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ARTNA > SEC Filings for ARTNA > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for ARTESIAN RESOURCES CORP


8-May-2013

Quarterly Report

Results of Operations - Analysis of the Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Operating Revenues

Revenues totaled $16.3 million for the three months ended March 31, 2013, $0.4 million, or 2.2%, below revenues for the three months ended March 31, 2012 of $16.7 million. Water sales revenues decreased $0.5 million, or 3.2%, for the three months ended March 31, 2013 from the corresponding period in 2012, primarily due to a decrease in overall water consumption. Partially offsetting the decrease in water sales revenues is an increase in the Distribution System Improvement Charge, or DSIC, revenue of approximately $0.3 million for the three months ended March 31, 2013 compared to the same period in 2012. We realized 89.2% of our total operating revenue for the three months ended March 31, 2013 from the sale of water as compared to 90.1% for the three months ended March 31, 2012.

Other utility operating revenue increased approximately $51,000, or 6.9%, for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase is primarily due to an increase in wastewater revenue.

Non-utility operating revenue increased approximately $55,000, or 6.0%, for the three months ended March 31, 2013 compared to same period in 2012. The increase is primarily due to an approximately $76,000 increase in water and wastewater Service Line Protection Plan, or SLP Plans, revenue. 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. The increase in non-utility operating revenue is partially offset by an approximately $32,000 decrease in Artesian Utility revenue, related to a decrease in contract services performed for municipalities in Maryland.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $1.0 million, or 10.3%, for the three months ended March 31, 2013, compared to the same period in 2012. The components of the change in operating expenses include an increase in utility operating expenses of $0.9 million and an increase in non-utility operating expenses of $41,000.

The increase in utility operating expenses of $0.9 million, or 11.4%, for the three months ended March 31, 2013 over the same period in 2012, was primarily due to increased legal costs associated with the litigation against Chester Water Authority in regard to the proper determination of the rate charged for water purchased under contract from the Chester Water Authority and increased wages and medical benefit premiums.

Non-utility expenses increased $41,000, or 8.2%, primarily the result of increased project activity in Artesian Utility as compared to the same period in 2012.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 63.9% for the three months ended March 31, 2013, compared to 56.7% for the three months ended March 31, 2012.

Depreciation and amortization expense increased $81,000, or 4.1%, primarily due to continued investment in utility plant in service providing supply, treatment, storage and distribution of water.

Federal and state income tax expense decreased $0.6 million, primarily due to lower pre-tax income for the three months ended March 31, 2013, compared to the three months ended March 31, 2012.

Net Income

Our net income applicable to common stock decreased $0.9 million for the three months ended March 31, 2013, compared to the same period a year ago. This decrease in net income was due to lower operating income margins in our water utility business, primarily the result of increased legal costs and decreased water sales revenue.


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LIQUIDITY AND CAPITAL RESOURCES

Overview

Our primary sources of liquidity for the three months ended March 31, 2013 were $4.8 million provided by cash flow from operating activities, $1.3 million in net contributions and advances from developers and $0.6 million in net proceeds from the issuance of common stock. Cash flow from operating activities is primarily provided by our utility operations, and is impacted by the timeliness and adequacy of rate increases and changes in water consumption as a result of year-to-year variations in weather conditions, particularly during the summer.
A significant part of our ability to maintain and meet our financial objectives is to ensure that our investments in utility plant and equipment are recovered in the rates charged to customers. As such, from time to time, we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment.

Investment in Plant and Systems

The primary focus of Artesian Water's investment was to continue to provide high quality reliable service to our growing service territory. We invested $4.1 million in capital expenditures during the first three months of 2013 compared to $3.6 million invested during the same period in 2012. During the first three months of 2013, we invested $0.3 million to enhance or improve existing treatment facilities and for the rehabilitation of pumping equipment to better serve our customers. We invested $0.2 million to upgrade and automate our meter reading equipment. We invested approximately $0.5 million for our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains and for new transmission and distribution facilities. We invested approximately $1.0 million in mandatory utility plant expenditures due to governmental highway projects which require the relocation of water service mains in addition to facility improvements and upgrades.
Developers financed $0.6 million for the installation of water mains and hydrants for the first three months of 2013 compared to $0.4 million for the first three months of 2012. We invested $0.2 million for equipment purchases, computer hardware and software upgrades and furniture and equipment related to renovations made to our main office building located in New Castle County. We also invested $0.9 million to upgrade our customer service software. An additional $0.4 million was invested in wastewater projects in Delaware.

Lines of Credit

At March 31, 2013, Artesian Resources had a $40 million line of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources. As of March 31, 2013, there was $33.9 million of available funds under this line of credit. The interest rate for borrowings under this line is the London Interbank Offered Rate, or LIBOR, plus 1.00%. This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time. The term of this line of credit expires on the earlier of May 30, 2013 or any date on which Citizens demands payment.

At March 31, 2013, Artesian Water had a $20 million line of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 million of this line available for the operations of Artesian Water Maryland. As of March 31, 2013, there was $16.0 million of available funds under this line of credit. The interest rate for borrowings under this line is LIBOR plus 1.50%. The term of this line of credit expires on January 14, 2014.

