Add
ARTNA to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| ARTNA > SEC Filings for ARTNA > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2009
OVERVIEW
Our profitability is primarily attributable to the sale of water by our largest operating subsidiary, Artesian Water, the amount of which is dependent on seasonal fluctuations in weather, particularly during the summer months when water demand may vary with rainfall and temperature. Artesian Water accounted for approximately 92% of our total operating revenues for the three months ended March 31, 2009. In the event that temperatures during the typically warmer months are cooler than expected, or rainfall is greater than expected, the demand for water may decrease and our revenues may be adversely affected. We believe the effects of weather are short term and do not materially affect the execution of our strategic initiatives.
While water sales revenues are our primary source of revenues, we continue to explore and develop relationships with developers and municipalities in order to increase revenues from contract water operations and wastewater management services. Our contract operations and wastewater management services provide a revenue stream that is not affected by changes in weather patterns. We plan to continue developing and expanding our contract operations and wastewater services in a manner that complements our growth in water service to new customers. Our anticipated growth in these areas is subject to changes in residential and commercial construction, which may be affected by interest rates, inflation and general housing and economic market conditions. As a result of the general economic downturn, we may not be able to increase our contract operations and wastewater services at the rate we had previously expected. We will continue to focus attention on expanding our contract operations opportunities with municipalities and private water providers in Delaware and surrounding areas.
As of March 31, 2009, we had approximately 75,900 metered water customers and approximately 640 wastewater customers in Delaware. Increases in the number of customers served by Artesian Water and Artesian Wastewater contributed to increases in our operating revenues. Water customers increased by approximately 500, while wastewater customers increased by approximately 100 compared to the same time period a year ago.
Water Division
Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water service to residential, commercial, industrial, governmental, municipal and utility customers. In October 2008, Artesian Water Maryland signed an agreement with Cecil County to purchase four water facilities, with closing expected to occur by June 30, 2009, subject to the satisfaction of customary closing conditions, including, among other matters, the completion of Artesian Resources' due diligence and the approval of the MDPSC. The Appleton Regional Community Alliance, or Appleton Alliance, filed a petition with The Circuit Court of Cecil County, Maryland for judicial review of the proposed transfer of certain Cecil County property and assets to Artesian. Should the Appleton Alliance proceed with their action, closing on the transaction may be delayed. In December 2008, the MDPSC approved an application for Artesian Water Maryland to construct a water system from the Delaware state line, interconnecting with the Artesian Water system, to the Town of Elkton. The Town of Elkton desired an additional source of water supply.
Wastewater Division
Artesian Wastewater, owns wastewater infrastructure and began providing wastewater services in Delaware in July 2005. Artesian Wastewater Maryland was incorporated on June 3, 2008 to provide regulated wastewater services in the state of Maryland. In October 2008, Artesian Wastewater Maryland signed two asset purchase agreements with Cecil County to purchase four wastewater facilities in Maryland. Closings on these transactions are expected to occur on or before June 30, 2009, subject to the satisfaction of customary closing conditions, including, among other matters, the completion of Artesian Resources' due diligence and the approval of the MDPSC. The Appleton Regional Community Alliance, or Appleton Alliance, filed a petition with The Circuit Court of Cecil County, Maryland for judicial review of the proposed transfer of certain Cecil County property and assets to Artesian. Should the Appleton Alliance proceed with their action, closing on the transaction may be delayed. Our wastewater customers are billed a flat monthly fee, which contributes to providing a revenue stream unaffected by weather.
Non-Regulated Division
Artesian Utility provides contract water and wastewater operation services to 31 private, municipal and governmental institutions in Pennsylvania, Delaware and Maryland. Artesian Utility currently operates a 2.5 mgd wastewater facility for Middletown under a 20-year contract that expires on February 1, 2021. Artesian Utility also operates an approximately 250,000 gallon per day wastewater facility in Middletown. In addition, we operate an additional wastewater facility in Middletown in order to support the 2.5 mgd wastewater facility described above.
On June 30, 2008, Artesian Utility signed an agreement with Northern Sussex Regional Water Recycling Complex, LLC, or NSRWRC, for the design, construction and operation of the Northern Sussex Regional Water Recycling Complex, a wastewater treatment facility to be located in Sussex County, Delaware. NSRWRC was created for the purpose of developing the treatment facility site, which once constructed, will be operated by Artesian Wastewater.
