Artesian Resources: Building Regional Strength Through Infrastructure and Diversification (ARTNB) - ARTNB Stock Research Report

## Executive Summary / Key Takeaways * Artesian Resources Corporation (ARTNB) is a regulated water and wastewater utility focused on strategic growth across the Delmarva Peninsula through infrastructure investment, acquisitions, and expansion of non-utility services. * The company's core strength lies in its regulated utility base, providing stable, recurring revenue, complemented by growing non-utility segments like Service Line Protection Plans that offer diversification and are less susceptible to weather fluctuations. * Recent performance in Q1 2025 showed solid revenue growth of 5.5% and a significant 23.2% increase in net income, driven by customer growth, DSIC revenue, and increased construction activity reflected in higher Allowance for Funds Used During Construction (AFUDC). * ARTNB is actively investing in its infrastructure, with capital expenditures increasing to $10.4 million in Q1 2025, including projects for aging system rehabilitation, expansion, and compliance with evolving environmental regulations like PFAS and LCRI, costs for which are anticipated to be recoverable through rates. * The company is pursuing necessary rate increases, filing a request in April 2025 for a 12.41% revenue increase in Delaware to support its capital program and cover rising operating costs, with a temporary rate increase of 1.22% petitioned for June 2025. ## Building a Regional Utility Powerhouse on the Delmarva Peninsula Artesian Resources Corporation operates as a vital provider of essential water and wastewater services across the Delmarva Peninsula, primarily through its regulated utility segment. This core business, accounting for the vast majority of the company's revenue (92.7% in Q1 2025), is characterized by stable, recurring income streams derived from regulated tariff rates approved by state public service commissions in Delaware, Maryland, and Pennsylvania. Beyond the traditional utility services, Artesian has strategically diversified into non-utility businesses, including Service Line Protection Plans, contract operations, and design/construction services, which offer complementary revenue less affected by external factors like weather.

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\ The company's history is one of deliberate expansion, marked by strategic acquisitions that have broadened its service territory and customer base. Notable examples include the acquisition of Mountain Hill Water Company and, more recently, Tidewater Environmental Services, Inc. (TESI) in 2022, which bolstered its wastewater presence in Sussex County, Delaware, and the asset purchase from the Town of Clayton in the same year. These moves are central to Artesian's strategy to be the primary resource for communities and developers needing both water and wastewater solutions, leveraging its proven ability to integrate acquired entities and build credibility with regulators and customers. In the competitive landscape, Artesian operates alongside larger, multi-state utilities such as American Water Works (TICKER:AWK) and Essential Utilities (TICKER:WTRG), as well as smaller regional players. While AWK and WTRG benefit from greater scale and broader geographic reach, leading to potentially lower unit costs and higher revenue growth rates (AWK at 7-8%, WTRG at 6-7% in 2024, compared to ARTNB's 4-5% in 2024), Artesian distinguishes itself through deep regional expertise and a focused approach on the Delmarva market. Artesian's operational efficiency in its core Delaware market is estimated to be 10-15% lower in operating costs per unit compared to some larger competitors due to localized infrastructure, although it may lag in the adoption speed of advanced metering technologies seen in peers like AWK, which enable faster data transmission and billing accuracy. Artesian's strategic partnerships with local governments and developers, coupled with its unique non-utility offerings like the Service Line Protection Plans, provide a differentiated value proposition in its specific service areas. Regulatory barriers to entry, while benefiting established players like AWK and WTRG, also protect Artesian's existing market share and support stable revenues. Artesian's technological capabilities are centered around its water and wastewater treatment and distribution infrastructure, designed to meet stringent quality standards. The company is actively investing in upgrading and expanding these systems. A key development is the construction of a new 625,000 gallon per day regional wastewater treatment facility at the Sussex Regional Recharge Facility (SRRF), expected to be completed in 2025. This project aims to enhance regional wastewater management efficiency and support expansion. Furthermore, Artesian is implementing treatment solutions for per- and polyfluoroalkyl substances (PFAS) at several wellfields and plans additional installations by 2029 to comply with new EPA maximum contaminant levels (MCLs). The company is also compliant with the Lead and Copper Rule Revisions and is addressing the requirements of the Lead and Copper Rule Improvements (LCRI), which mandate lead service line removal within 10 years. While specific quantifiable performance metrics for all of Artesian's technologies compared to alternatives are not detailed, the strategic intent behind these investments is clear: to ensure compliance, improve operational efficiency, support growth, and ultimately recover the associated capital and operating costs through the regulated rate base. These technological and infrastructure investments are foundational to maintaining service quality and supporting the company's long-term growth strategy. ## Recent Performance Reflects Strategic Momentum Artesian's financial performance in the first three months of 2025 demonstrates the impact of its strategic initiatives and the stability of its regulated business model. Total operating revenues reached $25.9 million, an increase of $1.3 million, or 5.5%, compared to the same period in 2024. This growth was primarily fueled by a 4.3% increase in water sales revenue, driven by a combination of higher overall water consumption, the implementation of Distribution System Improvement Charge (DSIC) revenue, and consistent customer growth. Metered water customers increased approximately 1.6% in Delaware and 2.2% in Maryland compared to the prior year. Beyond water sales, other utility operating revenue saw a notable 11.4% increase, primarily attributable to growth in the wastewater customer base, which expanded by approximately 6.3% in Delaware. The non-utility segment also contributed positively, with operating revenue increasing by 8.0%, largely due to the continued success and customer enrollment growth in the Service Line Protection Plans (WSLP +4.2%, SSLP +3.3%, ISLP +2.2%). Operating expenses, excluding depreciation and income taxes, increased by a more modest 3.1%. This was primarily due to increases in administrative costs and purchased power/water expenses, partially offset by decreases in supply/treatment and payroll costs. The company demonstrated improved operational leverage, with the ratio of these operating expenses to total revenue decreasing to 58.5% from 59.8% in the prior year period. Depreciation and amortization expense saw a slight decrease, influenced by the accounting treatment of utility plant funded by Contributions in Aid of Construction. Other income experienced a significant increase, primarily driven by a rise in Allowance for Funds Used During Construction (AFUDC). This reflects increased long-term construction activity, indicating the company's ongoing investment in its utility plant. The combined effect of revenue growth, managed expense increases, and higher other income resulted in a substantial 23.2% increase in net income applicable to common stock for the three months ended March 31, 2025, compared to the same period in 2024. This performance underscores the company's ability to translate strategic growth and operational management into improved profitability.

