ARTNA

Business Context and Reporting Period

Company: Artesian Resources Corporation (Parent holding company of Artesian Water Company, Inc.)
Reporting Period: Fiscal year ended December 31, 2002
Operations: Regulated public water utility serving approximately 68,000 metered customers and a population of 226,000 in Delaware (27% of state population). The company also operates a small regulated utility in Pennsylvania and non-regulated wastewater and development subsidiaries.
Key Developments: Artesian Water Pennsylvania received regulatory recognition in 2002. The company completed the Bayville Iron Removal Facilities project ($4.17 million) and increased groundwater self-supply to 82% of total volume.

Key Financial Metrics (2002)

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 8.2% to $34.6 million from $32.0 million in 2001. Water sales revenue grew 7.3% to $33.6 million, driven by customer growth and rate increases approved by the Delaware Public Service Commission (PSC).
• Profitability: Net income applicable to common stock increased 26.1% to $4.1 million. Diluted EPS rose to $1.71 from $1.58.
• Expense Management: Operating expenses (excluding depreciation and taxes) increased 4.1% to $18.3 million. Notably, purchased water expenses decreased $267,000 due to drought conditions allowing the company to rely more on lower-cost groundwater rather than purchased surface water.
• Interest Costs: Interest charges decreased 3.3% to $4.4 million, primarily due to lower interest rates on short-term lines of credit (average rate dropped from 4.8% in 2001 to 2.7% in 2002).
• Capital Structure: The company issued 500,000 shares of Class A Common Stock in 2002, generating net proceeds of approximately $14.9 million used to reduce debt.

Guidance, Outlook, and Risks

• Rate Case Status: A rate increase application filed in April 2002 was approved by the PSC on March 18, 2003. The company calculated the increase to be approximately $3.3 million. Temporary rates totaling an 11.4% increase were in effect as of December 3, 2002, pending final determination.
• 2003 Capital Plan: The company expects to invest approximately $19.7 million in utility plant and systems in 2003. Major projects include new treatment facilities, wells, and transmission/distribution upgrades.
• Financing: On January 31, 2003, the company issued a $25 million Series P First Mortgage Bond to refinance maturing debt and pay down short-term lines of credit. This raised the debt-to-capitalization ratio to approximately 55.58%.
• Legal Proceedings (Related Party): The company filed a condemnation action in December 2002 to acquire its leased office complex (664 Churchmans Road) from White Clay Realty, a partnership involving company officers and directors. An independent appraisal valued the property at $3.8 million. A payment of this amount was made to the court and recorded as a receivable pending the final decision.
• Risks: Operations are subject to seasonal weather fluctuations (droughts reduce water sales volume), regulatory approval of rate increases, and the availability of groundwater supplies.

Investor Verification Checklist

• Rate Case Finalization: Verify the final PSC order regarding the $3.3 million rate increase and the timing of revenue recognition for deferred amounts.
• Condemnation Proceeding: Monitor the Delaware Superior Court ruling on the acquisition of the corporate headquarters from related parties (White Clay Realty) and the final valuation determination.
• Debt Refinancing: Confirm the successful closing of the $25 million Series P bond issuance and the resulting impact on interest expense and debt covenants.
• Water Supply Constraints: Assess the impact of ongoing drought conditions on water sales volume versus the offsetting effect of approved rate increases.
• Capital Expenditure Execution: Track the $19.7 million planned investment for 2003, specifically the $3.8 million portion allocated to the potential headquarters purchase.