Business Context and Reporting Period
Company: Artesian Resources Corporation (Parent holding company of Artesian Water Company, Inc.)
Reporting Period: Fiscal year ended December 31, 1999
Business Overview: Artesian Resources operates as the parent of Artesian Water, the oldest and largest public water utility in Delaware. The company serves approximately 62,600 metered customers and a population of 200,000 (27% of Delaware's total population). Revenue is derived primarily from water sales to residential (61.4%), commercial/industrial/governmental (29.0%), and fire protection (9.6%) customers. The company holds exclusive franchises (CPCNs) for approximately 142 square miles of service territory.
Key Financial Metrics (Year Ended Dec 31, 1999)
| Metric | 1999 Value | 1998 Value |
|---|---|---|
| Total Operating Revenues | $26,777,000 | $25,466,000 |
| Water Sales Revenue | $26,310,000 | $25,096,000 |
| Operating Income | $6,090,000 | $5,667,000 |
| Net Income | $2,980,000 | $2,720,000 |
| Net Income Applicable to Common Stock | $2,909,000 | $2,638,000 |
| Diluted EPS | $1.46 | $1.45 |
| Cash Flow from Operating Activities | $7,450,000 | $7,406,000 |
| Capital Expenditures | $15,349,000 | $14,333,000 |
| Total Assets | $132,482,000 | $119,376,000 |
| Total Debt (Long-term + Current) | $43,282,000 | $39,842,000 |
| Stockholders' Equity | $32,356,000 | $27,933,000 |
| Working Capital | ($10,511,000) Deficit | ($8,492,000) Deficit |
Note: Working capital deficit is primarily due to borrowings on lines of credit ($7.6M), current portion of long-term debt, and deferred revenue held in reserve pending rate case completion.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 5.2% ($1.3M) driven by a temporary rate increase effective July 1, 1999, and a 3.2% increase in customer count.
- Profitability: Net income applicable to common stock rose 10.3% ($271,000). Operating income increased 7.5%.
- Expense Management: Operating expenses increased 4.5% ($417,000). However, the operating expense ratio improved to 54.9% from 56.0% in 1998. Notable savings included a $176,000 decrease in purchased water expenses (due to drought restrictions) and a $263,000 decrease in tank painting expenses.
- Capital Structure: The company issued 325,000 shares of Class A Non-Voting Common Stock in April 1999, raising approximately $7.5 million in net proceeds to reduce debt. Additionally, the company repurchased shares from former shareholders (Ellis and Helena Taylor) in exchange for a $4.45 million promissory note.
- Debt Levels: Interest charges increased 4.3% ($136,000), largely due to interest on the new promissory note related to the stock repurchase.
Guidance, Outlook, and Risks
- Rate Case Status: A petition for a permanent rate increase was filed in April 1999. A temporary increase of approximately 9.7% was effective July 1, 1999. The company has deferred approximately $720,000 of this temporary increase pending final approval by the Delaware Public Service Commission (PSC), expected in the first half of 2000.
- Capital Investment Outlook: Management estimates aggregate investments in utility plant for 2000 will be approximately $15.6 million. Major projects include the expansion of the system in Sussex County ($4.6 million total cost) and continued development of groundwater sources.
- Liquidity: The company maintains $35.0 million in unsecured lines of credit, with $27.4 million available as of year-end. Primary liquidity sources for 2000 are expected to be cash flow from operations and external financing.
- Risks and Contingencies:
- Regulatory Risk: Future revenue is dependent on PSC approval of rate increases. If the temporary rates are found excessive, refunds with interest may be required.
- Water Supply: While groundwater supply is sufficient for the foreseeable future, the company relies on interconnections with other utilities that include "take or pay" clauses (minimum draws of 1.3 billion gallons annually).
- Related Party Transactions: The company leases its headquarters from White Clay Realty (partners include directors/officers) and land for wells from Glendale Enterprises (owned by a former shareholder's father).
Key Facts for Investor Verification
- Rate Case Resolution: Verify the final outcome of the PSC rate proceeding expected in early 2000 to confirm the recovery of the $720,000 deferred revenue and the establishment of permanent rates.
- Debt Covenants: Review the trust indentures for First Mortgage Bonds, which limit long-term debt to 66 2/3% of total capitalization and could restrict dividend payments under certain circumstances.
- Capital Expenditure Funding: Confirm the ability to fund the projected $15.6 million in 2000 capital expenditures given the current working capital deficit and reliance on lines of credit.
- Stock Repurchase Note: Monitor the repayment schedule of the $4.45 million promissory note issued to Ellis and Helena Taylor, which bears interest based on dividends and adjusts for book value changes.
- Related Party Lease Renewals: Assess the terms and renewal status of the office lease with White Clay Realty (expires 2002) and the well site lease with Glendale Enterprises (notice of discontinuation received).