Artesian Resources Corporation — 2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2011; the quarterly figures below are unaudited fourth-quarter results. Artesian is a regulated water and wastewater utility holding company operating on the Delmarva Peninsula, with most revenue generated by water sales. Water sales represented 88.5% of 2011 operating revenue.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Operating revenue | $65.070 million | $64.885 million | Up 0.3% |
| Operating income | $13.736 million | $14.268 million | Down 3.7% |
| Net income attributable to common stock | $6.746 million | $7.620 million | Down 11.5% |
| Diluted earnings per share | $0.83 | $1.00 | Down $0.17 |
| Cash dividends per share | $0.7626 | $0.7529 | Up |
| Net cash from operating activities | $19.222 million | $18.178 million | Up $1.044 million |
| Capital expenditures | $15.787 million | $19.703 million | Down $3.916 million |
Operating margin was approximately 21.1% in 2011 versus 22.0% in 2010; net margin was approximately 10.4% versus 11.7%. Operating cash flow less capital expenditures was approximately $3.4 million.
Fourth-quarter results
| Metric | Q4 2011 | Q4 2010 |
|---|---|---|
| Operating revenue | $16.073 million | $15.936 million |
| Operating income | $3.562 million | $3.155 million |
| Net income attributable to common stock | $1.746 million | $1.279 million |
| Basic and diluted EPS | $0.20 | $0.17 |
Balance sheet and liquidity at December 31, 2011
- Total assets were $378.737 million; utility plant, net of accumulated depreciation, was $353.397 million.
- Cash and cash equivalents were $0.311 million and current assets were $13.250 million, compared with current liabilities of $24.660 million.
- Long-term debt, including current maturities, was $108.257 million; lines of credit outstanding were $11.740 million. Debt to total capitalization, including short-term borrowings, was 49.0%.
- The company reported $28.3 million available on its $40 million Citizens Bank demand line and no borrowings on its $20 million CoBank line. Citizens could demand repayment at any time; its line expired no later than May 31, 2012.
- Stockholders’ equity was $112.997 million, up from $95.146 million, substantially reflecting 2011 equity issuance.
Material changes and notable items
- Revenue was nearly flat despite a 1.6% increase in water-sales revenue. Water pumped declined to 7.401 billion gallons from 7.517 billion, and residential water volume fell 5.1%, primarily because of unusually wet late-summer weather. Customer growth and temporary rate increases partly offset lower demand.
- Operating income and net income declined. Utility operating expenses increased, including payroll and benefits, repair and maintenance, and purchased water costs. Non-utility revenue fell by about $1.0 million as contract and consulting activity declined; protection-plan revenue partly offset the decrease.
- On December 21, Artesian Water Maryland completed a $2.2 million purchase of Cecil County water facilities serving approximately 1,500 customers. The company added water and wastewater service territory during 2011.
- The company issued approximately 888,000 Class A shares in two 2011 offerings, raising about $15.6 million net; total net proceeds from common-stock issuance, including other issuance, were $17.2 million. Proceeds were used principally to repay short-term borrowings and support capital spending.
- Capital expenditures were $15.8 million, down from $19.7 million. Net utility plant increased by approximately $8.0 million year over year.
- Termination of Cecil County wastewater acquisition agreements resulted in a $354,000 reclassification of deferred acquisition costs to miscellaneous expense. Termination and franchise cancellation remained subject to Maryland regulatory approval.
Outlook, risks, and contingencies
- Management estimated 2012 investment in utility plant and systems at approximately $24.6 million and expected 2012 principal, interest, lease, and water-purchase obligations of approximately $12.7 million. It expected to rely on operating cash flow, cash balances, credit facilities, and financing as needed.
- A Delaware rate-case settlement was approved on January 31, 2012, after year-end. It authorized a permanent annualized revenue increase of approximately $6.25 million, or 11.13%, effective January 1, 2012, with a 10% authorized return on equity. The increase did not exceed temporary rates already collected, so no customer refunds were required.
- Management cited expansion opportunities in Delaware and Maryland, wastewater projects, contract operations, and service-line protection plans. Growth depends in part on development activity, regulatory approvals, and successful execution of capital projects.
- Key risks include weather-driven water demand, rate-case timing and adequacy, access to capital and refinancing, water allocation and environmental requirements, drought or contamination, wastewater system failures, and competition for new service territories.
- A federal grand jury investigation concerns Artesian Utility’s former operation of eight Pennsylvania wastewater facilities. The company said it was cooperating and could not estimate the outcome or any potential loss. Artesian Water also has ongoing litigation with Chester Water Authority, which has asserted a counterclaim seeking damages; approximately $1.1 million of disputed charges was accrued and withheld at year-end.
- The $40 million Citizens credit line was a demand facility due to expire by May 31, 2012, creating a near-term renewal or refinancing consideration. Management reported covenant compliance at year-end and expected adequate funding, but acknowledged that capital availability and refinancing are not assured.
Most important facts for investors to verify
- Whether the approved Delaware rate increase translates into expected revenue and margins, and whether further rate actions are needed.
- Renewal or replacement of the Citizens Bank demand line and the company’s funding plan for the projected 2012 capital program.
- Developments, potential financial exposure, and timing in the federal investigation and Chester Water Authority litigation.
- Maryland Public Service Commission approval of the wastewater agreement termination and the operational and financial effects of the Cecil County water acquisition.
- Whether water demand, weather, customer growth, and non-regulated contract activity recover sufficiently to support earnings after the 2011 decline.