Business Context and Reporting Period
Company: Artesian Resources Corporation (Artesian Resources)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2008
Business Overview: Artesian Resources is a holding company operating eight wholly owned subsidiaries, primarily providing regulated water and wastewater services in Delaware, Maryland, and Pennsylvania. The principal subsidiary, Artesian Water, is the oldest and largest public water utility on the Delmarva Peninsula. The company also engages in non-utility activities including contract operations, engineering services, and infrastructure development.
Key Financial Metrics
(All figures in thousands, except per share data)
| Metric | Quarter Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Operating Revenues | $15,656 | $41,828 |
| Net Income | $2,593 | $5,121 |
| Operating Income | $4,030 | $8,883 |
| Net Cash Provided by Operating Activities | N/A | $14,811 |
| Net Cash Used in Investing Activities | N/A | $(41,629) |
| Net Cash Provided by Financing Activities | N/A | $26,884 |
| Cash and Cash Equivalents (End of Period) | $2,586 | $2,586 |
| Long-Term Debt (Net of Current) | $93,200 | $93,200 |
| Lines of Credit (Current Liability) | $26,858 | $26,858 |
| Basic Earnings Per Share | $0.35 | $0.70 |
| Diluted Earnings Per Share | $0.35 | $0.69 |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Total operating revenues increased 4.1% for the quarter and 5.7% for the nine months compared to the prior year. Water sales revenue increased 2.7% (quarter) and 3.6% (nine months), driven by rate increases and temporary rate adjustments, though partially offset by a decline in per capita demand.
- Profitability: Net income decreased 6.2% for the quarter and 1.3% for the nine months. The decline was attributed to lower operating margins in utility businesses due to demand declines and increased costs (payroll, purchased water, and power), despite higher margins in non-utility segments.
- Capital Expenditures: Capital expenditures surged to $41.7 million for the nine months ended September 30, 2008, compared to $18.6 million in the prior year period. Significant investments included a new office building ($9.9 million), a regional wastewater facility ($6.6 million), and the acquisition of Mountain Hill Water Company ($4.8 million).
- Liquidity and Debt: Borrowings under lines of credit increased significantly to fund capital projects. Lines of credit outstanding rose from $898,000 at year-end 2007 to $26,858,000 at September 30, 2008.
Guidance, Outlook, Risks, and Unusual Items
- Rate Proceedings: Artesian Water filed a petition with the Delaware Public Service Commission (PSC) requesting a 27.3% revenue increase (approx. $13.5 million annualized). Temporary rates generating a 5.0% increase were placed into effect on June 21, 2008. A final decision is anticipated in the first quarter of 2009.
- Acquisitions and Expansion:
- Completed the acquisition of Mountain Hill Water Company, LLC for approximately $7.1 million on August 1, 2008.
- On October 7, 2008, signed agreements to purchase water facilities from Cecil County, Maryland (approx. $2.2 million) and wastewater facilities (approx. $11.6 million total), with closings expected by June 30, 2009.
- Internal Control Material Weakness: Management concluded that disclosure controls and procedures were not effective as of September 30, 2008. A material weakness was identified regarding the recordation of contributed plant assets and contributions in aid of construction (CIAC) in the proper accounting periods. Improvements to internal controls have been implemented.
- Guarantees: The company acts as guarantor for a $10 million construction loan for the Northern Sussex Regional Water Recycling Complex, LLC (NSRWRC). Approximately $6.6 million was drawn on this loan as of September 30, 2008.
- Weather Sensitivity: Management notes that profitability is dependent on seasonal weather fluctuations, particularly rainfall and temperature, which affect water demand.
Investor Verification Checklist
- Rate Case Outcome: Verify the final decision by the Delaware PSC regarding the requested 27.3% rate increase and its timing of implementation.
- Internal Control Remediation: Confirm the effectiveness of the remedial measures taken to address the material weakness in recording contributed plant assets.
- Debt Covenants: Review compliance with financial covenants in long-term debt and state revolving fund loan agreements, given the significant increase in short-term borrowings.
- Acquisition Closings: Monitor the closing of the Cecil County water and wastewater facility purchases scheduled for mid-2009 and the associated financing terms.
- Capital Expenditure Funding: Assess the company's ability to fund the $41.7 million in capital expenditures through operating cash flow, credit lines, and the planned $15 million First Mortgage Bond issuance.