Artesian Resources Corporation — Q2 2011 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2011. Artesian is a regulated water and wastewater utility operating mainly in Delaware, with operations in Maryland and Pennsylvania and non-regulated contract, engineering, and service-line protection businesses. Water sales are its primary revenue source; results are seasonally affected by weather. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Operating revenue | $16.510 million; up 3.2% year over year | $31.267 million; up 0.9% |
| Operating income | $3.588 million, versus $3.620 million | $5.807 million, versus $6.407 million |
| Net income | $1.753 million, down 2.5% | $2.762 million, down 19.8% |
| Basic / diluted EPS | $0.23 / $0.23 | $0.36 / $0.36 |
| Operating cash flow | $10.412 million for the six months, versus $10.011 million | |
| Capital expenditures | $6.560 million for the six months, versus $6.266 million |
Operating expenses excluding depreciation and income taxes were 59.6% of revenue in Q2, versus 59.1%; for the first six months, the ratio was 63.6%, versus 60.7%. Utility plant, net, was $348.251 million at June 30, up from $345.383 million at year-end.
At June 30, cash was $0.188 million and current assets were $11.339 million, compared with current liabilities of $38.253 million. Long-term debt was $106.729 million, with $1.653 million current; lines of credit were $25.632 million. Debt to total capitalization, including short-term debt, was 53.1%. The company reported $17.4 million available on its $40 million Citizens line and $17.0 million available on its $20 million CoBank line. It was in compliance with CoBank covenants.
Material changes versus prior periods
- Q2 water sales increased 5.6%, largely due to service-territory additions, interconnections, a temporary Delaware rate increase, and higher DSIC revenue. H1 water sales rose 3.0%; other utility revenue also increased, including wastewater customer revenue.
- Non-utility revenue fell 19.1% in Q2 and 22.4% for H1, reflecting reduced project, municipal contract, and consulting activity. The company reorganized Artesian Consulting Engineers in April and ended its outside development and architectural services.
- Utility operating expenses increased 9.0% in Q2 and 9.3% for H1, driven by payroll and benefits, administration, and maintenance costs. Higher interest charges reflected increased short-term borrowing and interest no longer capitalized after the NSRWRC termination.
- H1 net income declined by $0.682 million, principally from lower operating margins. The company paid $2.903 million in dividends during H1; cash dividends per share were $0.3794.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance is provided. Management expects to fund the next 12 months with cash, available credit lines, and operating cash flow, and describes growth opportunities in water, wastewater, and protection plans. It notes growth and project prospects depend partly on construction and economic conditions.
- Artesian Water requested a 19.45% annualized revenue increase, approximately $10.9 million, in Delaware. Temporary rates effective June 10 were designed to provide a 4.45% annualized increase, approximately $2.5 million, pending a final decision. A Maryland application seeks approximately $65,000 of annualized revenue; if approved, the proposed changes would increase the average residential customer’s bill by 34%.
- Maryland water and wastewater asset acquisitions from Cecil County were cleared by the state Court of Appeals, but remain subject to MDPSC approval; closing was expected by December 31, 2011. Cecil County also gave notice that its operating contract for certain facilities ends October 31, 2011.
- A federal grand jury investigation involving Artesian Utility’s prior operation of eight Pennsylvania wastewater facilities is ongoing. Artesian Water received a subpoena and the company is cooperating; the outcome and any potential loss cannot be predicted. The filing warns that fines, damages, or regulatory consequences could materially affect results.
- Legal expenses increased, including costs associated with litigation against Chester Water Authority and approximately $240,000 of costs related to the federal investigation. Weather, rate-case outcomes, operating-cost inflation, interest rates, and regulatory approvals are other risks.
- After quarter-end, the company sold 804,290 Class A shares on July 20, 2011, receiving net proceeds of approximately $14.1 million, intended primarily to reduce short-term borrowings and support capital spending. On July 15, Artesian Water entered a revolving state loan agreement for up to approximately $3.6 million at 1.7% interest plus a 1.7% administrative fee; no funds had been drawn as of August 5.
- Following the 2010 termination of the NSRWRC agreements, Artesian purchased the project land and engineering work by repaying a $7.9 million loan. The company now intends to manage construction and operation of the proposed Northern Sussex wastewater facility itself.
Important facts for investors to verify
- Progress, timing, and final authorized revenue from the Delaware rate case, and the outcome of the Maryland rate application.
- MDPSC approvals and completion of the Cecil County facility acquisitions, including the effect of the October 2011 operating-contract termination.
- Developments in the federal grand jury investigation, any resulting claims or penalties, and Chester Water Authority litigation.
- Use of the equity-offering proceeds, subsequent borrowing levels, credit-line renewals, and funding needs for the capital program.
- Whether water-demand, customer-growth, and wastewater-project expectations materialize; management notes weather and economic conditions can affect results.