Business context and reporting period
Artesian Resources Corporation is a regulated water and wastewater utility operating primarily in Delaware, with water and wastewater operations in Maryland and water service in Pennsylvania, plus non-regulated contract services and service-line protection plans. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods.
Key financial metrics
| Metric | Q2 2015 | Six months 2015 |
|---|---|---|
| Operating revenue | $19.536 million, up 9.2% | $37.497 million, up 7.8% |
| Operating income | $4.985 million, versus $3.649 million | $8.657 million, versus $6.795 million |
| Net income applicable to common stock | $3.233 million, versus $1.962 million | $5.770 million, versus $4.045 million |
| Diluted EPS | $0.36, versus $0.22 | $0.64, versus $0.45 |
| Cash from operating activities | Six-month amount: $14.948 million, versus $10.028 million | |
| Capital expenditures | Six-month amount: $9.581 million, versus $9.704 million | |
| Cash and cash equivalents | $0.360 million at June 30, 2015 |
Water sales were $17.474 million in Q2 and $33.512 million for the six months; management attributed the increases primarily to temporary rate increases and higher water consumption. Water sales represented 89.4% of six-month revenue. The operating-expense-to-revenue ratio, excluding depreciation and income taxes, improved to 52.1% for Q2 and 54.6% for the six months, from 60.2% and 60.3%, respectively. Income tax expense increased year over year, mainly with higher pretax income.
Debt, liquidity and financial position
At June 30, total long-term debt, including its current portion, was $105.571 million; lines of credit were drawn by $13.816 million. Debt to total capitalization, including current long-term debt, was 45.2%, and the company reported compliance with its debt covenants. Fixed-rate long-term debt had a disclosed estimated fair value of $127.704 million versus a carrying amount of $105.571 million.
The company had two credit facilities totaling $60 million, with $46.2 million available at quarter-end. The Citizens facility is payable on demand and expires no later than May 27, 2016; the CoBank facility expires January 12, 2016. Six-month dividends paid were $3.865 million. Total contractual cash obligations were $200.077 million, including principal and interest, purchase obligations and other commitments.
Material changes, outlook and risks
- Q2 revenue rose 9.2% and net income rose approximately 64.8%; six-month revenue rose 7.8% and net income rose approximately 42.7%. Management linked earnings growth chiefly to temporary water-rate increases and higher consumption. Lower employee bonus costs also reduced operating expenses.
- The Delaware water rate case filed in April 2014 sought an annualized revenue increase of approximately $10.0 million (15.90%). Temporary increases were in effect, but a portion of the second step remained reserved pending a final Delaware Public Service Commission decision and was not recognized in income. The final rate outcome and timing were uncertain.
- Management expected to fund the next 12 months through operating cash flow, cash balances, bank credit lines and capital-market financing as needed, and believed existing resources would be adequate for working capital and financing requirements. No specific earnings or revenue guidance was provided.
- Key risks include weather-driven water demand, regulatory approval and timing of rate recovery, infrastructure investment needs, construction and economic conditions, variable-rate borrowing costs, and commodity costs. The company said it mitigates certain electricity-price exposure with a two-year fixed-price supply contract and expects recoverable cost increases to be addressed through rates.
- The company had paid approximately $3.1 million to Chester Water Authority in October 2014 and approximately $379,000 of related interest in January 2015 following a court order; the amounts had been accrued. Management said other ordinary-course litigation was not expected to have a material effect, while noting litigation costs and outcomes remain uncertain.
- Management reported no material changes to the risk factors in its 2014 Form 10-K and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when the Delaware water rate case receives a final decision, including the treatment of temporary rates and amounts held in reserve.
- Whether water consumption, customer growth and weather support the revenue and earnings gains; Delaware and Maryland water customers increased by approximately 700 and 100, respectively, year over year.
- Renewal or refinancing of the two credit facilities, their demand and maturity terms, and continued covenant compliance.
- Execution and financing of the capital program, including the reported $9.6 million of first-half capital expenditures and future infrastructure requirements.
- Future rate recovery of operating, tax, financing and commodity costs, and any developments in litigation or tax examinations for 2011–2014.