ARTNA

Business Context and Reporting Period

Company: Artesian Resources Corporation (Delaware)

Reporting Period: Fiscal year ended December 31, 2005

Business Overview: Artesian Resources is a holding company for regulated public utilities (Artesian Water, Artesian Water Pennsylvania, Artesian Wastewater) and non-regulated subsidiaries (Artesian Utility, Artesian Development). Artesian Water is the oldest and largest public water utility in Delaware, serving approximately 72,400 metered customers and 239,000 people. The company operates primarily in Delaware with a small presence in Pennsylvania. It is subject to regulation by the Delaware Public Service Commission (PSC) regarding rates and service territories.

Key Financial Metrics (2005)

Material Changes vs. Prior Period (2004)

• Revenue Growth: Total operating revenues increased 14.4% to $45.3 million from $39.6 million in 2004. This was driven by a 9.6% increase in water sales revenue (due to favorable weather, a 2.0% increase in customers, and rate increases) and a significant 246% increase in non-utility operating revenue to $2.6 million.
• Profitability: Net income applicable to common stock rose 14.4% to $5.0 million from $4.4 million. Operating income increased to $10.6 million.
• Expense Increases: Operating expenses (excluding depreciation and taxes) rose 18.6% to $24.5 million, primarily due to increased non-utility operating expenses ($1.8 million increase), payroll/benefits ($1.2 million increase), and administrative expenses ($0.5 million increase, partly due to Sarbanes-Oxley compliance).
• Capital Structure: In August 2005, the company issued $25 million in Series R First Mortgage Bonds to retire higher-interest Series M and N bonds and repay lines of credit. This reduced the weighted average cost of debt from 7.93% in 2001 to 6.45% at year-end 2005.
• Customer Base: Metered customers increased by 1,390 (2.0%) to 72,383. Service territory expanded by approximately 28 square miles.

Guidance, Outlook, and Risks

• Rate Proceedings: A rate application filed in February 2004 requesting an $8.7 million annual increase is pending. Temporary rates totaling $5.5 million annually were implemented in 2004. As of December 31, 2005, the company has deferred $966,000 in revenue in anticipation of a potential refund if the PSC rules the temporary rates excessive. A final decision is expected in 2006.
• 2006 Outlook: The company projects capital expenditures of approximately $22.9 million for 2006. It expects available cash, operating cash flow, and credit lines to be sufficient to fund operations and investments.
• Regulatory Risks: Profitability depends on the PSC's approval of rate increases to cover capital investments and operating costs. Delays or insufficient approvals could adversely affect financial results.
• Weather Sensitivity: Water demand is seasonal and weather-dependent. Cooler temperatures or higher rainfall during summer months can reduce demand and revenues.
• Environmental Compliance: Stricter federal or state environmental regulations could increase operating costs or limit water supply access.
• Land Sale: Artesian Development has an agreement to sell 4 acres of land for $1.35 million, contingent on governmental approvals and an environmental audit. Closing is expected within 12 months of the August 2005 agreement.

Investor Verification Checklist

• Rate Case Resolution: Monitor the final PSC ruling on the 2004 rate application to determine the magnitude of any required revenue refund and the level of permanent rate increases approved.
• Non-Utility Growth: Verify the sustainability of the rapid growth in non-utility wastewater revenues ($2.6 million in 2005 vs. $0.7 million in 2004) and the pipeline of future contracts.
• Capital Expenditure Plan: Review the execution of the projected $22.9 million capital plan for 2006, particularly regarding transmission/distribution rehabilitation and new supply sources.
• Debt Covenants: Confirm continued compliance with debt covenants limiting long-term debt to 66 2/3% of total capitalization (currently at 61.9%).
• Land Sale Closing: Track the status of the $1.35 million land sale to The Commonwealth Group, Ltd., specifically the receipt of governmental approvals and the environmental audit.