Artesian Resources Corporation (NASDAQ:ARTNA) is a leading provider of water and wastewater services in the Mid-Atlantic region, serving customers across Delaware, Maryland, and Pennsylvania. With a strong focus on operational excellence, strategic growth, and regulatory compliance, the company has consistently delivered reliable services and steady financial performance, making it an attractive investment opportunity for those seeking exposure to the regulated utility sector.

Business Overview

Artesian Resources operates through two primary business segments - the Regulated Utility segment and the Non-Utility segment. The Regulated Utility segment, which accounts for the majority of the company's revenue, includes the water and wastewater operations of its subsidiaries Artesian Water, Artesian Wastewater, and Tidewater Environmental Services. These regulated entities provide water distribution and wastewater treatment services to residential, commercial, industrial, and municipal customers across their service territories. The Non-Utility segment, on the other hand, encompasses the company's contract water and wastewater operations, water and wastewater design and construction services, and its service line protection plans.

Financials

Artesian Resources has demonstrated consistent financial performance, with annual revenue reaching $98.861 million in 2023 and net income of $16.699 million. The company's operating cash flow for the year was $31.851 million, while free cash flow was -$30.326 million, reflecting the company's ongoing investments in infrastructure and growth initiatives.

For the first quarter of 2024, Artesian Resources reported total operating revenues of $24.544 million, a 9.1% increase from the $22.495 million reported in the same period of 2023. This growth was primarily driven by a 10.0% increase in water sales revenue, which reached $19.825 million in Q1 2024, up from $18.016 million in Q1 2023. The increase in water sales revenue was largely attributable to a temporary rate increase of 7.50% implemented in November 2023, as well as an overall increase in water consumption.

Other utility operating revenue also increased by 7.0% to $3.015 million in Q1 2024, compared to $2.817 million in the prior-year quarter, primarily due to growth in the company's wastewater operations. Non-utility operating revenue remained relatively stable, increasing slightly from $1.662 million in Q1 2023 to $1.704 million in Q1 2024.

Operational Highlights

Artesian Water, the company's largest subsidiary, serves approximately 96,200 customers in Delaware as of March 31, 2024, representing a 1.3% increase in the customer base compared to the same period in 2023. The company's Maryland subsidiary, Artesian Water Maryland, serves approximately 2,600 customers, a 1.7% increase year-over-year. In Pennsylvania, Artesian Water Pennsylvania serves around 40 customers, maintaining a consistent customer base.

Artesian Wastewater and its subsidiary, Tidewater Environmental Services, serve a combined 8,200 wastewater customers in Sussex County, Delaware, representing a 6.0% increase in the customer base compared to March 31, 2023. The company's wastewater operations provide a stable revenue stream, as the majority of residential and commercial customers are billed a flat monthly fee, while the large industrial wastewater customer is billed based on usage.

In the Non-Utility segment, Artesian Utility's service line protection plans continue to see steady growth, with the eligible customers enrolled in the Water Service Line Protection Plan, Sewer Service Line Protection Plan, and Internal Service Line Protection Plan increasing by 3.4%, 2.4%, and 5.4%, respectively, compared to March 31, 2023.

Regulatory Environment and Rate Case Updates

Artesian Water filed an initial rate increase request with the Delaware Public Service Commission (DEPSC) in April 2023, seeking a 22.66% increase in revenue, or approximately $16.7 million on an annualized basis. The company subsequently filed a supplemental request in November 2023. While the actual effective increase would be less than 22.66% due to the company's ability to recover specific infrastructure investments through a Distribution System Improvement Charge (DSIC), the requested increase is designed to support Artesian Water's ongoing capital improvement program and cover increased operating costs.

In accordance with Delaware law, Artesian Water was permitted to implement a temporary base rate increase of up to 15% of gross water sales on an annualized basis, or $2.5 million, whichever is lower. The company filed an interim rates application, which was approved, to place a 15% temporary base rate increase into effect on November 28, 2023, while reducing the existing 7.5% DSIC rate to zero. These interim rates are subject to refund until the DEPSC determines the permanent rates.

Artesian Wastewater and its subsidiary, Tidewater Environmental Services, provide regulated wastewater services in Sussex County, Delaware. The company continues to seek strategic partnerships and relationships with developers and governmental agencies to expand its wastewater service footprint on the Delmarva Peninsula.

Growth Initiatives and Capital Investments

Artesian Resources remains focused on strategic growth opportunities, both in its regulated water and wastewater operations, as well as its non-utility business segments. In the regulated utility segment, the company is pursuing expansion in the Cecil County designated growth corridor in Maryland and exploring opportunities to add new water and wastewater systems to its service area.

The company's capital investment plan includes projects for water infrastructure improvements and expansion in both Delaware and Maryland, as well as wastewater infrastructure improvements and expansion in Delaware. These investments are necessary to support the company's growing customer base, maintain the reliability of its systems, and comply with evolving regulatory requirements.

In the non-utility segment, Artesian Utility continues to seek opportunities to expand its contract operations, design, engineering, and construction services for water and wastewater facilities. The company also anticipates continued growth in its service line protection plan offerings, which provide a stable revenue stream unaffected by weather conditions.

Liquidity

Artesian Resources maintains a strong liquidity position, with $9.503 million in cash and cash equivalents as of March 31, 2024. The company's primary sources of liquidity include cash flow from operating activities, which totaled $12.594 million in the first quarter of 2024, as well as access to lines of credit and the ability to issue long-term debt.

As of March 31, 2024, Artesian Resources had a $40 million line of credit with Citizens Bank and a $20 million line of credit with CoBank, ACB, both of which were undrawn. The company also has long-term debt agreements, including first mortgage bonds, state revolving fund loans, and a promissory note, which it intends to refinance as they mature.

Artesian Resources' capital expenditures during the first three months of 2024 totaled $8.922 million, primarily focused on PFAS treatment equipment, infrastructure rehabilitation, and system expansions to serve its growing customer base. The company's strong liquidity and access to capital markets provide it with the financial flexibility to continue investing in its operations and pursuing strategic growth opportunities.

Risks and Challenges

As a regulated utility, Artesian Resources is subject to the oversight and approval of state public service commissions, which can impact the company's ability to recover its costs and earn a reasonable return on its investments. The company's ability to obtain timely and adequate rate increases is crucial to its financial performance and the execution of its capital investment plan.

Additionally, the company faces operational risks related to water quality, environmental regulations, and the maintenance and replacement of aging infrastructure. Compliance with evolving water quality standards, such as the recent EPA regulations on PFAS, requires ongoing capital investments and operational adjustments, which can impact the company's financial results.

Artesian Resources also operates in a competitive market, where it must continually seek opportunities to expand its service territory and customer base to drive growth. The company's ability to successfully identify and integrate strategic acquisitions, as well as develop partnerships with developers and municipalities, will be critical to its long-term success.

Conclusion

Artesian Resources Corporation is a well-established and financially stable regulated utility company serving customers in the Mid-Atlantic region. The company's consistent financial performance, strategic growth initiatives, and focus on operational excellence position it as an attractive investment opportunity for investors seeking exposure to the regulated utility sector.

Despite the challenges posed by the regulatory environment and the need for ongoing capital investments, Artesian Resources has demonstrated its ability to navigate these obstacles and deliver reliable services to its growing customer base. With a strong liquidity position, a diversified business model, and a commitment to sustainable growth, the company is well-equipped to continue creating value for its shareholders in the years to come.