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\ ## Investing for the Future and Managing Capital Needs Capital investment is fundamental to Artesian's strategy, supporting customer growth, maintaining service reliability, and complying with evolving regulations. Capital expenditures in the first three months of 2025 totaled $10.4 million, an increase from $8.9 million in the prior year period. These investments are directed towards critical projects, including the rehabilitation of aging infrastructure, installation of new mains to serve expanding areas, upgrades to elevated storage tanks and meter reading equipment, construction of the new wastewater treatment plant at SRRF, and improvements to pumping stations.

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\ Funding these significant capital needs relies on a combination of internally generated cash flow from operations, contributions and advances from developers tied to new construction, and external financing. For the three months ended March 31, 2025, operating activities provided $11.0 million in cash, while net contributions and advances from developers added $5.2 million. Cash flows used in investing activities primarily reflected the capital expenditures. Financing activities provided $2.0 million, influenced by net contributions/advances, decreased long-term debt issuance, and higher dividend payments.

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\ Artesian maintains access to liquidity through bank credit lines, including a $40.0 million line with Citizens Bank (TICKER:CFG) and a $20.0 million line with CoBank, both of which had full availability as of March 31, 2025, and are expected to be renewed. The company's long-term debt structure includes fixed-rate first mortgage bonds, state revolving fund loans, and a promissory note, with maturities extending to 2049. Artesian was in compliance with all debt covenants as of March 31, 2025, and intends to refinance maturing long-term debt as needed. A key factor influencing Artesian's financial health and investment capacity is its ability to recover costs through regulated rates. Inflation, particularly impacting facility replacement and operating costs like chemicals and electricity, necessitates periodic rate adjustments. The company actively pursues these adjustments, as evidenced by the April 4, 2025 filing with the DEPSC seeking a 12.41% increase in annualized revenue (approximately $10.8 million). This request is specifically designed to support the ongoing capital improvement program and cover increased operational expenses. Artesian has also petitioned for a temporary incremental rate increase of 1.22%, effective June 3, 2025, which would provide approximately $1.2 million in additional annual revenue while the full rate case is pending. The outcome and timing of these regulatory proceedings are critical to ensuring the timely recovery of investments and operating costs. ## Outlook and Key Considerations Artesian's outlook is centered on executing its growth strategy, managing regulatory requirements, and continuing necessary infrastructure investments. The company anticipates continued customer growth, particularly in Delaware and the Cecil County, Maryland designated growth corridor, driven by regional development. Expansion of regulated water and wastewater service areas through strategic acquisitions and partnerships remains a priority. The non-utility segment, especially the Service Line Protection Plans, is expected to contribute to growth and revenue diversification. Significant capital expenditures are planned over the next three years to address aging infrastructure, support growth, and comply with environmental mandates like PFAS treatment and LCRI lead service line replacements. While these investments are substantial, the company anticipates recovering associated costs through the rate-setting process. The success of the pending rate case in Delaware is a key factor to watch, as it will directly impact the company's ability to fund its capital program and cover rising operating costs, including increases in electric supply rates contracted for future periods. Key risks to the investment thesis include the potential for unfavorable outcomes or delays in regulatory rate case approvals, which could impact the timely recovery of costs and investments. Fluctuations in weather can still affect water consumption and revenues, although the growing wastewater and non-utility segments provide some mitigation. The significant capital required for environmental compliance, while expected to be recoverable, represents a substantial upfront investment. Competition from larger utilities and alternative service providers, though mitigated by regulatory barriers and Artesian's regional focus, remains a factor. ## Conclusion Artesian Resources Corporation presents a compelling investment narrative grounded in its essential regulated utility operations and strategic growth initiatives on the Delmarva Peninsula. The company's recent financial performance in Q1 2025 demonstrates solid revenue and earnings growth, reflecting the benefits of customer expansion, infrastructure investment, and diversification into non-utility services. Artesian's commitment to upgrading its systems, including addressing critical environmental regulations like PFAS and LCRI, positions it to provide reliable service for future growth, with the expectation that these necessary costs will be recovered through the regulatory process. While challenges such as securing timely rate increases to offset inflation and fund capital expenditures, as well as ongoing environmental compliance costs, require careful management, Artesian's proactive approach to regulatory filings and its diversified business model provide a foundation for stability. The company's regional focus and strategic partnerships offer a competitive edge in its core markets. Investors should monitor the progress of the pending rate case in Delaware and the execution of the capital improvement program as key indicators of Artesian's ability to continue its trajectory of growth and deliver value.