ARTNA

Business Context and Reporting Period

Company: Artesian Resources Corporation (Delaware)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Quarter and nine months ended September 30, 2003

Business Overview: Artesian Resources is a non-operating holding company deriving income from four wholly-owned subsidiaries, primarily Artesian Water Company, Inc., the oldest and largest public water utility in Delaware. The company serves approximately 69,000 metered customers and 230,000 residents. Additional operations include wastewater management and contract operations for other utilities.

Key Financial Metrics

Note: Current Ratio calculated as Current Assets ($11,602) / Current Liabilities ($15,394).

Material Changes vs. Prior Period

• Revenue Trends: Quarterly revenue decreased 2.5% year-over-year due to a wet and cool summer reducing water consumption, despite rate increases. However, nine-month revenue increased 5.3% driven by customer growth and a 9.68% rate increase approved by the Delaware PSC effective May 1, 2003.
• Profitability: Net income applicable to common stock fell 30.7% for the quarter ($1.052M vs $1.518M) but rose slightly (0.8%) for the nine-month period ($2.977M vs $2.952M).
• Operating Expenses: Excluding depreciation and taxes, operating expenses increased 9.5% for the quarter and 2.9% for the nine months. Increases were driven by payroll/benefits ($346k increase) and purchased water costs ($175k increase) due to contractual minimums and supplier rate hikes.
• Interest Charges: Interest expense increased 12.7% for the quarter and 8.8% for the nine months, primarily due to the issuance of a $25 million Series P First Mortgage Bond in January 2003.
• Cash Flow: Operating cash flow for the nine months surged to $10.3 million from $3.2 million in the prior year, significantly aided by a $3.8 million refund from the Prothonotary related to a condemnation action.

Guidance, Outlook, and Risks

• Rate Proceedings: A 9.68% rate increase is in effect, expected to generate an additional $3.3 million in annual operating revenues. A 0.39% Distribution System Improvement Charge (DSIC) was implemented in July 2003, expected to generate $75,000 in 2003.
• Capital Expenditures: The company expects to continue investing in utility plant and the Aquifer Storage and Recovery Program to ensure water supply reliability.
• Liquidity: The company maintains $35.0 million in lines of credit with $28.3 million available as of September 30, 2003. Management states cash from operations and credit lines are sufficient for the next 12 months.
• Legal Contingency (Resolved): A condemnation action to acquire the company's office and shop complex (664 Churchmans Road) was settled on October 20, 2003, for $4.5 million. The company also agreed to pay $50,000 in expenses to two tenants in common.
• Risks: Key risks include weather fluctuations affecting water demand, inflation increasing facility costs, and regulatory delays in rate recovery. The company also faces interest rate risk, though it is managed primarily through fixed-rate long-term debt.

Investor Verification Checklist

• Weather Impact: Verify the extent to which the "wet and cool summer" impacted Q3 water sales volumes versus the long-term trend of customer growth.
• Related Party Transaction: Confirm the final closing of the $4.5 million property acquisition and the impact on future capital expenditures and cash flow.
• Purchased Water Costs: Monitor Q4 results for the anticipated $485,000 increase in purchased water expense due to minimum take obligations.
• Debt Structure: Review the terms of the new Series P First Mortgage Bond and its effect on future interest coverage ratios.
• Stock Split: Note that all share and per-share data have been restated for the 3-for-2 stock split effective May 30, 2003.