ARTNA

Business Context and Reporting Period

Company: Artesian Resources Corporation (Parent holding company of Artesian Water Company, Inc.)
Reporting Period: Fiscal year ended December 31, 1998
Business Overview: Artesian Water is the oldest and largest regulated public water utility in Delaware, serving approximately 61,000 metered customers and a population of 200,000 (27% of the state's population). The company distributes water to residential, commercial, industrial, and municipal customers. It holds exclusive franchises (CPCNs) for approximately 140 square miles of service territory, primarily in New Castle County, with expansion efforts in Kent and Sussex Counties.

Key Financial Metrics

Margins: The ratio of operating and maintenance expenses to total revenue was 56.0% in 1998, compared to 57.2% in 1997. The effective income tax rate was 39.9% in 1998.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 14.1% to $25.5 million, driven by rate increases effective in late 1997 and 1998, and a 2.5% increase in customer count. Water sales revenue specifically rose to $25.1 million.
• Profitability: Net income applicable to common stock increased 39.4% to $2.6 million. Operating income rose 28.6% to $5.7 million.
• Expense Increases: Operating and maintenance expenses increased 11.7% due to higher payroll, regulatory expenses, and rent (following a lease renewal). Interest charges increased 22.6% due to a higher average debt level.
• Capital Expenditures: Investment in utility plant increased 22.9% to $13.4 million (excluding developer contributions), with total capital expenditures rising 27.5% to approximately $15.5 million.
• Liquidity Position: The company reported a working capital deficit of $8.5 million at year-end, primarily due to short-term borrowings ($7.7 million) to fund ongoing construction projects.

Guidance, Outlook, and Risks

• Rate Proceedings: Management anticipates filing for a rate increase in the first half of 1999 to cover increased operating and financing costs. Approval is not guaranteed.
• Capital Plan: Estimated aggregate investments in utility plant for 1999 are approximately $15.5 million. Major projects include a $6.0 million system in Sussex County and $7.8 million for new water sources and treatment facilities.
• Financing: The company filed a registration statement for a public offering of up to 460,000 shares of Class A Non-Voting Common Stock. Proceeds are intended to repay short-term borrowings and eliminate the working capital deficit.
• Year 2000 Compliance: Management expects full compliance by June 30, 1999, with contingency plans in place. No material impact on operations or liquidity is anticipated.
• Regulatory Risks: Operations are subject to regulation by the Delaware Public Service Commission (rates) and DNREC (water allocation and quality). Access to aquifers is not exclusive, though management believes third-party usage will not interfere with supply.
• Contractual Obligations: The company has "take or pay" interconnection agreements requiring minimum annual water purchases of 1.3 billion gallons.

Investor Verification Checklist

• Rate Increase Approval: Verify the outcome of the anticipated 1999 rate case filing with the Delaware Public Service Commission.
• Equity Offering Status: Confirm the completion and net proceeds of the proposed Class A Common Stock offering intended to reduce short-term debt.
• Working Capital: Monitor the reduction of the $8.5 million working capital deficit and reliance on revolving credit lines.
• Capital Expenditure Execution: Track the $15.5 million 1999 capital plan, specifically the Sussex County expansion and water source development.
• Year 2000 Readiness: Confirm successful system compliance by the June 30, 1999 deadline to avoid operational disruptions.