ARTESIAN RESOURCES CORP annual report, FY2012

Business context and reporting period

Artesian Resources Corporation’s Form 10-K covers the fiscal year ended December 31, 2012; it is an annual filing, not a standalone fourth-quarter report. Artesian operates regulated water and wastewater utilities and non-regulated service businesses, principally on the Delmarva Peninsula. Water sales are the primary revenue source.

Financial performance and position

Water sales were $63.6 million, or 90.1% of revenue. The reported operating-expense ratio, excluding depreciation and income taxes, improved to 56.9% from 60.4%. Total assets were $391.7 million and stockholders’ equity was $118.2 million. Long-term debt, including current maturities, was $107.4 million; lines of credit outstanding were $10.7 million. The company reported debt at 47.6% of total capitalization and compliance with debt covenants. The $40 million Citizens demand facility had $29.3 million available at year-end; a separate $20 million CoBank facility was undrawn.

For fourth-quarter 2012, revenue was $17.0 million, operating income $3.5 million, and net income $1.75 million, compared with $16.1 million, $3.6 million, and $1.75 million, respectively, in fourth-quarter 2011. 2012 dividends declared were approximately $0.79 per share.

Material changes versus prior period

• Revenue rose 8.4%; water-sales revenue increased 10.5%, mainly reflecting the 11.13% permanent Delaware rate increase effective January 1, 2012, customer additions, and higher consumption in Cecil County, Maryland.
• Net income increased $3.1 million. Management attributed the improvement to higher water-utility operating margins, lower non-utility expenses and interest charges, and higher miscellaneous income.
• Operating and maintenance costs increased, notably payroll and benefits, while non-utility expenses declined with reduced project activity. Depreciation also rose with continued utility-plant investment.
• Operating cash flow increased, while capital spending rose to $20.5 million. Metered customers totaled 81,200, up from 80,600.
• Maryland operations added the CECO water system in November 2012, serving approximately 200 customers. The company also completed the earlier Cecil County water-asset purchase; planned wastewater-asset purchases in Cecil County had been terminated.

Outlook, risks, contingencies, and unusual items

• Management projected approximately $24.7 million of utility-plant and system investment in 2013 and approximately $12.1 million of 2013 obligations for interest, principal, leases, and water-purchase agreements. It expected to use operating cash flow, available cash, credit facilities, and financing as needed; no earnings guidance was provided.
• Artesian Wastewater filed a Delaware rate application in January 2013 seeking an annualized revenue increase of approximately $343,000, or 34.8%; approval was pending. A 1.45% Distribution System Improvement Charge was approved to take effect January 1, 2013, subject to audit.
• The Citizens $40 million demand line was due to expire no later than May 30, 2013, unless renewed sooner or called by the bank. Management expected to refinance first-mortgage bonds at maturity and stated that available funding was adequate, but these outcomes were not assured.
• Artesian Water’s dispute with Chester Water Authority over bulk-water contract rates remained in litigation. The company had withheld the disputed amounts and recorded accrued expenses of approximately $2.2 million at year-end; the counterclaim seeks damages, costs, and attorneys’ fees.
• Key operating risks include weather-driven water demand, drought and water-allocation limits, rate-case outcomes, environmental requirements, wastewater system failures, capital-market access, and competition for new service territories. The company also has minimum water-purchase commitments under interconnection agreements.
• Other items affecting comparability included a roughly $168,000 refund of prior Delaware Public Service Commission assessments and a roughly $349,000 reclassification of deferred acquisition costs into miscellaneous income. A regulatory accounting change also reclassified approximately $1.2 million to a utility-plant retirement liability; this was a balance-sheet reclassification, not reported operating revenue.

Important facts for investors to verify

• Whether the 2013 wastewater rate request was approved and the actual revenue and customer impact.
• Renewal or replacement terms for the Citizens demand credit line and funding availability for the planned capital program.
• Progress and final outcome of the Chester Water Authority litigation, including the accrued disputed balance and counterclaim exposure.
• Whether higher 2012 water consumption persists; the filing notes that weather and rainfall can materially affect usage and revenue.
• Execution, cost, and regulatory recovery of planned capital investment, alongside customer growth and the performance of non-regulated service-line plans.
• Auditor BDO USA, LLP issued an unqualified opinion on the financial statements and internal controls; management also reported effective disclosure controls and internal control over financial reporting.