Artesian Resources Corp. 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1997, and the nine months ended on that date. Artesian Resources Corporation, incorporated in Delaware, operates primarily through its subsidiary, Artesian Water Company, Inc., providing water utility services in Delaware. As of November 3, 1997, the company had 1,266,657 shares of Class A Non-Voting Common Stock and 506,490 shares of Class B Common Stock outstanding.
Key Financial Metrics
Revenue and Profit (Nine Months Ended Sept 30, 1997):
- Total Operating Revenues: $16,393,000 (Water sales: $16,145,000).
- Net Income: $1,316,000 (Decrease of $21,000 vs. prior year).
- Net Income Applicable to Common Stock: $1,246,000.
- Earnings Per Share (EPS): $0.70 (vs. $0.90 in prior year).
- Operating Income: $3,096,000.
Cash Flow (Nine Months Ended Sept 30, 1997):
- Net Cash Provided by Operating Activities: $1,507,000.
- Net Cash Used in Investing Activities: ($6,623,000), primarily due to capital expenditures of $6,785,000.
- Net Cash Provided by Financing Activities: $5,597,000, driven by $15,000,000 in proceeds from long-term debt.
- Cash and Cash Equivalents (End of Period): $629,000.
Balance Sheet Highlights (Sept 30, 1997):
- Total Assets: $105,463,000.
- Total Liabilities and Equity: $105,463,000.
- Long-Term Debt (net of current portion): $32,133,000.
- Current Liabilities: $4,821,000.
- Stockholders' Equity: $26,045,000 (Common) + $712,000 (Preferred mandatorily redeemable).
Material Changes vs. Prior Period
Revenue Growth: Water sales revenue increased by $781,000 for the nine months ended September 30, 1997, compared to the same period in 1996. This growth was driven by a 2.4% increase in customers served, a 2% increase in per capita consumption (attributed to a hotter, drier summer), and a 1.13% rate increase effective May 1, 1997.
Expense Increases: Purchased water expense increased by $400,000 for the nine-month period. This was primarily due to a 19% price increase effective September 1, 1996, and a 12.3% increase in the minimum monthly purchase requirement under the contract with Chester Water Authority (CWA). However, a renegotiated contract effective August 1, 1997, reduced the minimum daily average purchase requirement to 3.0 million gallons through 2021.
Interest Expense: Interest expense decreased by $91,000 for the nine months ended September 30, 1997, due to a lower average debt outstanding ($29.4 million vs. $29.8 million) and a lower average interest rate.
Capital Structure: The company issued $15.0 million in Series M and N First Mortgage Bonds in 1997 to repay lines of credit and fund capital expenditures. Long-term debt increased significantly from $26,259,000 at year-end 1996 to $32,133,000 at September 30, 1997.
Outlook, Risks, and Management Commentary
Rate Cases and Regulatory Actions:
- The Delaware Public Service Commission (PSC) approved a rate settlement in August 1997, finalizing a 1.13% annualized revenue increase effective May 1, 1997.
- In September 1997, the company refunded approximately $253,000 to customers for excess billings collected under a temporary 4.5% rate increase; this had no impact on revenue as it was reserved as a liability.
- On October 3, 1997, Artesian Water filed a petition with the PSC for new rates to meet a projected 25.6% ($5.6 million) annualized revenue requirement to achieve a fair rate of return. Temporary rates of up to $2.5 million annualized were permitted to be collected starting December 3, 1997.
Acquisitions: On October 2, 1997, the company acquired Cat Hill Water Company and Whites Haven Water Company in Sussex County, Delaware, adding approximately 225 customers to its base of 60,000.
Liquidity: The primary source of liquidity for the period was the $15.0 million bond issuance. As of September 30, 1997, there were no borrowings on the $15.0 million available lines of credit, though $0.2 million was borrowed as of October 31, 1997. Remaining line capacity is intended to finance fourth-quarter capital expenditures.
Risks and Contingencies:
- Related Party Transactions: The company leases its office/shop complex from White Clay Realty (partners include officers/directors) and land for water wells from Glendale Enterprises (wholly-owned by the Chairman Emeritus). Management asserts these rates are comparable to market rates.
- Accounting Changes: The company is evaluating the impact of new FASB statements (SFAS 128, 129, 130, 131) effective for periods after December 31, 1997.
Key Facts for Investor Verification
- Verify the approval status and effective date of the new rate petition filed October 3, 1997, seeking a 25.6% revenue increase.
- Confirm the impact of the renegotiated Chester Water Authority (CWA) contract on future purchased water expenses.
- Monitor the integration and financial performance of the Cat Hill and Whites Haven Water Company acquisitions.
- Review the utilization of the $15.0 million lines of credit for fourth-quarter capital expenditures.
- Assess the long-term implications of the $15.0 million in new fixed-rate debt issued in 1997 on future interest coverage ratios.