 2008 to provide wastewater treatment and disposal services for Georgetown's growth and annexation areas. Artesian Wastewater will provide up to 1 mgd of wastewater capacity for the town. The preliminary engineering and design work was completed on a regional wastewater treatment and disposal facility located in the northern Sussex County area that has the potential to treat up to approximately 8 mgd. This facility is strategically situated on 75 acres to provide service to the growing population in the Georgetown, Ellendale and Milton areas, as well as to neighboring municipal systems. This facility was granted conditional use approval by Sussex County Council to serve the Elizabethtown subdivision of approximately 4,000 homes and 439,000 square feet of proposed commercial space, as well as seven additional projects comprising approximately 3,000 residential units. The facility will also be capable of offering wastewater services to local municipalities. Artesian Wastewater will manage the design and construction of the facility and, once constructed, the operation of the facility. 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 five years includes projects for water treatment plant improvements and additions in both Delaware and Maryland and wastewater treatment plant improvements and additions in Delaware. Capital improvements are planned and budgeted to meet anticipated changes in regulations and needs for increased capacity related to projected growth. The Delaware Public Service Commission and Maryland Public Service Commission 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. 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. Regulatory Matters and Inflation 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. On April 11, 2014, Artesian Water filed a request with the DEPSC to implement new rates to meet a requested increase in revenue of 15.9%, or approximately $10.0 million, on an annualized basis. The actual effective increase is less than 15.9% since, in accordance with applicable law, on June 10, 2014, Artesian Water placed temporary rates into effect designed to generate an increase in annual operating revenue of approximately 3.98%, or $2.5 million, on an annualized basis, until permanent rates are determined by the DEPSC. Also, as permitted by law, on November 13, 2014 we will place into effect a second step of temporary rates designed to generate an increase in annual operating revenue of approximately 7.17%, or $4.5 million, on an annualized basis, subject to approval by the DEPSC, until permanent rates are determined by the DEPSC. Artesian Water had been permitted to recover specific investments made in infrastructure through the assessment of a 3.3% Distribution System Improvement Charge, or DSIC, which was set to zero when temporary rates were placed into effect. The new rates are designed to support Artesian Water's ongoing capital improvement program and to cover increased costs of operations, including water quality testing, chemicals and electricity for water treatment, taxes, labor and benefits. Artesian Water's last request to implement new rates was filed in April 2011. On January 18, 2013, Artesian Wastewater filed an application with the DEPSC to revise its rates and charges for wastewater services concerning territories located in Kent and Sussex County, Delaware. Artesian Wastewater requested authorization to implement proposed rates for wastewater services to meet a requested increase in revenue of approximately $343,000, or 34.8%, on an annualized basis. The new rates are designed to support Artesian Wastewater's ongoing capital improvement program and to cover increased costs of operations. On August 6, 2013, Artesian Wastewater, the Staff of the Delaware Public Service Commission and the Division of the Public Advocate entered into an agreement to settle Artesian Wastewater's application for an increase in rates. On October 8, 2013, the DEPSC approved the settlement agreement authorizing a two-step increase in rates, with the first step effective upon approval of the settlement and the second step effective September 14, 2014. Once fully implemented, based on the current number of households, the new rates will provide Artesian Wastewater approximately $174,000 in additional annual revenue. The settlement also authorized a return on equity of 10%. 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. 14-------------------------------------------------------------------------------- Results of Operations - Analysis of the Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013. Operating Revenues Revenues totaled $19.6 million for the three months ended September 30, 2014, $1.5 million, or 8.4%, above revenues for the three months ended September 30, 2013 of $18.1 million. Water sales revenues increased $1.3 million, or 8.2%, for the three months ended September 30, 2014 from the corresponding period in 2013, a result of a temporary rate increase that was placed into effect on June 10, 2014 and an increase in overall water consumption, including sales to a neighboring municipality through an existing interconnection while they worked to install treatment equipment at the well field that is their sole source of self-supply. This increase is partially offset by a decrease in the Distribution System Improvement Charge, or DSIC, revenue of approximately $336,000. We realized 90.1% of our total operating revenue for the three months ended September 30, 2014 from the sale of water as compared to 90.3% for the three months ended September 30, 2013. Other utility operating revenue increased approximately $0.2 million, or 23.7%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The increase is primarily due to an increase in service and finance charges and an increase in wastewater revenue. Non-utility operating revenue increased approximately $17,000, or 1.7%, for the three months ended September 30, 2014 compared to the same period in 2013. The increase is primarily due to an increase