Artesian Resources, Winning Water Assets On Bad Week (ARTNA)

Cecil County, Maryland, has approved the transfer of its water distribution and wastewater assets to Artesian Resources (NASDAQ:ARTNA) this week. This is just the latest in a string of conversions from publicly-supported water systems to private companies. The conversions typically spring from deteriorating infrastructure, which could cost local governments millions of dollars they don’t have to repair.

Companies such as Artesian take over the infrastructure, and promise torepair and improve delivery and keep taxpayer costs down. The problemsstart when the private companies find it necessary to raise rates topay for the infrastructure improvements. Artesian, for example,submitted a rate increase proposal for 28.3% to pay for fixes to theaging infrastructure in other parts of Maryland. The public outcry ledthe company to reduce the request to 27.3%. Artesian instituted atemporary rate increase of 5% on its own.

As a whole, the private water sector is running at about a 15% loss,and its price-to-free-cash flow ratio for the June quarter was -17.8%.Most users don’t want to pay private companies for water; they like thegovernment-supported system. But many local governments can’t pay, andfederal subsidies are drying up.

If there’s a commodity more valuable than oil or gold, it’s water. Yetthe trail of failed privatization schemes doesn’t paint a prettypicture going forward.

Paul Ausick
October 9, 2008