ARTNA

Artesian Resources Corp. 10-Q Summary (Period Ended Sept 30, 2010)

Business Context and Reporting Period

This Form 10-Q covers the quarterly and nine-month periods ended September 30, 2010. Artesian Resources Corporation operates regulated water and wastewater utilities in Delaware, Maryland, and Pennsylvania, alongside non-regulated contract operations, engineering services, and service line protection plans. The company serves approximately 77,700 metered water customers in Delaware as of the reporting date.

Key Financial Metrics

Note: Cash flow and balance sheet figures are presented for the nine-month period or as of period end where applicable.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 7.8% ($3.5 million) for the nine months ended Sept 30, 2010, compared to the prior year. Water sales revenue rose 5.6%, attributed to drier weather conditions in 2010 compared to the heavy precipitation in 2009 which suppressed consumption.
• Profitability: Net income increased 10.9% ($625,000) for the nine-month period. Operating income margins improved due to higher water utility revenues.
• Expense Trends: Utility operating expenses increased 4.9% due to higher payroll, purchased water costs (rate increases from Chester Water Authority), and maintenance. Non-utility expenses rose 28.3% driven by increased project activity in contract operations.
• Deconsolidation: On August 6, 2010, the company deconsolidated the Northern Sussex Regional Water Recycling Complex, LLC (NSRWRC) following a termination agreement. This resulted in the reclassification of assets from non-utility property to utility plant.

Guidance, Outlook, and Risks

• Strategic Direction: Management continues to focus on expanding water and wastewater services across the Delmarva Peninsula, targeting growth in Maryland (Cecil County) and Delaware (Sussex County).
• Acquisitions:
  • Port Deposit, MD: Closed on November 1, 2010 (subsequent event), acquiring water assets for $1.256 million, including a promissory note of $800,000.
  • Cecil County, MD: Pending acquisition of water and wastewater facilities from Cecil County is delayed pending a final judicial determination regarding a petition by the Appleton Alliance. Closing is extended to December 31, 2010.
• Regulatory Matters: Artesian Water settled a rate case in late 2009, making a 15% temporary increase permanent. The company is restricted from filing new rate increases for 18 months from the order date. Distribution System Improvement Charges (DSIC) were approved for 2010.
• Liquidity: The company maintains $40 million and $20 million lines of credit with Citizens Bank and CoBank, respectively. Total available funds under these lines were approximately $36.1 million as of September 30, 2010.
• Risks: Key risks include weather variability affecting water consumption, regulatory delays in rate approvals and acquisitions, and the general economic downturn impacting construction and contract operations.

Investor Verification Checklist

• Acquisition Status: Verify the final resolution of the Appleton Alliance legal challenge regarding the Cecil County, MD water and wastewater facility purchases.
• Weather Sensitivity: Monitor rainfall and temperature data in Delaware and Maryland to assess potential impacts on water sales revenue for the remainder of the fiscal year.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the debt-to-capitalization ratio (53.4% at Sept 30, 2010) and interest coverage ratios required by CoBank.
• Rate Case Restrictions: Note the 18-month moratorium on new rate increase filings for Artesian Water following the September 2009 settlement.
• Capital Expenditures: Review the reduction in discretionary capital expenditures and its impact on future growth projects and AFUDC (Allowance for Funds Used During Construction).