Business context and reporting period
Artesian Resources Corporation’s Form 10-K covers the fiscal year ended December 31, 2013; it is an annual report, not a standalone quarterly filing. The company operates regulated water and wastewater utilities and related service businesses, primarily on the Delmarva Peninsula. Water sales generated 89.5% of 2013 operating revenue.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Operating revenue | $69.1 million | $70.6 million |
| Operating income | $14.5 million | $15.9 million |
| Net income | $8.3 million | $9.8 million |
| Diluted earnings per share | $0.94 | $1.13 |
| Operating cash flow | $21.0 million | $23.4 million |
| Capital expenditures | $21.2 million | $20.5 million |
| Cash dividends paid | $7.2 million | $6.9 million |
Operating margin was approximately 21.0%, down from 22.5% in 2012; net margin was approximately 12.0%, down from 14.0%. At year-end, total assets were $403.8 million, stockholders’ equity $121.8 million, long-term debt including current maturities $106.6 million, and credit-line borrowings $10.3 million. Cash was $0.4 million. Current assets of $13.3 million compared with current liabilities of $25.6 million.
For the fourth quarter, unaudited revenue was $16.9 million versus $17.0 million in Q4 2012; operating income was $3.3 million versus $3.5 million, and net income was $1.5 million versus $1.7 million.
Material changes versus the prior comparable period
- Full-year revenue fell 2.1%; water sales declined 2.8%, including a $2.8 million estimated impact from lower consumption amid heavy precipitation. The residential water volume sold fell 8.7%.
- Net income declined $1.5 million, primarily from lower water sales and approximately $0.5 million of additional legal costs related to the Chester Water Authority dispute.
- DSIC revenue rose to approximately $1.1 million from $42,000. Service-line protection plan revenue also increased, helping offset weaker water sales.
- Operating cash flow decreased $2.4 million. Utility plant, net of accumulated depreciation, increased to $379.0 million from $366.6 million; year-end line-of-credit borrowings declined modestly.
- Cash dividends per share increased to approximately $0.82 from $0.79.
Outlook, risks, contingencies, and unusual items
- Management expected approximately $28.6 million of 2014 investment in plant and systems and approximately $11.9 million of 2014 contractual payments for debt service, leases, and water purchases. It expected operating cash flow and existing credit facilities to support near-term liquidity, while noting acquisitions could require additional debt or equity.
- Artesian Water planned to file a Delaware water-rate application on April 1, 2014. A wastewater rate settlement approved in October 2013 provides approximately $174,000 of annual revenue once fully implemented. A 3.32% DSIC rate was approved for January 2014, subject to later audit.
- Two credit lines totaled $60 million, with $10.3 million drawn at year-end. The $40 million Citizens facility was a demand line expiring no later than May 29, 2014; the $20 million CoBank facility expires January 13, 2015. The company reported compliance with debt covenants and a 46.7% debt-to-total-capitalization ratio.
- In the Chester Water Authority litigation, a Special Master recommended payment of approximately $2.6 million already accrued, plus a disputed late fee of approximately $230,000. Artesian objected; final judgment was pending.
- Key risks include weather-driven demand and seasonality, rate-case outcomes and timing, permits and environmental requirements, water supply and drought, capital-market access and refinancing, and wastewater system failures. The company reported material compliance with current water-quality requirements and adequate supply capacity for the foreseeable future, but these are management assessments.
- Other income included non-routine refunds of regulatory assessments; management cautioned such refunds may not recur. The 2013 financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether the weather-related decline in water consumption reverses, and how water volumes and customer growth develop.
- The outcome and financial resolution of the Chester Water Authority dispute, including the proposed late fee.
- Timing and approved terms of the planned water-rate case, and realization of wastewater-rate and DSIC revenue.
- Renewal or replacement of the demand credit line and funding for the planned 2014 capital program.
- Whether cash generation, liquidity, and dividends remain adequate given low cash balances, capital needs, and debt obligations.