Artesian Resources Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. The company provides regulated water and wastewater services, principally in Delaware, with additional Maryland and Pennsylvania operations and non-regulated service, engineering and protection-plan businesses. Figures below are in millions of dollars except per-share amounts, percentages and customer counts.
Financial performance
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Operating revenue | $14.757 | $14.983; down 1.5% |
| Operating income | $2.219 | $2.787 |
| Net income | $1.009 | $1.646; down 38.6% |
| Basic and diluted EPS | $0.13 | $0.22 |
| Operating margin | 15.0% | 18.6% (calculated) |
| Net margin | 6.8% | 11.0% (calculated) |
| Operating cash flow | $5.570 | $5.556 |
| Capital expenditures | $2.573 | $2.568 |
Water sales were $12.916 million, up 0.2%, while non-utility revenue fell 25.5% to $1.095 million. Other utility revenue increased to $0.746 million. Management attributed the overall revenue decline mainly to lower non-utility project and contract activity. Utility operating expenses rose 9.6% to $8.078 million, with higher payroll and benefits, repairs and maintenance among the drivers. Operating expenses excluding depreciation and income taxes were 68.0% of revenue, versus 62.4% a year earlier.
Liquidity, debt and balance sheet
At March 31, 2011, cash was $0.323 million, current assets $11.779 million and current liabilities $38.229 million (current ratio approximately 0.31). Lines of credit totaled $25.306 million; the company reported $17.7 million available on its $40 million Citizens line and $17.0 million available on its $20 million CoBank line. The Citizens facility is payable on demand; both facilities were scheduled to expire in January 2012. Management said it expected to fund the next 12 months with cash, credit lines and operating cash flow.
Long-term debt was $106.920 million, with $1.652 million current portion; debt to total capitalization, including short-term debt, was 53.3%. Net cash increased $0.144 million during the quarter. Financing cash use was $2.865 million, including $1.445 million of dividends, net line-of-credit repayments of $3.765 million, and $2.830 million of long-term debt issuance. Debt fair value was reported at $113.220 million versus carrying value of $106.920 million. The company reported compliance with its debt covenants.
Changes, outlook and risks
- Net income fell chiefly because of unusually wet weather and lower water demand, higher utility operating costs, and higher interest expense. Interest charges increased 2.6%, partly because borrowing costs previously capitalized in connection with the Northern Sussex project were expensed after the 2010 termination agreement.
- On April 11, 2011, after quarter-end, Artesian Water requested a Delaware rate increase of 19.45%, or approximately $10.9 million in annualized revenue, to support capital investment and higher operating costs. The filing says it anticipated seeking up to $2.5 million annualized in temporary rates under bond, subject to regulatory action. This request was not approved as of the filing.
- A Maryland rate application filed in December 2010 sought approximately $65,000 of annualized additional revenue for the former Mountain Hill system; if approved, the proposed changes would increase the average residential customer’s bill by 34%.
- Management’s strategy is to grow water, wastewater and service-line protection services across the Delmarva Peninsula. It cited customer growth and expansion opportunities, but noted exposure to weather, economic and construction conditions, regulatory rate decisions, inflation and capital requirements. No numerical earnings or revenue guidance was provided.
- In April 2011, management decided to reduce staffing and reorganize Artesian Consulting Engineers; it will stop taking outside development and architectural services while completing existing engineering projects. Design and engineering contract work will continue through Artesian Utility.
- Artesian Water received a federal grand jury subpoena related to an investigation by the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the EPA into Artesian Utility’s prior operation of eight Pennsylvania wastewater facilities. The company said it was cooperating and could not estimate the outcome or any potential loss; fines, damages or regulatory consequences could be material.
- Proposed purchases of Cecil County water and wastewater facilities remained delayed pending a Maryland Court of Appeals decision and regulatory approval. The filing also describes the Northern Sussex facility as a continuing development project following cancellation of the prior agreement with NSRWRC.
Important facts for investors to verify
- Whether and when regulators approve the Delaware and Maryland rate requests, and the final revenue and customer-bill effects.
- Progress and potential financial or regulatory consequences of the Pennsylvania grand jury investigation; the filing provides no estimable loss range.
- Credit-line renewal terms and availability before the facilities’ January 2012 expiration dates, particularly given the demand feature on the Citizens line.
- Whether wet-weather-related demand weakness reverses, and whether operating-cost increases continue to outpace revenue.
- Timing, approvals, funding needs and customer commitments for the Northern Sussex project and delayed Cecil County acquisitions.