On March 17, 2009, Artesian Utility signed an agreement with the Cecil County Public Works in Cecil County, Maryland to operate the Meadowview Wastewater and Highlands Wastewater treatment and disposal facilities until Artesian Wastewater Maryland's purchase of the facilities is closed. This agreement also employs Artesian Utility to operate two water supply and treatment stations and two booster stations in Cecil County. In addition, on March 31, 2009 Artesian Utility signed an agreement with the Town of Port Deposit in Cecil County, Maryland to operate and maintain a water system from April 1, 2009 through August 30, 2009, with three additional one-year renewal options.
Artesian Development owns an approximately six-acre parcel of land zoned for office buildings located immediately adjacent to our corporate headquarters. In 2007, Artesian Development purchased approximately eighteen acres of land, in Sussex County, to construct an office facility, a water treatment plant and a wastewater facility.
Artesian Consulting provides engineering services to developers for residential and commercial development. The acquisition of Meridian in June 2008 included the assignment of certain current contract agreements to provide engineering services to developers and includes services to be provided to Artesian Water.
In addition to services discussed above, Artesian Resources initiated a Water Service Line Protection Plan, or WSLP Plan, in March 2005. The WSLP Plan covers all parts, material and labor required to repair or replace participants' leaking water service lines up to an annual limit. As of March 31, 2009, approximately 13,300, or 20.8%, of our 64,000 eligible water customers had signed up for the WSLP Plan. The WSLP Plan was expanded in the second quarter of 2008 to include maintenance or repair to customers' sewer lines. This plan, Sewer Service Line Protection Plan, or SSLP Plan, covers all parts, material and labor required to repair or replace participants' leaking or clogged sewer lines up to an annual limit. As of March 31, 2009, approximately 5,000, or 10.9%, of our 46,000 eligible customers had signed up for the SSLP Plan.
Strategic Direction
Our strategy is to significantly increase customer growth, revenues, earnings and dividends by expanding our water and wastewater services across the Delmarva Peninsula. We remain focused on providing superior service to our customers and continuously seeking ways to improve our efficiency and performance. By providing both water and wastewater services, we are positioned as the primary resource for developers and communities throughout the Delmarva Peninsula seeking to fill both needs simultaneously. We have a proven ability to acquire and integrate high growth, established entities, through which we have captured additional service territories that will serve as a base for future revenue. We have completed four acquisitions during the past two years, and have successfully integrated their operations, infrastructure, technology and employees. We believe this experience presents a strong platform for further expansion and that our success to date also produces positive relationships and credibility with regulators, municipalities, developers and customers in both existing and prospective service areas.
In our regulated water division, our strategy is to focus on a wide spectrum of activities, which include identifying new and dependable sources of supply, developing the wells, treatment plants and delivery systems to get water to customers and educating customers on the wise use of water. Our strategy includes focusing our efforts to expand in new regions added to our Delaware service territory over the last 10 years, where growth is strong and demand is increasing. In addition, we believe growth will be developed in the Maryland counties on the Delmarva Peninsula. We plan to expand our regulated water service area in the Cecil County designated growth corridor and to expand our business through the design, construction, operation and management, as well as acquisition, of additional water systems. The expansion of our exclusive franchise areas elsewhere in Maryland and the award of additional contracts will similarly enhance our operations within the state.
We have also expanded the provision of our services into Maryland. Cecil County has designated the Interstate 95 corridor as a preferred growth area for business and residential expansion. Recently, the federal Base Re-Alignment and Closure Commission announced the relocation of approximately 14,000 jobs to nearby Aberdeen, Maryland by 2011. The Wilmington Metropolitan Area Planning Commission projects Cecil County will grow 86% between 2000 and 2030 and the Maryland Department of Planning projects that Cecil County will experience the highest rate of household growth through 2025 of any jurisdiction in the state. Artesian Water Maryland signed an agreement in October 2008 with Cecil County for the purchase of specific water facilities, which is expected to close by June 30, 2009, subject to the satisfaction of customary closing conditions, including, among other matters, the completion of Artesian Resources' due diligence and the approval of the MDPSC. The Appleton Regional Community Alliance, or Appleton Alliance, filed a petition with The Circuit Court of Cecil County, Maryland for judicial review of the proposed transfer of certain Cecil County property and assets to Artesian. Should the Appleton Alliance proceed with their action, closing on the transaction may be delayed. Once completed, this will add four water facilities to our service area. We continue to increase our sources of supply to assure we have adequate high quality water supply to meet our customer growth expectations in all of the states in which we provide water.
