Artesian Resources Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; comparisons are with the same 2013 periods. Amounts below are in millions unless stated otherwise. Artesian is a regulated water and wastewater utility operating principally in Delaware, with Maryland and Pennsylvania operations, alongside non-regulated contract services and service-line protection plans.
Financial results and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $19.6 | $18.1 | $54.4 | $52.2 |
| Operating income | $5.3 | $4.3 | $12.1 | $11.2 |
| Net income | $3.3 | $2.6 | $7.4 | $6.8 |
| Basic earnings per share | $0.37 | $0.30 | $0.83 | $0.77 |
| Operating margin | 27.2% | 23.9% | 22.3% | 21.5% |
- Revenue and earnings: Q3 revenue increased 8.4% and nine-month revenue increased 4.2%. Water sales drove most of the increase, supported by temporary Delaware rates and higher water consumption; Q3 sales also benefited from bulk water supplied to a neighboring municipality. Nine-month net income rose 9.0%.
- Cash flow and investment: Nine-month operating cash flow was $17.0 million, compared with $15.1 million. Capital expenditures were $19.3 million versus $13.9 million, leaving operating cash flow less capital expenditures at negative $2.3 million. Cash was $0.2 million at September 30, 2014, down from $0.4 million at year-end 2013.
- Margins and costs: Management reported operating expenses excluding depreciation and income taxes at 49.9% of revenue in Q3 (55.0% in 2013) and 56.6% for nine months (58.0% in 2013). Depreciation, taxes and interest charges increased. Interest expense included accrued prejudgment interest related to the Chester Water Authority (CWA) dispute.
- Debt and liquidity: Long-term debt, including current maturities, was $106.4 million; line-of-credit borrowings were $14.4 million. The company also reported a $0.7 million overdraft payable. It had $60 million of combined bank credit lines, with $45.6 million available at quarter-end; the facilities were demand or near-term-expiry lines. The debt-to-total-capitalization ratio, including current debt, was 46.4%, and the company reported compliance with its covenants.
- Other balance-sheet items: Total assets were $417.0 million, stockholders’ equity $123.2 million, and current liabilities $34.2 million. Cash and current assets were limited relative to current liabilities.
- Dividends: Cash dividends per common share were $0.2119 in Q3 and $0.6326 for the first nine months of 2014, versus $0.2057 and $0.6141, respectively, in 2013.
Material changes and notable items
- Artesian Water’s April 2014 Delaware rate filing requested a 15.9% annualized revenue increase, approximately $10.0 million. Temporary rates effective June 10 were designed to add about $2.5 million annually; a second temporary step designed to add about $4.5 million annually was scheduled for November 13, 2014, subject to DEPSC approval. Temporary rates replaced the prior distribution system improvement charge, which had generated $0.8 million of revenue in the first nine months of 2014.
- The September 30 court order in the CWA case upheld the relevant rate increases and required payment of approximately $3.1 million of previously withheld amounts. That principal had already been accrued and was paid in October 2014. Artesian also accrued approximately $378,000 in prejudgment interest and believed it would be awarded. The court rejected a separate approximately $300,000 late fee; additional damages documentation was still to be submitted.
- A Q3 review of personnel costs resulted in a $419,000 increase to utility plant and corresponding decreases to utility operating expenses ($393,000) and property and other taxes ($26,000), before tax effects. The company said the prior-quarter effects were immaterial.
- Utility plant increased to $391.1 million from $379.0 million at December 31, 2013, reflecting ongoing investment. Capital spending focused on mains, treatment facilities and pumping equipment.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance was provided. Management said it expected to fund the next 12 months with operating cash flow, available cash, credit lines and, as needed, capital-market financing, and considered these sources adequate for normal operations and financing needs.
- Management’s strategy emphasizes growth in water and wastewater service, contract operations and service-line protection plans. It cited population growth and development opportunities, while noting that construction and housing conditions may affect growth.
- Key risks include weather-related fluctuations in water demand, the timing and sufficiency of regulatory rate approvals, significant infrastructure investment needs, inflation in labor and operating inputs, and interest-rate exposure on variable-rate borrowing. Most long-term debt was fixed-rate; the company reported $14.4 million drawn on variable-rate lines at quarter-end.
- Management reported no material changes to the risk factors in its 2013 Form 10-K, no material impact from newly adopted accounting policies, and no material effect expected from the accounting standards discussed. It also said ordinary-course legal matters were not expected to materially affect results, while noting that litigation can involve expense and management distraction.
Investor verification priorities
- Track the DEPSC decision and realized revenue impact of the pending permanent rate case and the second temporary rate step.
- Confirm the final CWA damages determination, including the accrued prejudgment interest and any additional amounts beyond the $3.1 million already paid.
- Monitor credit-line renewals, availability and borrowing costs given low cash balances, high capital expenditures and the near-term facility maturities.
- Assess whether operating cash generation and approved rates are sufficient to support the capital program, debt service and dividend payments.
- Check subsequent filings for customer and water-consumption trends, regulatory developments, and the impact of the personnel-cost capitalization adjustment.