in water and wastewater Service Line Protection Plan, or SLP Plans, revenue. The SLP Plans provide coverage for all material and labor required to repair or replace participants' leaking water service or clogged sewer lines up to an annual limit. This increase is partially offset by a decrease in contract revenue, primarily due to a decrease in wastwater contract services. Operating Expenses Operating expenses, excluding depreciation and income taxes, decreased $0.2 million, or 1.6%, for the three months ended September 30, 2014, compared to the same period in 2013. Payroll and employee benefit costs decreased $0.3 million, or 6.1%, primarily due to a reclassification of personnel costs to overhead for capital projects based upon a review of job responsibilities. This decrease is partially offset by an increase in wages and medical benefits. Repair and maintenance costs increased $0.2 million, or 26.3%, primarily due to increased water treatment plant expenses and equipment maintenance costs. The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 49.9% for the three months ended September 30, 2014, compared to 55.0% for the three months ended September 30, 2013. Depreciation and amortization expense increased $0.2 million, or 9.4%, primarily due to continued investment in utility plant in service providing supply, treatment, storage and distribution of water. Federal and state income tax expense increased $0.5 million, primarily due to higher pre-tax income for the three months ended September 30, 2014, compared to the three months ended September 30, 2013. Interest Charges Interest charges increased $0.4 million, primarily due to the accrual of prejudgment interest on amounts withheld related to the litigation against Chester Water Authority in regard to the proper determination of the rate charged for water purchased under contract from the Chester Water Authority. Net Income Our net income applicable to common stock increased $0.7 million for the three months ended September 30, 2014, compared to the same period a year ago. This increase in net income was due to higher operating income margins in our water utility business, primarily due to a temporary rate increase placed in effect on June 10, 2014 and an increase in overall water consumption. Results of Operations - Analysis of the Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013. Operating Revenues Revenues totaled $54.4 million for the nine months ended September 30, 2014, $2.2 million, or 4.2%, above revenues for the nine months ended September 30, 2013 of $52.2 million. Water sales revenues increased $1.7 million, or 3.6%, for the nine months ended September 30, 2014 from the corresponding period in 2013, a result of a temporary rate increase placed into effect on June 10, 2014, as permitted under Delaware law, until permanent rates are determined by the DEPSC. We realized 89.5% of our total operating revenue for the nine months ended September 30, 2014 from the sale of water as compared to 90.1% for the nine months ended September 30, 2013. Other utility operating revenue increased approximately $0.4 million, or 16.7%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The increase is primarily due to an increase in service and finance charges and an increase in wastewater revenue. Non-utility operating revenue increased approximately $0.2 million, or 5.3%, for the nine months ended September 30, 2014 compared to the same period in 2013. The increase is primarily due to an approximately $269,000 increase in water and wastewater Service Line Protection Plan, or SLP Plans, revenue. The SLP Plans provide coverage for all material and labor required to repair or replace participants' leaking water service or clogged sewer lines up to an annual limit. This increase is partially offset by a decrease in contract revenue, primarily due to a decrease in wastewater contract services. Operating Expenses Operating expenses, excluding depreciation and income taxes, increased $0.5 million, or 1.7%, for the nine months ended September 30, 2014, compared to the same period in 2013. Payroll and employee benefit costs increased $1.0 million, or 7.3%, primarily the result of an increase in wages and an increase in medical benefit premiums, partially offset by the reclassification of personnel costs to overhead for capital projects based on a review of job responsibilities. Administration expenses decreased $1.0 million, or 24.5%, primarily due to legal costs associated with the litigation against Chester Water Authority in regard to the proper determination of the rate charged for water purchased under contract from the Chester Water Authority. Property and other taxes increased $0.2 million, or 5.7%, reflecting increases in tax rates charged for public schools in various areas where Artesian holds property and 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 primarily owned by Artesian Water. The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 56.6% for the nine months ended September 30, 2014, compared to 58.0% for the nine months ended September 30, 2013. Depreciation and amortization expense increased $0.4 million, or 6.3%, primarily due to continued investment in utility plant in service providing supply, treatment, storage and distribution of water. Federal and state income tax expense increased $0.4 million, primarily due to higher pre-tax income for the nine months ended September 30, 2014, compared to the nine months ended September 30, 2013. Interest Charges Interest expense increased $0.3 million, primarily due to accrual of prejudgment interest expense related with the litigation against Chester Water Authority in regard to the proper determination of the rate charged for water purchased under contract from the Chester Water Authority which is partially offset by a decrease in long-term debt outstanding. Net Income Our net income applicable to common stock increased $0.6 million for the nine months ended September 30, 2014, compared to the same period a year ago. This increase in net income was due to higher operating income margins in our water utility business, primarily due temporary rate increase placed in effect on June 10, 2014 and an increase in overall water consumption. 