Line of Credit Commitments                     Commitment Due by Period
In thousands                  Less than       1-3 Years       4-5 Years      Over 5 Years
                               1 Year
Lines of Credit              $    10,087     $     -----     $     -----     $       -----


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Long-Term Debt

Artesian Water's trust indentures, which set certain criteria for the issuance of new long-term debt, limit long-term debt, including the short-term portion thereof, to 66?% of total capitalization. Our debt to total capitalization, including the short-term portion thereof, was 47.5% at March 31, 2013. In addition, our revolving line of credit with CoBank contains customary affirmative and negative covenants that are binding on us (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on our ability to make certain loans and investments, guaranty certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions, transfer certain assets, change our business or incur additional indebtedness. In addition, this line of credit requires us to abide by certain financial covenants and ratios. As of March 31, 2013, we were in compliance with these covenants.

We expect to fund our activities for the next 12 months using our available cash balances and bank credit lines, plus projected cash generated from operations.

Contractual Obligations                                 Payments Due by Period
                                    Less than           1-3           4-5       After 5
In thousands                           1 Year         Years         Years         Years         Total
First Mortgage Bonds (Principal
and Interest)                     $     6,985     $  13,847     $  13,694     $ 140,900     $ 175,426
State revolving fund loans
(Principal and Interest)                  867         1,838         1,838         7,458        12,001
Operating leases                           46           102           107         1,645         1,900
Unconditional purchase
obligations                             3,780         7,571         7,561        14,200        33,112
Tank painting contractual
obligation                                234           ---           ---           ---           234
Total contractual cash
obligations                       $    11,912     $  23,358     $  23,200     $ 164,203     $ 222,673

Long-term debt obligations reflect the maturities of certain series of our first mortgage bonds, which we intend to refinance when due. The state revolving fund loan obligation has an amortizing mortgage payment payable over a 20-year period, and will be refinanced as future securities are issued. Both the long-term debt and the state revolving fund loan have certain financial covenant provisions, the violation of which could result in default and require the obligation to be immediately repaid, including all interest. We have not experienced conditions that would result in our default under these agreements, and we do not anticipate any such occurrence. Payments for unconditional purchase obligations reflect minimum water purchase obligations based on rates that are subject to change under our interconnection agreement with the Chester Water Authority.

On July 15, 2011, Artesian Water entered into a Financing Agreement, or Financing Agreement, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of Delaware, or the Department. The Company has been given a loan of approximately $3.6 million, or the Loan, from the Delaware Safe Drinking Water Revolving Fund to finance all or a portion of the cost to replace specific water transmission mains in service areas located in New Castle County, Delaware (collectively, the "Project"). In accordance with the Financing Agreement, the Company will from time to time request funds under the Loan as it incurs costs in connection with the Project. The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 1.7% per annum and an administrative fee at the rate of 1.7% per annum. As of March 31, 2013, approximately $1.6 million was borrowed under this Loan.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, including any arrangements with any structured finance, special purpose or variable interest entities.


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Critical Accounting Assumptions, Estimates and Policies; Recent Accounting Standards

This discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2012 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2012. The preparation of those financial statements required management to make assumptions and estimates that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Actual amounts or results could differ from those based on such assumptions and estimates.

Our critical accounting policies are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2012. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2012 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2012.

Information concerning our implementation and the impact of recent accounting standards issued by the Financial Accounting Standards Board is included in the notes to our 2012 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2012 and also in the notes to our unaudited condensed consolidated financial statements contained in this quarterly report on Form 10-Q. We did not adopt any accounting policy in the first three months of 2013 that had a material impact on our financial condition, liquidity or results of operations.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q which express our "belief," "anticipation" or "expectation," as well as other statements which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and the Private Securities Litigation Reform Act of 1995. Statements regarding our goals, priorities, growth and expansion plans and expectation for our water and wastewater subsidiaries and non-regulated subsidiaries, customer base growth opportunities in Delaware and Cecil County, Maryland, our belief regarding our capacity to provide water services for the foreseeable future to our customers, our belief relating to our compliance and the cost to achieve compliance with relevant governmental regulations, our expectation of the timing of decisions by regulatory authorities, the impact of weather on our operations and the execution of our strategic initiatives, our expectation of the timing for construction on new projects, our belief regarding our reliance on outside engineering firms, our expectation relating to the adoption of recent accounting pronouncements, contract operations opportunities, legal proceedings, our properties, deferred tax assets, adequacy of our available sources of financing, the expected recovery of expenses related to our long-term debt, our expectation to be in compliance with financial covenants in our debt instruments, our ability to refinance our debt as it comes due, the timing and terms of renewals of our lines of credit, plans to increase our wastewater treatment operations, engineering services and other revenue streams less affected by weather, expected future contributions to our postretirement benefit plan, the reclassification on our balance sheet regarding our utility plant, anticipated growth in our non-regulated division, the impact of recent acquisitions on our ability to expand and foster relationships, anticipated investments in certain of our facilities and systems, the positioning of our Company resulting from our simultaneous provision of water and wastewater services and the sources of funding for such investments, sufficiency of internally generated funds and credit facilities to provide working capital and our liquidity needs are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "projects", "forecasts", "may", "should", variations of such words and similar expressions are intended to identify such forward-looking statements. Certain factors as discussed under Item 1A -Risk Factors, in the Company's annual report on Form 10-K, such as changes in weather, changes in our contractual obligations, changes in government policies, the timing and results of our rate requests, changes in economic and market conditions generally, and other matters could cause results to differ materially from those in the forward-looking statements. While the Company may elect to update forward-looking statements, we specifically disclaim any obligation to do so and you should not rely on any forward-looking statement as representation of the Company's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q.


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