ARTNA

Business Context and Reporting Period

Company: Artesian Resources Corp (Delaware)

Filing Type: Form 10-Q (Unaudited)

Reporting Period: Quarter and six months ended June 30, 2002

Business Overview: Artesian Resources is a non-operating holding company deriving income from its wholly-owned subsidiaries, primarily Artesian Water Company, Inc., the oldest and largest regulated public water utility in Delaware. As of June 30, 2002, the company served approximately 67,300 metered customers and a population of 220,000 (27% of Delaware's total population). The company also holds a one-third interest in AquaStructure Delaware, LLC, which markets wastewater services.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 8.4% for the quarter and 9.7% for the six months ended June 30, 2002, compared to the prior year. This growth was driven by an increase in the number of customers, rate increases approved in 2001, and temporary rates implemented on June 1, 2002.
• Operating Expenses: Operating and maintenance expenses (excluding depreciation and taxes) increased by $600,000 for the quarter and $842,000 for the six months. Increases were attributed to higher payroll/benefits ($309k/$409k) and administration/consulting costs ($222k/$263k).
• Net Income: Net income applicable to common stock increased by $13,000 for the quarter and $293,000 for the six months compared to the prior year periods.
• Capital Structure: On June 6, 2002, the company sold 500,000 shares of Class A Non-Voting Common Stock, generating net proceeds of approximately $15.1 million. These proceeds were used to reduce borrowings on lines of credit.
• Interest Charges: Interest charges decreased slightly ($30,000) for the quarter due to lower short-term financing rates.

Guidance, Outlook, Risks, and Unusual Items

• Rate Proceedings: On April 2, 2002, Artesian Water filed for a 23.1% rate increase ($7.5M annualized). On June 17, 2002, this was reduced to a 19.0% request ($6.4M annualized). Temporary rates of $2.5M annualized were placed into effect on June 1, 2002. The City of Wilmington and General Motors have intervened in the proceeding, challenging a new industrial rate classification.
• Drought Restrictions: Mandatory water use restrictions were implemented by Executive Order on August 2, 2002, in Northern New Castle County due to drought conditions. Management expects these restrictions to result in decreased water usage and potentially lower revenues.
• Liquidity: The company maintains $35.0 million in lines of credit with $25.3 million available as of June 30, 2002. Management believes cash from operations and credit facilities are sufficient to meet obligations for the next twelve months.
• Accounting Pronouncements: The company noted the issuance of FASB Statements No. 146, 145, and 143. Management does not expect these to have a material impact on financial condition or results of operations upon adoption.

Investor Verification Checklist

• Rate Case Outcome: Verify the final decision by the Delaware Public Service Commission regarding the 19.0% rate increase request and the intervention by the City of Wilmington and General Motors.
• Drought Impact: Monitor the duration and severity of mandatory water restrictions and their actual impact on water sales volumes and revenue in subsequent quarters.
• Debt Reduction: Confirm the utilization of the $15.1 million stock offering proceeds to reduce short-term debt and the resulting impact on interest expense.
• Customer Growth: Assess whether the growth in customer count is sustainable given the drought conditions and potential economic pressures.
• Related Party Transactions: Review the lease agreement with White Clay Realty (officers/directors are partners) to ensure terms remain comparable to market rates as the lease expires in 2002.