ARTNA

Business Context and Reporting Period

Company: Artesian Resources Corporation (Delaware)

Reporting Period: Quarter ended March 31, 2003

Business Overview: Artesian Resources is a non-operating holding company deriving income from four wholly-owned subsidiaries and a one-third interest in AquaStructure. Its principal subsidiary, Artesian Water Company, Inc., is the oldest and largest public water utility in Delaware, serving approximately 68,000 metered customers. The company also operates wastewater management services and contract operations for other water providers.

Key Financial Metrics

Liquidity: The company maintains $35.0 million in unsecured lines of credit, with $29.1 million available as of March 31, 2003. Management states that cash from operations and credit lines are sufficient to meet obligations for the next twelve months.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 10.3% to $8.5 million, driven by a 9.1% increase in water sales due to customer growth and rate increases effective June 1 and December 3, 2002. Non-utility revenue (wastewater) also contributed to the growth.
• Profitability: Net income applicable to common stock rose 32.1% ($172,000 increase) compared to Q1 2002. Operating income increased from $1.5 million to $1.9 million.
• Expense Trends: Operating expenses (excluding depreciation and taxes) increased 5.0% to $4.8 million, primarily due to an 8.8% rise in payroll and benefits. However, the operating expense ratio to total revenue improved to 56.6% from 59.4%.
• Interest Costs: Interest charges increased 3.5% to $1.2 million, largely due to the issuance of a $25 million Series P First Mortgage Bond in January 2003.
• Capital Expenditures: Net cash used in investing activities decreased to $4.3 million from $6.1 million in the prior year.

Guidance, Outlook, and Risks

• Rate Increase Approval: On April 15, 2003, the Delaware Public Service Commission (PSC) approved a 9.68% increase in revenue requirements, effective May 1, 2003. This is expected to generate approximately $3.3 million in additional annual operating revenues.
• Strategic Focus: Management is focusing on customer growth and diversifying revenue streams unrelated to weather, specifically through wastewater management and contract operations. Investments are planned for the Aquifer Storage and Recovery Program to enhance water supply reliability.
• Stock Split: A 3-for-2 stock split was approved on April 30, 2003, with a stock dividend declared. All share data in the filing has been restated to reflect this split.
• Legal Contingency (Condemnation): Artesian Water is engaged in a condemnation proceeding to acquire its leased office complex (664 Churchmans Road) from White Clay Realty, a partnership involving company officers. Artesian values the property at $3.8 million; the owners value it at $4.8 million. A $3.8 million payment has been deposited with the court pending resolution.
• Risks: Forward-looking statements are subject to risks including weather fluctuations affecting water demand, competitive pressures, and changes in government policies or economic conditions.

Investor Verification Checklist

• Verify the implementation and revenue impact of the 9.68% rate increase approved by the Delaware PSC effective May 1, 2003.
• Monitor the resolution of the condemnation proceeding regarding the office complex at 664 Churchmans Road and the potential final purchase price ($3.8M vs $4.8M valuation).
• Confirm the execution of the 3-for-2 stock split and the associated stock dividend payment.
• Review the utilization of the $35 million credit facility and the impact of the new Series P bond on future interest obligations.
• Assess the progress of the new wastewater treatment facility in Middletown and its contribution to non-utility revenue growth.