ARTNA

Business Context and Reporting Period

Company: Artesian Resources Corp (Delaware)

Reporting Period: Quarterly period ended September 30, 2000 (Unaudited)

Business Overview: Artesian Water Company, Inc., the principal subsidiary, is the oldest and largest regulated public water utility in Delaware, serving approximately 65,000 metered customers and a population of 200,000. The company's rates and capital structure are regulated by the Delaware Public Service Commission (PSC).

Key Financial Metrics

Note: Working capital deficit of $16.6 million is primarily due to short-term borrowings financing utility plant investments.

Material Changes vs. Prior Period

• Revenue Decline (Q3): Total operating revenue decreased 4.8% ($352,000) compared to Q3 1999, primarily due to frequent rainfall reducing outdoor water usage.
• Revenue Growth (9 Months): Revenue increased 2.5% ($503,000) for the nine-month period, driven by a temporary rate increase effective July 1999 and customer base growth, offset by wet weather.
• Profitability Drop: Net income applicable to common stock fell 44.8% in Q3 and 13.8% for the nine months ended September 30, 2000. This was driven by higher interest charges and operating expenses.
• Expense Increases: Operating expenses rose due to payroll and benefits increases. Interest charges increased 29.3% in Q3 due to higher average borrowings and interest on temporary rate refunds.
• Rate Proceeding Outcome: The PSC approved a permanent rate increase of approximately $1.3 million annually, lower than the temporary increase collected. The company refunded approximately $1.355 million of deferred amounts in Q3.

Guidance, Outlook, and Risks

• Capital Expenditures: Management estimates Q4 2000 utility plant investments at approximately $5.8 million, financed by operations and short-term borrowings. An additional $2.1 million is expected to be financed by developer contributions.
• Environmental Investment: The company is investing approximately $1 million by year-end in a carbon treatment facility at the Llangollen well field to address Bis(2-chloroethyl)ether (BCEE) contamination. The well field remains out of service until completion.
• Liquidity: The company maintains $35.0 million in unsecured lines of credit, with $20.2 million available as of September 30, 2000. A working capital deficit exists due to heavy investment financing.
• Legal/Regulatory Risks:
  • Land Lease Dispute: A third party has claimed ownership of land leased from a related party (Glendale Enterprises) for water wells. The company intends to contest this; if upheld, the impact could be material.
  • Rate Proceedings: Future revenue is subject to the timing and results of rate proceedings before the Delaware PSC.
• Forward-Looking Statement: Actual results may differ due to weather conditions, capital expenditure levels, and regulatory factors.

Investor Verification Checklist

• Rate Refund Impact: Verify the final recognition of the $173,000 difference between deferred and refunded amounts from the rate settlement.
• Land Ownership Claim: Monitor the status of the third-party claim regarding the Glendale Enterprises well site lease and potential financial exposure.
• Environmental Remediation: Confirm the timeline and final cost of the $1 million carbon treatment facility at the Llangollen well field.
• Debt Servicing: Review the sustainability of the working capital deficit and reliance on revolving credit facilities to fund ongoing capital projects.
• Weather Sensitivity: Assess the volatility of quarterly revenues due to seasonal weather patterns affecting outdoor water usage.