ARTNA

Artesian Resources Corp. 10-Q Summary

Business Context and Reporting Period

This filing covers the quarterly period ended June 30, 2010. Artesian Resources Corporation operates as a holding company for regulated water and wastewater utilities in Delaware, Maryland, and Pennsylvania, alongside non-regulated subsidiaries providing contract operations, engineering, and development services. The company serves approximately 77,500 metered water customers in Delaware.

Key Financial Metrics (Six Months Ended June 30, 2010)

Note: Debt figures include long-term debt net of current portion ($105,545k) plus current portion of long-term debt ($1,537k) and lines of credit ($22,719k) and overdrafts ($1,215k) as presented in the balance sheet liabilities.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 6.0% year-over-year. Water sales rose 2.2% due to a 2.8% increase in consumption and an addition of approximately 1,500 customers. Non-utility revenue surged 41.2% to $2.85 million, driven by increased contract design and permitting services.
• Profitability Decline: Net income decreased 4.4% to $3.44 million. The primary driver was a $157,000 reduction in Allowance for Funds Used During Construction (AFUDC) due to reduced discretionary capital expenditures and a slowdown in the housing market.
• Expense Increases: Operating expenses (excluding depreciation and taxes) rose 9.6%. Key drivers included a 25.9% increase in purchased water costs (due to rate hikes by Chester Water Authority) and a 4.8% increase in payroll costs.
• Cash Flow Improvement: Net cash provided by operating activities increased significantly to $10.0 million from $6.1 million in the prior year, aided by changes in working capital and prepaid property taxes.

Outlook, Risks, and Contingencies

• Regulatory Proceedings: The company is awaiting a final judicial determination regarding the Appleton Alliance petition, which delays the closing of the Cecil County water and wastewater facility acquisitions. The closing date has been extended to December 31, 2010. The Port Deposit acquisition was approved by the MDPSC in July 2010 and is expected to close in the fall of 2010.
• Rate Matters: Artesian Water settled a rate case in September 2009, making a 15% temporary increase permanent. The company is restricted from filing a new rate increase for 18 months from that date. A Distribution System Improvement Charge (DSIC) of 0.68% was approved effective July 1, 2010.
• Tax Contingency: The IRS proposed a $1.9 million adjustment to 2008 tax depreciation (bonus depreciation), which the company agrees with. This results in a deferral of the deduction rather than a disallowance.
• Guarantees: Artesian Resources guarantees a $10 million construction loan for the Northern Sussex Regional Water Recycling Complex (NSRWRC). Approximately $7.6 million has been drawn on this loan as of June 30, 2010.
• Liquidity: The company maintains a $40 million line of credit with Citizens Bank ($24.9 million available) and a $20 million line with CoBank (fully available). Management expects to fund operations via cash balances, credit lines, and operating cash flow.

Investor Verification Checklist

• Acquisition Timelines: Verify the status of the Appleton Alliance litigation and the expected closing dates for the Cecil County and Port Deposit acquisitions.
• Rate Case Restrictions: Confirm the impact of the 18-month moratorium on new rate filings for Artesian Water on future revenue recovery.
• Capital Expenditure Plans: Review the reduction in discretionary capital spending and its long-term impact on AFUDC and growth.
• Debt Covenants: Monitor compliance with the debt-to-capitalization ratio (currently 54.1% vs. 66 2/3% limit) and the EBITDA-to-interest coverage ratio (limit 2.5:1).
• Weather Sensitivity: Assess the exposure of water sales revenue to seasonal weather variations and rainfall patterns.