Artesian Resources Corporation — Q1 2014 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Artesian operates regulated water and wastewater utilities, mainly in Delaware, with smaller Maryland and Pennsylvania operations and non-regulated service-line protection and contract-services businesses. Water sales generated 89.3% of quarterly operating revenue.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $16.900 million | $16.327 million | +3.5% |
| Operating income | $3.146 million | $2.738 million | +14.9% |
| Net income applicable to common stock | $2.083 million | $1.640 million | +27.0% |
| Basic / diluted earnings per share | $0.24 / $0.23 | $0.19 / $0.19 | Higher |
| Cash dividends per common share | $0.2088 | $0.2027 | Higher |
| Net cash from operating activities | $5.054 million | $4.751 million | +6.4% |
| Capital expenditures | $2.730 million | $4.087 million | Lower by $1.357 million |
Water-sales revenue rose 3.5%, reflecting higher water consumption and approximately $0.2 million more Distribution System Improvement Charge (DSIC) revenue. Non-utility revenue increased about 5.0%, primarily from higher service-line protection plan revenue. Net income benefited from higher water sales and approximately $0.6 million lower legal costs related to the Chester Water Authority dispute.
The reported ratio of operating expenses excluding depreciation and income taxes to revenue improved to 60.4% from 63.9%. Depreciation and amortization was $2.138 million, versus $2.041 million; income tax expense was $1.401 million, versus $1.111 million; and interest charges were $1.736 million, versus $1.747 million.
Financial position and liquidity
- At March 31, 2014, cash was $0.451 million; current assets were $12.043 million and current liabilities were $22.629 million, a calculated current-asset shortfall of approximately $10.586 million.
- Long-term debt, including its current portion, was $106.615 million. Lines of credit outstanding were $7.769 million; the balance sheet also reported a $1.196 million overdraft payable. Management reported debt to total capitalization, including the short-term portion, of 46.5% and compliance with applicable covenants.
- Operating cash flow of $5.054 million, net developer advances and contributions of approximately $1.0 million, and common-stock issuance proceeds of $0.667 million were primary funding sources. Financing activities used $2.304 million, including $1.845 million of dividends paid and $2.563 million of net line-of-credit repayments.
- Citizens Bank’s $40 million demand line had $38.2 million available; its stated term expired on the earlier of May 29, 2014 or a demand for payment. CoBank’s $20 million line had $14.0 million available and expired January 13, 2015. Management expected to fund the next 12 months with cash, credit lines, and operating cash flow.
- Contractual cash obligations totaled $212.4 million, including $168.4 million for first mortgage bonds and interest. Management said it intends to refinance bond maturities when due. Long-term debt carrying value was $106.615 million versus estimated fair value of $127.063 million.
Material changes, outlook, and risks
- Rate request: On April 11, 2014, after quarter-end, Artesian Water requested a 15.9% annualized revenue increase, approximately $10.0 million. With the existing 3.3% DSIC set to zero when temporary rates take effect, the customer increase would be 12.6% if the request were granted in full. The company anticipated temporary rates subject to statutory limits while the Delaware commission considers permanent rates; approval and timing are uncertain.
- Wastewater rates: A 2013 Delaware wastewater rate-case settlement authorized a two-step increase; when fully implemented, it is expected to add approximately $174,000 in annual revenue based on current households, with a 10% authorized return on equity.
- Business outlook: Management described plans to expand water and wastewater service, customer growth, contract operations, and service-line protection plans. It expects continued non-regulated growth but provided no quantified earnings or revenue guidance. Growth and water demand are exposed to weather, construction activity, economic conditions, and regulatory approvals. Capital needs reflect growth, aging infrastructure, and water-quality requirements; inflation is increasing operating and facility costs.
- Contingency: In the Chester Water Authority litigation, a Special Master recommended payment of approximately $2.8 million in amounts withheld, already accrued in current liabilities, plus a disputed $0.280 million late fee. The company objected; the District Court had not entered final judgment. The Special Master rejected Chester Water Authority’s counterclaim.
- Other risks and items: The Citizens line is callable and near-term expiry creates refinancing/renewal risk. Variable-rate borrowings expose the company to rising interest costs; weather and regulatory rate decisions can affect revenue and cost recovery. A related-party construction contract had a stated value of approximately $0.340 million. Management reported no material change in the risk factors from its 2013 Form 10-K and no off-balance-sheet arrangements.
Investor verification priorities
- Check the outcome, timing, and allowed amount of the April 2014 Delaware water rate request, including temporary rates and the DSIC reset.
- Confirm renewal or replacement of the Citizens demand line, which was due no later than May 29, 2014, and review subsequent liquidity and borrowing levels.
- Track the final court decision in the Chester Water Authority case, including the disputed late fee and any effects beyond the already accrued $2.8 million.
- Assess whether Q1 earnings growth persists after accounting for lower litigation costs, and monitor water consumption, customer additions, and DSIC revenue.
- Compare planned infrastructure spending and debt refinancing needs with operating cash generation, dividends, and regulatory cost recovery.