ARTNA

Artesian Resources Corp. Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Artesian Resources Corporation is a holding company operating eight wholly owned subsidiaries, primarily providing regulated water and wastewater services in Delaware, Maryland, and Pennsylvania. The company's principal subsidiary, Artesian Water, is the oldest and largest public water utility in Delaware. The company is also expanding its non-regulated contract operations and engineering services divisions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 13.1% to $13.9 million, driven by a 12.7% increase in water sales. This growth was primarily due to temporary rate increases implemented in June and December 2008 and an addition of approximately 509 customers.
• Profitability: Net income rose 60.9% to $1.6 million. Operating income increased 46.1% to $2.8 million. The improvement is attributed to rate increases and higher participation in Service Line Protection Plans.
• Expense Management: Utility operating expenses decreased 1.9% despite increases in payroll and purchased water costs, offset by a 17.3% reduction in administration expenses. Depreciation and amortization increased 19.8% due to new plant investments.
• Cash Flow: Net cash provided by operating activities decreased 50.4% to $3.2 million, largely due to changes in working capital (specifically a decrease in accrued expenses and an increase in accounts receivable) compared to the prior year.
• Capital Spending: Capital expenditures dropped significantly by 56.6% to $3.5 million, reflecting a slowdown in the housing market and reduced construction activity.

Outlook, Risks, and Management Commentary

• Rate Proceedings: Artesian Water is awaiting a final decision from the Delaware Public Service Commission (DEPSC) on a rate increase request filed in 2008, with a decision anticipated in Q3 2009. Temporary rates totaling approximately 15% were implemented in 2008 pending this decision.
• Acquisitions and Expansion: The company signed agreements in October 2008 to purchase water and wastewater facilities in Cecil County, Maryland, from Cecil County. Closings are expected by June 30, 2009, subject to regulatory approval. However, the Appleton Regional Community Alliance has filed a petition for judicial review, which could delay the closing.
• Liquidity and Debt: The company maintains $32.4 million in available funds under its primary lines of credit. Debt-to-total capitalization stood at 55.6% as of March 31, 2009, well below the 66 2/3% covenant limit. Management notes that current economic conditions have increased the cost and reduced the availability of financing.
• Guarantees: Artesian Resources acts as the guarantor for a $10 million construction loan for the Northern Sussex Regional Water Recycling Complex (NSRWRC), a variable interest entity. Approximately $7.1 million of this loan was drawn as of March 31, 2009.
• Weather Sensitivity: Management notes that water sales are subject to seasonal weather fluctuations, though contract operations and wastewater services provide a revenue stream less sensitive to weather patterns.

Key Facts for Investor Verification

• Regulatory Approval Risk: Verify the status of the judicial review filed by the Appleton Alliance regarding the Cecil County, Maryland asset purchases, as this could delay or prevent the closing of these strategic acquisitions.
• Rate Case Outcome: Monitor the DEPSC's final decision on the pending rate increase, which is expected in Q3 2009, to confirm the long-term revenue recovery for infrastructure investments.
• Refinancing Needs: Assess the company's ability to refinance maturing First Mortgage Bonds given the volatility in credit markets mentioned in the filing.
• Off-Balance Sheet Exposure: Review the terms of the $10 million construction loan guarantee for NSRWRC and the potential liability if the entity defaults.
• Customer Growth vs. Demand: While customer count increased, per capita water demand declined in Q1 2009; verify if this trend persists or if it is purely seasonal.