ARTNA

Artesian Resources Corp. 10-Q Summary (Period Ended June 30, 2009)

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 2009, for Artesian Resources Corporation, a holding company operating regulated water and wastewater utilities in Delaware, Maryland, and Pennsylvania. The company's strategy focuses on expanding service territories across the Delmarva Peninsula through organic growth, acquisitions, and contract operations. As of June 30, 2009, the company served approximately 76,000 metered water customers and 660 wastewater customers in Delaware.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 10.6% for the quarter and 11.7% for the six months ended June 30, 2009, compared to the prior year. This growth was driven by temporary rate increases implemented in June and December 2008 and an increase in customer count, partially offset by a decline in per capita water demand.
• Profitability: Net income rose 30.6% for the quarter and 42.6% for the six-month period. Improvements were attributed to higher operating margins from water utility business and Service Line Protection (SLP) plans, despite higher depreciation and interest expenses.
• Expense Management: Utility operating expenses decreased due to lower payroll/bonus costs and reduced repair/maintenance spending. However, water treatment and purchased water expenses increased due to regulatory testing requirements and rate hikes from suppliers.
• Capital Spending: Capital expenditures dropped significantly to $8.7 million for the first six months of 2009, compared to $19.3 million in the same period of 2008, reflecting a slowdown in the housing market and related development projects.

Guidance, Outlook, and Risks

• Regulatory Proceedings: A final decision on a major rate increase request filed with the Delaware Public Service Commission (DEPSC) is anticipated in the third quarter of 2009. The company has implemented temporary rate increases totaling approximately 15% pending final approval.
• Acquisition Contingencies: The closing of agreements to purchase water and wastewater facilities in Cecil County, Maryland, from Cecil County is delayed due to a judicial review petition filed by the Appleton Regional Community Alliance. Closing is also subject to Maryland Public Service Commission (MDPSC) approval and must occur by December 31, 2009, unless extended.
• Liquidity and Debt: The company maintains $29.8 million in available funds under its primary lines of credit. However, interest rates on credit facilities increased in July 2009 (e.g., LIBOR + 1.00% to LIBOR + 2.00% for one facility). The company notes that recent economic volatility may impact the availability and cost of future financing.
• Weather Sensitivity: Management notes that water sales are subject to seasonal weather fluctuations, particularly rainfall and temperature, which can impact demand.

Investor Verification Checklist

• Rate Case Outcome: Monitor the third-quarter 2009 DEPSC decision on the requested 27.3% rate increase to confirm revenue recovery.
• MD Acquisition Status: Verify the resolution of the Appleton Alliance legal challenge and the MDPSC approval status for the Cecil County, Maryland facility purchases.
• Debt Refinancing: Assess the company's ability to refinance maturing First Mortgage Bonds given current credit market volatility.
• Interest Rate Exposure: Review the impact of the July 2009 interest rate increases on lines of credit and variable-rate debt on future interest expenses.
• Capital Expenditure Trends: Evaluate if the significant reduction in capital spending in 2009 is a temporary market reaction or a shift in long-term investment strategy.