15 --------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES Overview Our primary sources of liquidity for the nine months ended September 30, 2014 were $17.0 million provided by cash flow from operating activities, $2.4 million in net contributions and advances from developers and $1.4 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 $19.3 million in capital expenditures during the first nine months of 2014 compared to $13.9 million invested during the same period in 2013. During the first nine months of 2014, we invested approximately $7.9 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 $6.6 million to enhance or improve existing treatment facilities and for the rehabilitation of pumping equipment to better serve our customers. We invested $2.1 million for equipment purchases, computer hardware and software upgrades and transportation and equipment purchases. Developers financed $2.0 million for the installation of water mains and hydrants for the first nine months of 2014 compared to $3.4 million for the first nine months of 2013. We invested $0.3 million to upgrade and automate our meter reading equipment. We invested approximately $0.2 million in mandatory utility plant expenditures due to governmental highway projects which require the relocation of water service mains in addition to facility improvements and upgrades. An additional $0.2 million was invested in wastewater projects in Delaware. 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 as well as 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. Lines of Credit At September 30, 2014, Artesian Resources had a $40 million line of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources. As of September 30, 2014, there was $32.8 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 28, 2015 or any date on which Citizens demands payment. At September 30, 2014, Artesian Water had a $20 million line of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 million of this line available for the operations of Artesian Water Maryland. As of September 30, 2014, there was $12.8 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 January 13, 2015. Pursuant to the Order issued on September 30, 2014 by the United States District Court for the Eastern District of Pennsylvania regarding the complaint filed on December 22, 2010 by Artesian Water against Chester Water Authority, or CWA, Artesian Water is required to pay CWA amounts withheld related to CWA rate increases from 2008, 2009, and 2010 totaling approximately $3.1 million. Artesian Water intends to finance the $3.1 million payment using the existing lines of credit noted above. The $3.1 million withheld was paid by Artesian Water to CWA in October 2014. Line of Credit Commitments Commitment Due by Period Less than 1-3 Years 4-5 Years Over 5 Years In thousands 1 Year Lines of Credit $ 14,436 $ ----- $ ----- $ ----- 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 66?% of total capitalization. Our debt to total capitalization, including the short-term portion thereof, was 46.4% at September 30, 2014. 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 September 30, 2014, we were in compliance with these covenants. 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 Less than 1-3 4-5 After 5 In thousands 1 Year Years Years Years Total First mortgage bonds (principal and interest) $ 6,944 $ 13,776 $ 37,075 $ 110,646 $ 168,441 State revolving fund loans (principal and interest) 984 1,969 1,969 7,182 12,104 Operating leases 72 106 111 1,560 1,849 Unconditional purchase obligations 3,780 7,571 7,561 8,524 27,436 Tank painting contractual obligation 306 382 -- -- 688 Total contractual cash obligations $ 12,086 $ 23,804 $ 46,716 $ 127,912 $ 210,518 Long-term debt obligations reflect the maturities of certain series of our first mortgage bonds, which we intend to refinance when due. 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, and we do not anticipate any such occurrence. 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. On July 15, 2011, Artesian Water entered into a Financing Agreement with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of Delaware, or the Department. The Company has been given a loan of approximately $3.6 million, or the Loan, from the Delaware Safe Drinking Water Revolving Fund to finance all or a portion of the cost to replace specific water transmission mains in service areas located in New Castle County, Delaware (collectively, the "Project"). In accordance with the Financing Agreement, the Company will from time to time request funds under the Loan as it incurs costs in connection with the Project. The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 1.7% per annum and an administrative fee at the rate of 1.7% per annum. As of September 30, 2014, approximately $2.6 million was borrowed under this Loan. The Company will not request any further funds under this Loan. 16 --------------------------------------------------------------------------------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 2013 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, 2013. 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, 2013. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2013 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2013. 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 2013 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2013 and also in the notes to our unaudited condensed consolidated financial statements contained in this quarterly report on Form 10-Q. We did not adopt any accounting policy in the first nine months of 2014 that had a material impact on our financial condition, liquidity or results of operations. 17-------------------------------------------------------------------------------- |