ARTNA

Business Context and Reporting Period

Company: Artesian Resources Corporation (Delaware)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Quarter ended March 31, 2002

Artesian Resources is a non-operating holding company deriving income from its subsidiaries, primarily Artesian Water Company, Inc., the oldest and largest regulated public water utility in Delaware. As of March 31, 2002, the company served approximately 66,477 metered customers and a population of 220,000 (27% of Delaware's total population). The company is regulated by the Delaware Public Service Commission (PSC).

Key Financial Metrics

Margins: Operating margin was approximately 19.5% for Q1 2002 compared to 18.2% for Q1 2001. The ratio of operating expenses (excluding depreciation and taxes) to total revenue was 59.4% in Q1 2002, down from 62.6% in Q1 2001.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 11.3% to $7.7 million, driven by a 10.8% increase in water sales due to customer growth and rate increases approved in 2001.
• Profitability: Net income applicable to common stock more than doubled, increasing $280,000 (109.4%) to $536,000. This was primarily due to authorized rate increases and continued customer growth.
• Operating Expenses: Excluding depreciation and taxes, operating expenses increased 5.6% to $4.6 million. Increases were attributed to payroll (merit compensation), purchased water expenditures (resting of well fields), and tank painting expenses.
• Depreciation: Depreciation and amortization increased 14.7% to $812,000 due to additions to utility plant and equipment.
• Cash Flow: Net cash provided by operating activities decreased to $1.1 million from $1.7 million, largely due to a $990,000 decrease in accounts payable and a $239,000 decrease in accrued interest.
• Capital Expenditures: Capital expenditures (net of AFUDC) increased to $6.1 million from $5.6 million.

Guidance, Outlook, and Risks

Rate Proceedings: On April 2, 2002, Artesian Water filed an application with the Delaware PSC requesting a 23.1% rate increase (approximately $7.5 million annualized). The company anticipates placing temporary rates into effect on June 1, 2002, up to the statutory limit of $2.5 million annualized, pending a final decision on permanent rates.

Liquidity: The company maintains $35.0 million in lines of credit with three financial institutions. As of March 31, 2002, $15.0 million was available. The weighted average interest rate on borrowings was 2.52%.

Risks and Contingencies:

• Regulatory Risk: Future profitability depends on the Delaware PSC's approval of rate increases to cover costs and investments.
• Market Risk: The company is subject to fluctuating interest rates, though risk is managed through fixed-rate long-term debt.
• Operational Risk: Business is subject to seasonal fluctuations and weather effects.
• Legal: No material legal proceedings were pending as of the filing date.

Investor Verification Checklist

• Rate Approval Status: Verify the outcome of the April 2, 2002 rate increase application and the implementation of temporary rates on June 1, 2002.
• Capital Expenditure Plan: Confirm the $6.1 million quarterly capital spend aligns with the annual investment plan and funding sources.
• Debt Covenants: Review the terms of the $35.0 million credit facilities and the $4.3 million note to the Delaware Department of Health and Social Services.
• Customer Growth: Validate the reported customer count of 66,477 and the sustainability of the growth rate driving revenue increases.
• Related Party Transactions: Review the lease agreement with White Clay Realty (officers/directors are partners) to ensure terms remain comparable to market rates.