Artesian Resources Corp. Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010. Artesian Resources Corporation operates regulated water and wastewater utilities in Delaware, Maryland, and Pennsylvania, alongside non-regulated contract operations, engineering, and development services. The company serves approximately 77,200 metered water customers in Delaware, with consistent customer counts in Maryland and Pennsylvania.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Operating Revenues | $14,983 | $13,876 |
| Net Income | $1,646 | $1,607 |
| Operating Income | $2,787 | $2,828 |
| Cash Flow from Operations | $5,556 | $3,168 |
| Capital Expenditures | $(2,568) | $(3,461) |
| Long-Term Debt (net of current) | $105,741 | $106,025 |
| Lines of Credit Outstanding | $23,708 | $25,123 |
| Cash and Equivalents | $722 | $841 |
| Diluted EPS | $0.22 | $0.22 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 8.0% ($1.1 million) year-over-year. This was driven primarily by a 61.9% increase in non-utility revenue ($562,000) due to increased contract services, and a 3.2% increase in water sales revenue due to higher consumption and an addition of approximately 1,300 customers.
- Expense Increases: Operating expenses (excluding depreciation and taxes) rose 11.7%. Key drivers included a 30.4% increase in purchased water costs (due to rate hikes by Chester Water Authority and timing of purchases) and a 51.9% increase in non-utility operating expenses linked to project activity.
- Profitability: Net income increased 2.4% ($39,000). While operating income slightly declined, net income was bolstered by a $143,000 increase in miscellaneous income (CoBank patronage distribution), partially offset by a decrease in Allowance for Funds Used During Construction (AFUDC) due to a housing market slowdown.
- Liquidity: Cash flow from operating activities improved significantly to $5.6 million from $3.2 million. Capital expenditures decreased to $2.6 million from $3.5 million.
Outlook, Risks, and Contingencies
- Regulatory Proceedings: A 15% temporary rate increase for Artesian Water in Delaware was made permanent in September 2009; the company is barred from filing new rate increases for 18 months. A Distribution System Improvement Charge (DSIC) of 0.34% became effective January 1, 2010.
- Pending Acquisitions:
- Cecil County, MD: Agreements to purchase water and wastewater facilities (approx. $2.2M and $11.6M combined) are delayed pending a judicial determination regarding a petition by the Appleton Alliance. Closing is extended to December 31, 2010.
- Port Deposit, MD: Agreement to purchase water system assets ($250,000 cash + $800,000 note) is expected to close mid-year 2010, subject to regulatory approval.
- Construction Projects: The Northern Sussex Regional Water Recycling Complex (NSRWRC) is under construction. Artesian Resources guarantees a $10 million construction loan; $7.6 million has been drawn as of March 31, 2010.
- Risks: Revenue is sensitive to weather conditions (rainfall/temperature). Growth in contract operations is subject to the general economic downturn and housing market conditions. Interest rate risk exists on variable-rate debt (LIBOR-based).
Investor Verification Checklist
- Verify the status of the Appleton Alliance litigation and its impact on the closing of the Cecil County, MD acquisitions.
- Monitor the timing of the Port Deposit, MD acquisition closing and associated financing terms.
- Assess the impact of the 18-month moratorium on Delaware rate increases on future margin recovery.
- Review the drawdown status and repayment schedule of the NSRWRC construction loan guarantee.
- Confirm the sustainability of non-utility revenue growth given the current economic climate.