In our regulated wastewater division, we foresee significant growth opportunities and will continue to seek strategic partnerships and relationships with developers and municipalities to complement existing agreements for the provision of wastewater service in Delaware, Maryland, and the surrounding areas. Artesian Wastewater completed an agreement with Georgetown, Delaware in July 2008 to provide wastewater treatment and disposal services for Georgetown's growth and annexation areas. Artesian Wastewater will provide up to 1 mgd of wastewater capacity for the town within the next 10 years. Artesian Wastewater Maryland signed two agreements in October 2008 with Cecil County for the purchase of specific wastewater facilities, which are expected to close by June 30, 2009, subject to the satisfaction of customary closing conditions, including, among other matters, the completion of Artesian Resources' due diligence and the approval of the MDPSC. The Appleton Regional Community Alliance, or Appleton Alliance, filed a petition with The Circuit Court of Cecil County, Maryland for judicial review of the proposed transfer of certain Cecil County property and assets to Artesian. Should the Appleton Alliance proceed with their action, closing on the transaction may be delayed. Once completed, these acquisitions will add four wastewater facilities to our service area.
We will continue to seek acquisitions of water and wastewater contract operations on the Delmarva Peninsula. The purchase of water and wastewater operations agreements assists in our expansion efforts in water and wastewater activity.
In our non-regulated division, we are actively pursuing opportunities to expand our contract operations in southern Delaware. In Artesian Utility, we will continue to expand our contract design and construction services of water and wastewater facilities for developers, municipalities and other utilities and will continue to actively pursue water and wastewater operation contracts with municipalities across the Delmarva Peninsula. Artesian Development purchased eighteen acres of land, also located in Sussex County, Delaware, which will allow for construction of an office facility, water treatment facility and wastewater treatment facility. Artesian Consulting continues to provide engineering services to design on-site and off-site water and wastewater systems for developers as demand increases. Also, with the expansion efforts in our water and wastewater divisions, Artesian Consulting will provide increased design and engineering services.
Regulatory Matters and Inflation
Our water and wastewater utility operations are subject to regulation by their respective state regulatory commissions, which have broad administrative power and authority to regulate rates charged for service, determine franchise areas and conditions of service, approve acquisitions, authorize the issuance of securities and other matters. The profitability of our utility operations is influenced, to a great extent, by the timeliness and adequacy of rate allowances we are granted by the respective regulatory commissions or authorities in the states in which we operate.
We are subject to regulation by the following state regulatory commissions: The DEPSC regulates both Artesian Water and Artesian Wastewater. Artesian Water Maryland and Artesian Wastewater Maryland are subject to the regulatory jurisdiction of the MDPSC, and Artesian Water Pennsylvania is subject to the regulatory jurisdiction of the PAPUC.
Our regulated utilities periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business. In Delaware, utilities are permitted by law to place rates into effect, under bond, on a temporary basis pending completion of a rate increase proceeding. The first temporary increase may be up to the lesser of $2.5 million on an annual basis or 15% of gross water sales. Should the rate case not be completed within seven months, by law, the utility may put the entire requested rate relief, up to 15% of gross water sales, in effect under bond until a final resolution is ordered and placed into effect. If any such rates are found to be in excess of rates the DEPSC finds to be appropriate, the utility must refund the portion found to be in excess to customers with interest. The timing of our rate increase requests are therefore dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we hope to recover through the rate increase. We can provide no assurances that rate increase requests will be approved by applicable regulatory agencies; and, if approved, we cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase.
On January 25, 2008, Artesian Water submitted a notice to the DEPSC of our intent to file an application for a rate increase. On April 22, 2008, Artesian Water filed a petition with the DEPSC to implement new rates to meet a requested increase in revenue of 28.8%, or approximately $14.2 million, on an annualized basis. On July, 11, 2008, pursuant to the DEPSC's minimum filing requirements, Artesian filed a supplemental filing with the DEPSC to update financial schedules for actual experience through March 31, 2008 and to reflect additional changes affecting the requested increase. The overall result was a reduction to the requested increase in revenue of 1.5%, to 27.3% or approximately $13.5 million, on an annualized basis.
