Business context and reporting period
Artesian Resources Corporation’s Form 10-K covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. The company provides regulated water and wastewater services, principally in Delaware, with operations in Maryland and Pennsylvania, alongside contract services and service-line protection plans.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Operating revenue | $77.0 million | $72.5 million |
| Operating income | $17.6 million | $16.0 million |
| Net income | $11.3 million | $9.5 million |
| Diluted EPS | $1.26 | $1.07 |
| Cash from operations | $28.3 million | $18.3 million |
| Capital expenditures | $20.7 million | $23.7 million |
| Cash dividends paid | $7.8 million | $7.5 million |
Water sales were $68.9 million, 89.5% of revenue. Operating expenses excluding depreciation and income taxes were 55.6% of revenue, down from 57.1%. The effective income tax rate was 40.8%, versus 40.1%.
At year-end, cash was $0.2 million and current assets were $14.4 million versus current liabilities of $23.2 million. Long-term debt, including current maturities, was $104.9 million; lines of credit outstanding were $10.5 million. The company reported debt at 44.2% of total capitalization and compliance with debt covenants. Available credit was $36.5 million under Citizens and $13.0 million under CoBank, but both facilities were due to expire in 2016 and renewal was expected.
Fourth-quarter revenue rose to $18.8 million from $18.1 million, while operating income fell to $3.5 million from $3.9 million and net income to $1.8 million from $2.1 million. Fourth-quarter diluted EPS was $0.21 versus $0.24.
Material changes versus the prior period
- Annual revenue increased 6.3%, primarily from Delaware water-rate increases placed into effect during 2014; water sales grew 6.6%.
- Net income increased 18.9%, reflecting stronger water utility margins, higher service-line plan revenue and lower interest expense.
- Service-line protection revenue contributed to 6.0% growth in non-utility revenue. The company introduced an internal service-line plan in November 2015.
- Operating cash flow increased by $9.9 million year over year. Capital spending declined by $3.0 million.
- Interest expense fell $0.4 million; 2014 included accrued interest associated with the Chester Water Authority litigation.
Outlook, risks and unusual items
Management expected 2016 gross investment of approximately $25.7 million, offset by about $4.4 million of developer contributions and advances, for net investment of approximately $21.3 million. It forecast approximately $12.0 million of 2016 principal, interest, rental and water-interconnection payments and expected to fund operations through cash generated, cash balances and credit facilities. Management cited growth opportunities in water, wastewater and service-line plans, while noting that expansion depends on construction activity, permits and regulatory approvals.
The Delaware regulator’s final order, issued January 19, 2016, approved a permanent water-rate increase of approximately $6.0 million annually, or 9.5%, below temporary collections. The company reported that it refunded approximately $878,000, including interest, to customers in October 2015 and that the final award did not materially affect previously reported water-sales revenue. The filing describes the order as final after year-end.
Artesian paid Chester Water Authority approximately $0.4 million of accrued interest in January 2015, following a 2014 court order requiring payment of previously withheld water charges. The underlying approximately $3.1 million had been paid in October 2014. Other ordinary-course litigation was not expected by management to have a material effect, but outcomes remain uncertain.
Key risks include regulatory rate decisions and cost recovery, weather-driven water demand, drought and water allocation limits, environmental compliance and wastewater-system failures, access to capital and refinancing, and competition for new service territories. The Citizens facility was callable on demand; the company said it expected renewal of both credit lines. Artesian also entered a fixed-price electricity contract effective May 2016, at a rate 11% below its expiring contract. Management reported material compliance with applicable water-quality standards. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm renewal terms, availability and pricing of the Citizens and CoBank credit facilities, and refinancing plans for debt maturities.
- Review the final Delaware rate order, customer refunds and subsequent rate collections, including the timing of the January 2016 order.
- Assess whether forecast 2016 capital spending, developer contributions and operating cash flow support the investment plan and dividend.
- Track the fourth-quarter decline in operating income and net income against annual growth, including seasonal demand and expense trends.
- Evaluate exposure to Chester Water Authority minimum-purchase commitments, water-supply permits, drought and changing environmental requirements.
- Check the notes for contingencies, contractual commitments and tax matters; the IRS was auditing tax years 2012–2014.