ARTNA

Business Context and Reporting Period

Company: Artesian Resources Corporation (Delaware)

Filing Type: Form 10-Q (Unaudited)

Reporting Period: Quarter and nine months ended September 30, 2006

Artesian Resources operates as a holding company for five wholly owned subsidiaries, primarily Artesian Water Company, Inc., the oldest and largest public water utility in Delaware. The company also provides wastewater services through Artesian Wastewater Management, Inc., and engages in utility development and land ownership. As of October 31, 2006, the company had approximately 6.07 million shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 14.7% in Q3 and 8.6% for the nine months ended September 30, 2006, compared to the prior year. This was driven by a 7.3% to 8.3% increase in water sales (due to customer growth and rate adjustments) and a one-time $1.32 million gain on the sale of land by Artesian Development.
• Profitability: Net income rose 55.3% in Q3 and 29.3% for the nine-month period. The increase is largely attributable to the land sale gain and improved operational efficiency, despite higher operating costs.
• Operating Expenses: Utility operating expenses increased due to a 92% rise in purchased power costs following the lifting of price caps in Delaware's electric industry (effective May 2006) and increased repair/maintenance costs. Non-utility expenses decreased significantly due to reduced wastewater construction activity.
• Capital Investment: Capital expenditures surged to $25.0 million for the first nine months of 2006, compared to $15.1 million in the prior year, reflecting heavy investment in infrastructure, including a new storage facility in New Castle County and wastewater treatment plants in Sussex County.

Guidance, Outlook, and Risks

• Rate Proceedings: On April 11, 2006, the Delaware Public Service Commission (PSC) approved a permanent rate increase of approximately 13.4% (generating ~$4.9 million annually). The company must refund excess temporary rates collected, estimated at $941,000 plus interest, to customers. A new rate case was filed in May 2006 requesting a 20.5% increase to cover infrastructure and power costs; temporary rates of 5.9% were implemented in July 2006 pending final approval.
• Power Costs: The company faces significant inflationary pressure from purchased power expenses. It has mitigated some risk by signing a two-year fixed-price supply contract with Pepco Holdings, Inc.
• Liquidity: The company maintains $40.0 million in lines of credit for Artesian Water, with $32.4 million available as of September 30, 2006. Management believes current cash, operating cash flow, and credit facilities are sufficient to fund operations and capital commitments for the next 12 months.
• Regulatory Risks: Future results depend on the timing and approval of rate increases to recover infrastructure investments and operating cost increases. Weather conditions also impact water demand and revenue.

Investor Verification Checklist

• Land Sale Gain: Verify the sustainability of earnings by excluding the $1.32 million one-time gain on the sale of land.
• Power Cost Exposure: Assess the long-term impact of the 92% increase in electric rates and the effectiveness of the new fixed-price contract.
• Rate Case Outcome: Monitor the status of the May 2006 rate case requesting an additional 20.5% increase to ensure recovery of capital expenditures.
• Customer Refund Liability: Confirm the timing and accounting treatment of the ~$1 million refund to customers for excess temporary rates.
• Capital Expenditure Pace: Review the $25 million capital spend for the nine-month period against future cash flow projections and debt covenants.