As permitted by law, on June 21, 2008, we placed temporary rates into effect, designed to generate an increase in annual operating revenue of approximately 5.0%, or $2.5 million on an annualized basis, until new rates are approved by the DEPSC. Also pursuant to law, on December 17, 2008, we placed temporary rates into effect, designed to generate an additional increase in annual operating revenue of approximately 10% or $5.0 million on an annualized basis, given that the rate case had not been concluded in a seven month period. Evidentiary hearings were held on December 8-9, 2008 and a final Commission decision is anticipated in the third quarter of 2009 in reference to the implementation of our requested rate increase.
Delaware statute permits water utilities to put into effect, on a semi-annual basis, increases related to specific types of distribution system improvements through a Distribution System Improvement Charge or DSIC. This charge is available to water utilities to be implemented between general rate increase applications that normally recognize changes in a water utility's overall financial position. The DSIC approval process is less costly when compared to the approval process for general rate increase requests. The DSIC rate applied between base rate filings is capped at 7.5% of the amount billed to customers under otherwise applicable rates and charges, and the DSIC rate increase applied can not exceed 5% within any 12-month period. In December 2007, Artesian Water filed an application with the DEPSC for approval to collect a 0.46% increase, effective January 1, 2008, to recover the costs of eligible non-revenue producing improvements made since the last rate increase in 2006. The DEPSC approved the DSIC effective January 1, 2008 subject to audit at a later date. During the first three months of 2008, we earned approximately $65,000 in DSIC revenue. On June 21, 2008, the Company discontinued the collection of DSIC pursuant to Delaware law which requires the Company to discontinue a DSIC when new base rates are put into effect. We did not have DSIC in effect during 2009.
In 2003, legislation was enacted in Delaware requiring all water utilities serving within northern New Castle County, Delaware to certify by July 2006, and each three years thereafter, that they have sufficient sources of self-supply to serve their respective systems. On June 30, 2006, Artesian Water filed our certification related to the adequacy of our water supply through 2009. After completion of their review, on July 24, 2007, the DEPSC accepted our certification of sufficient water supply. As required, we will file a new certification of self-sufficiency with the DEPSC by June 30, 2009, for the period through 2012.
On April 10, 2006, the DEPSC made effective new rules under Regulation Docket 15 that govern the terms and conditions under which water utilities require advances or contributions from customers or developers. These regulations require that developers pay for all water facilities within a new development, with such funding recorded as contributions in aid of construction by the water utility. In addition, the utility is required to receive a contribution in aid of construction of $1,500 for each new residential connection to its system towards the cost of water supply, treatment and storage facilities. These regulations further require developers to fully pay for facilities to serve satellite systems. These required contributions are intended to place a greater burden upon new customers to pay for the cost of facilities required to serve them. On April 8, 2008, the DEPSC reopened this docket to assess the effectiveness of the 2006 rules and regulations requiring water utilities to collect contributions in aid of construction. In March 2009, the Delaware Public Advocate, or DPA, and in April 2009 the DEPSC filed their findings, which both recommend the current rules and regulations remain in effect. We anticipate a final decision in the second quarter of 2009.
On March 20, 2007, the DEPSC entered Order No. 7142 which re-opened Regulation Docket No. 51. By this Order, the DEPSC proposes to repeal rules implemented in 2001 and replace them with new "Regulations Governing Certificates of Public Convenience and Necessity." The proposed rules address the content of how notifications are sent to landowners, the definitions for the "Proposed Service Area," and the requirement of the applying utility to certify that it will actually provide water services to a new proposed service territory within three years. If water service is not provided within the three year time frame, the proposed rule provides a mechanism for the DEPSC to determine whether the utility should be able to retain the new CPCN. In the March 2009 proceedings, the DEPSC recommended that a utility provide water service to a new proposed service territory within five years. These proposed rules have not been adopted and they may not be adopted or could be modified prior to adoption. As of March 31, 2009, no final decision had been made by the DEPSC.
