Artesian Resources Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; comparative results are for the three and nine months ended September 30, 2015 versus 2014. The unaudited consolidated company is primarily a regulated water utility operating in Delaware, with wastewater, Maryland and Pennsylvania utility operations and non-regulated service-line plans and contract services. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $20.8 | $19.6 | $58.3 | $54.4 |
| Operating income | $5.4 | $5.3 | $14.1 | $12.1 |
| Net income | $3.7 | $3.3 | $9.5 | $7.4 |
| Diluted earnings per share | $0.41 | $0.37 | $1.06 | $0.83 |
| Operating margin | 26.0% | 27.2% | 24.1% | 22.3% |
| Operating expense ratio, excluding depreciation and income taxes | 51.4% | 49.9% | 53.5% | 56.6% |
Q3 revenue grew 6.0%, primarily from higher water sales following temporary rate increases. Net income rose about $0.4 million, helped by lower interest expense and water utility margins. For the first nine months, revenue increased 7.2% and net income increased about $2.1 million; management attributed the earnings improvement primarily to temporary rate increases and lower interest expense. Water sales were 89.8% of nine-month revenue, versus 89.5% in 2014.
For the first nine months, operating cash flow was $22.0 million, compared with $17.0 million in 2014. Capital expenditures were $15.9 million, down from $19.3 million. Cash increased to $0.5 million from $0.2 million at year-end 2014. Cash dividends paid were $5.8 million; Q3 dividends paid were $0.2183 per common share.
At September 30, total assets were $429.9 million and stockholders’ equity was $129.2 million. Long-term debt, including its current portion, was $105.2 million; borrowings under lines of credit were $12.4 million. The company reported $47.6 million of available capacity across its $40 million Citizens Bank and $20 million CoBank facilities. Current liabilities exceeded current assets ($27.3 million versus $15.0 million); the company said operating cash flow and available credit facilities should meet working-capital and financing needs.
Material changes and notable items
- Water sales increased $3.7 million, or 7.5%, in the first nine months, principally reflecting temporary Delaware rate increases implemented in June and November 2014. DSIC revenue declined about $0.5 million year over year.
- The Delaware Public Service Commission’s October 6, 2015 final order approved an annualized permanent water-revenue increase of about $6.0 million, or 9.5%, below the temporary amounts collected. The company recorded a customer refund liability, including interest, at September 30; the filing does not provide a clear refund amount. Management said there was no material impact on previously reported water sales revenue.
- Q3 operating expenses excluding depreciation and income taxes rose 9.2%, including higher payroll and benefits, partly related to employee bonuses, personnel cost allocation and wage and benefit increases. Nine-month expenses on the same basis rose 1.3%; increased administration and power costs were partly offset by lower repair and maintenance costs.
- Interest expense declined about $0.4 million in both comparative periods, primarily because 2014 included accrued interest related to the Chester Water Authority litigation. The company paid the previously accrued $3.1 million principal in October 2014 and approximately $379,000 of interest in January 2015.
- In September 2015, Artesian Water agreed with CoBank to set the rate on a First Mortgage Bond at 4.45% beginning March 1, 2016; the bond principal is expected to be $10.65 million at that date. In October 2015, it also contracted for electricity at a fixed price 11% below its then-current contract rate, for May 2016 through May 2019.
- The 2014 third-quarter comparison includes a $419,000 adjustment to capitalize certain personnel costs from the first half of 2014, reducing reported operating expenses and property taxes for that quarter.
Outlook, risks and contingencies
Management’s strategy is to expand water, wastewater, contract operations and service-line protection plans across the Delmarva Peninsula. It described planned capital investment in water and wastewater treatment facilities and distribution systems, and expects to fund near-term activities through operating cash flow, cash balances, bank credit lines and capital-market financing as needed. No numerical earnings or revenue guidance is provided.
Key sensitivities include weather-driven water demand, timing and adequacy of regulatory rate decisions, construction and customer growth, operating and capital costs, and interest rates on variable-rate borrowing. The Citizens facility is a demand line and may be called at any time; the Citizens and CoBank lines expire in May 2016 and January 2016, respectively. Management reported compliance with debt covenants and no off-balance-sheet arrangements. It intends to refinance specified debt maturities, but cannot assure refinancing or rate-case outcomes. Ordinary-course legal matters may involve expense and management distraction; the company did not expect them to materially affect results. No material changes to the annual-report risk factors were reported.
Important facts for investors to verify
- The amount and timing of customer refunds, including interest, resulting from the final Delaware rate order.
- Renewal or replacement of the CoBank and Citizens credit facilities before their stated expiration dates, and continued covenant compliance.
- Future capital spending, its funding mix, and recovery of investment through regulated rates.
- Whether customer growth, water demand and service-line plan participation support the company’s stated expansion strategy.
- The effect of weather, power and other input costs, and variable interest rates on margins and cash generation.