Artesian Resources Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Artesian is a regulated water and wastewater utility operating primarily in Delaware, with operations in Maryland and Pennsylvania, and has non-regulated service, construction and service-line protection businesses. Financial amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Operating revenue | $18.449 | $17.962 |
| Operating income | $3.853 | $3.672 |
| Net income applicable to common stock | $2.830 | $2.538 |
| Basic and diluted EPS | $0.31 | $0.28 |
| Operating margin | 20.9% | 20.4% |
| Net cash from operating activities | $6.938 | $7.999 |
| Capital expenditures | $4.270 | $3.609 |
| Cash and cash equivalents | $0.511 | $0.209 at Dec. 31, 2015 |
| Long-term debt, including current portion | $104.557 | $104.936 at Dec. 31, 2015 |
| Lines of credit outstanding | $6.466 | $10.487 at Dec. 31, 2015 |
| Common dividends per share | $0.2216 | $0.2151 |
Water sales were $16.436 million, approximately 89.1% of revenue. Total assets were $430.806 million and stockholders’ equity was $133.537 million at quarter-end. Debt to total capitalization, including the short-term portion, was 43.9%; the company reported compliance with its debt covenants. The stated expense ratio excluding depreciation and income taxes improved to 56.0% from 57.4%.
Material changes and management commentary
- Revenue increased 2.7%; water sales rose 2.5%, primarily due to higher DSIC revenue, customer growth and the final Delaware rate adjustment, partly offset by lower water consumption. Non-utility revenue increased 8.1%, mainly from service-line protection plans.
- Net income rose approximately 11.5%, reflecting higher water-utility operating income and lower interest expense. Interest expense declined $45,000, partly because the Series S bond rate fell from 6.73% to 4.45% effective March 1, 2016.
- Operating cash flow declined $1.061 million year over year. The company spent $4.270 million on capital expenditures and received $3.214 million in net developer contributions and advances. Cash increased $0.302 million during the quarter.
- Utility plant at original cost increased to $407.173 million from $405.606 million at year-end. Management describes ongoing investment in mains, treatment facilities, pumping equipment and meter-reading systems.
Liquidity, outlook and risks
- At March 31, the company had two credit facilities totaling $60 million: a $40 million Citizens Bank demand line, with $39.0 million available, and a $20 million CoBank line, with $14.5 million available. The Citizens facility was due to expire May 27, 2016 and the CoBank facility July 12, 2016; management expected renewal of the Citizens line. The filing says available cash, credit lines, operating cash flow and, as needed, capital-market financing should fund the next 12 months.
- Management’s strategy is to expand water, wastewater, contract operations and service-line protection services across the Delmarva Peninsula. No quantified earnings or revenue guidance is provided. Management anticipates growth in non-regulated services and identifies planned water and wastewater system investments.
- Water demand and revenue are seasonal and can be affected by temperature and rainfall. Other identified uncertainties include the timing and adequacy of rate approvals, construction and economic conditions, interest-rate changes on variable-rate borrowings, and costs of electricity, chemicals and other commodities. A fixed-price electricity contract effective May 2016 through May 2019 is expected to be 11% below the expiring contract rate.
- The January 2016 final Delaware rate order approved a permanent annualized revenue increase of approximately $6.0 million, or 9.50%, below the original request; the filing says the final award did not materially affect previously reported water-sales revenue. The current DSIC rate was 1.57%; DSIC revenue was approximately $249,000 versus $63,000 in Q1 2015.
- The company reported no material change to the risk factors in its 2015 Form 10-K and no off-balance-sheet arrangements. It did not expect ordinary-course litigation to materially affect results, but noted litigation may entail expense and management distraction. The IRS was auditing tax years 2012–2014; federal and state tax years 2012–2015 remained subject to examination.
Important facts for investors to verify
- Renewal and terms of the Citizens and CoBank credit facilities, including the demand feature and available borrowing capacity.
- Whether customer growth and rate adjustments offset weather-related consumption changes, and the timing of future regulatory decisions.
- Capital spending, developer contributions and operating cash flow relative to funding needs and dividend payments.
- Progress in expanding wastewater and service-line protection businesses, and the effect of related operating costs.
- Outcome of the IRS audit and any material developments in litigation or other contingencies.