ARTNA

Business Context and Reporting Period

Company: Artesian Resources Corporation (Delaware)

Reporting Period: Quarterly period ended June 30, 2003 (Form 10-Q)

Business Overview: Artesian Resources is a non-operating holding company deriving income from four wholly owned subsidiaries and a one-third interest in AquaStructure. Its principal subsidiary, Artesian Water Company, Inc., is the oldest and largest public water utility in Delaware, serving approximately 69,000 metered customers. The company also operates wastewater management services and contract operations for other utilities.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 9.4% for the quarter and 9.8% year-to-date compared to 2002. Water sales revenue grew 7.7% (quarter) and 8.3% (YTD) due to customer growth and rate increases approved by the Delaware Public Service Commission (PSC).
• Profitability: Net income applicable to common stock increased 35.5% for the quarter ($319k increase) and 34.2% YTD ($491k increase). This was driven by rate increases, customer growth, and expense control.
• Expenses: Operating expenses (excluding depreciation and taxes) decreased 1.4% for the quarter but increased slightly YTD due to higher payroll and benefit costs. Depreciation and amortization increased 10.0% (quarter) and 7.2% (YTD) due to increased utility plant in service.
• Interest Charges: Interest charges increased 10.4% (quarter) and 7.0% (YTD), primarily due to the issuance of a $25 million Series P First Mortgage Bond in January 2003.
• Cash Flow: Net cash provided by operating activities surged to $9.57M YTD 2003 from $3.63M YTD 2002. This increase was significantly impacted by a $3.8M refund from the Prothonotary for the State of Delaware related to a pending condemnation action.

Guidance, Outlook, and Risks

• Rate Proceedings: The Delaware PSC approved a 9.68% revenue requirement increase effective May 1, 2003, generating approximately $3.3M in additional annual operating revenue. The company refunded ~$201k to customers in June 2003 because temporary rates exceeded the final approved increase.
• Future Revenue: The company implemented a 0.39% Distribution System Improvement Charge (DSIC) effective July 1, 2003, expecting to generate approximately $75,000 in 2003 revenues.
• Strategic Focus: Management is focusing on customer growth and diversifying revenue streams less dependent on weather, specifically through wastewater management services and contract operations.
• Liquidity: The company maintains $35.0M in lines of credit with $31.1M available as of June 30, 2003. Management believes cash from operations and credit lines are sufficient for the next 12 months.
• Legal Contingency: Artesian Water is involved in a condemnation action to acquire its leased office and shop complex (664 Churchmans Road). The company values the property at $3.8M, while owners value it at $4.8M. A final determination is pending court proceedings.
• Stock Split: A 3-for-2 stock split was effective May 30, 2003. All historical share and per-share data have been restated.

Investor Verification Checklist

• Condemnation Outcome: Verify the final resolution and cost of the property acquisition at 664 Churchmans Road, given the $1M valuation gap between the company and the owners.
• Rate Case Impact: Confirm the full realization of the $3.3M annual revenue increase from the PSC-approved rate hike and monitor for any future regulatory adjustments.
• Debt Servicing: Review the impact of the new $25M Series P bond on future interest coverage ratios, noting the 10.4% increase in interest charges.
• Seasonality: Assess the sensitivity of water sales revenue to weather patterns, as profitability is heavily dependent on summer demand.
• Wastewater Expansion: Monitor the performance of the new spray irrigation wastewater treatment facility in Middletown, Delaware, as a non-regulated revenue stream.