In March 2009, Artesian Wastewater filed an application with the DEPSC for approval of a uniform tariff applicable to all of our wastewater territories in Delaware. Currently, each time we add a new service territory, an application must be submitted to the DEPSC for rate approval. If the application is approved, Artesian Wastewater would be permitted to apply its tariffed rates to any new service territories without prior DEPSC approval.
In April 2009, Artesian Water Maryland applied for approval from the MDPSC to construct a water system to the 172 residents of the Whitaker Woods housing development located in the Mountain Hill service area. This expanded franchise area was approved by the MDPSC in the Mountain Hill acquisition and would be subject to the Mountain Hill tariff rates. Artesian Water Maryland has requested expedited approval of this application, as water supply in that area is currently very limited. A final decision is expected in May 2009.
Our water and wastewater utilities in Maryland are subject to regulation by the MDPSC. If we are seeking new franchise areas, we must first seek approval from the county government and this franchise area must be included in that county's master sewer and water plan. Final granting of these franchise areas must then be obtained by the MDPSC. In Maryland, if utilities want to construct a new plant, approvals must be obtained from the Maryland Department of the Environment, the county government and the MDPSC. Also, soil and erosion plans must be approved and easement agreements with affected parties must be obtained. The MDPSC also approves rates and charges for service, acquisitions, mergers, issuance of securities and other matters.
In December 2008, the MDPSC approved an application for Artesian Water Maryland to construct a water system from the Delaware state line, interconnecting with the Artesian Water system, to the Town of Elkton. The Town of Elkton has agreed to take a minimum of 50,000 gallons per day and a maximum of 200,000 gallons per day.
We are affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand our service capability. The cumulative effect of inflation results in significantly higher facility costs compared to investments made 20 to 40 years ago, which must be recovered from future cash flows.
Results of Operations - Analysis of the Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008
Operating Revenues
Revenues totaled $13.9 million for the three months ended March 31, 2009, $1.6 million, or 13.1% above revenues for the three months ended March 31, 2008 of $12.3 million. Water sales revenues increased 12.7% for the three months ended March 31, 2009, over the corresponding period in 2008. Water sales revenue for the three months ended March 31, 2009 was positively impacted by the implementation a 5% temporary rate increase effective June 21, 2008 and a 10% temporary rate increase effective December 17, 2008. In addition, a portion of the increase in water sales revenue reflects an increase of 509 in the number of customers served as compared to the same period in 2008. However, per capita demand has declined for the quarter ended March 31, 2009 in comparison to the quarter ended March 31, 2008, thereby reducing the effect of the temporary rate increases. We realized 90.1% of our total operating revenue for the three months ended March 31, 2009 from the sale of water. In 2008, 90.4% of our total revenue was from water sales.
Non-utility operating revenue increased $167,000 for the three months ended March 31, 2009, or 22.5%, from $741,000 in 2008 to $908,000 for the same period in 2009. This increase in non-utility revenue is attributable to the addition of Artesian Consulting, which contributed $122,000 to the increase. The increase in non-utility revenue also reflects an increase of $27,000 and $82,000, respectively, in water and wastewater Service Line Protection Plan, or SLP Plans, revenue earned by Artesian Resources. The SLP Plans provide coverage for all material and labor required to repair or replace participants' leaking water service or clogged sewer lines up to an annual limit.
Operating Expenses
Operating expenses, excluding depreciation and income taxes, increased $38,000, or 0.5%, to $8.4 million for the three months ended March 31, 2009, compared to $8.3 million for the same period in 2008. The components of the change in operating expenses includes a decrease in utility operating expenses of $129,000, an increase in property taxes of $60,000 and an increase in non-utility operating expenses of $107,000.
The decrease in utility operating expense of $129,000 for the quarter ended March 31, 2009, or 1.9%, over the same period in 2008, is comprised of a reduction in administration expenses offset by increases in payroll and employee benefits costs and purchased water expense.
Administration expenses decreased $197,000, or 17.3%, in the first quarter of 2009 compared to 2008 as a result of decreases in employee recruitment fees, employee training expenses, postage costs, outside consulting fees and the use of temporary employment services.
Payroll and employee benefit expense increased $93,000, or 2.6%, compared to the same period in 2008, primarily due to increases in employee count, employee wages from merit increases, and increased medical insurance expense.
Purchased water expense increased $64,000, or 9.1%, compared to the same period . . .
|
|