Artesian Resources Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results. Artesian is a regulated water and wastewater utility, with additional contract operations and service-line protection businesses; water sales generated 89.3% of quarterly revenue.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $17.962 million | $16.900 million | +6.3% |
| Operating income | $3.672 million | $3.146 million | +16.7% |
| Net income applicable to common stock | $2.538 million | $2.083 million | +21.8% |
| Diluted earnings per share | $0.28 | $0.23 | Increased |
| Operating cash flow | $7.969 million | $5.054 million | Increased |
| Capital expenditures | $3.609 million | $2.730 million | Increased |
Operating margin was approximately 20.4%, compared with 18.6% a year earlier. Management reported that operating expenses excluding depreciation and income taxes were 57.4% of revenue, versus 60.4%. Cash dividends per share were $0.2151, compared with $0.2088.
Balance sheet, debt and liquidity
- At March 31, cash was $353,000; current assets were $14.509 million and current liabilities were $28.221 million.
- Long-term debt, including its current portion, was $105.829 million; outstanding lines of credit were $13.702 million. Total stockholders’ equity was $124.485 million.
- Management reported debt to total capitalization of 45.9% and compliance with applicable debt covenants.
- Operating cash flow and $1.9 million in net developer contributions and advances were primary funding sources. The company used $4.256 million in financing activities, including $1.917 million of dividends paid and $370,000 of long-term debt principal repayments.
- Available credit was reported as $36.3 million on the $40 million Citizens Bank facility and $10 million on the $20 million CoBank facility. The Citizens facility was a demand line and was due to expire May 28, 2015, unless extended or otherwise renewed.
Material changes and management commentary
- Water sales increased $954,000, or 6.3%, primarily due to temporary rate increases effective in June and November 2014 and higher water consumption. The increase was partly offset by a $432,000 decline in Distribution System Improvement Charge revenue.
- Other utility revenue rose 8.7%, largely from wastewater customers and a rate increase; non-utility revenue rose 3.8%, primarily from service-line protection plans.
- Net income growth reflected stronger water utility margins. Income tax expense rose $363,000, while interest charges were broadly flat at $1.748 million.
- Artesian distributed approximately 1.8 billion gallons in Delaware and 35.0 million gallons in Maryland. Customer counts increased by about 900 in Delaware and 100 in Maryland year over year.
- Management plans continued investment in water and wastewater infrastructure and expects to fund operations and capital needs over the next 12 months with operating cash flow, available cash, bank credit lines and, as necessary, capital-market financing. No specific earnings or revenue guidance was provided.
Outlook, risks and contingencies
- A Delaware Water rate case remained pending: the company requested an annualized revenue increase of approximately $10.0 million, or 15.90%. Temporary increases were in effect, but a portion of the second step was held in reserve and excluded from income. Final rates and timing were subject to regulatory determination.
- Water demand is seasonal and sensitive to rainfall and temperature. Management also cited dependence on timely and adequate rate decisions, construction and customer growth, and access to financing.
- Variable-rate borrowings expose the company to higher interest expense if rates rise. The company also identified potential cost exposure to chemicals, electricity and other commodities; it had a two-year fixed-price electricity supply contract.
- Following a court order in the dispute with Chester Water Authority, approximately $3.1 million previously accrued was paid in October 2014, and approximately $379,000 of accrued interest was paid in January 2015. The filing says other ordinary-course litigation is not expected to have a material effect, while noting litigation costs and management distraction remain possible.
- Contractual cash obligations totaled $203.149 million, including scheduled debt principal and interest, purchase obligations and leases. The company stated that it intends to refinance certain bond maturities as they come due.
Important facts for investors to verify
- Whether the Citizens Bank demand credit line was renewed or replaced before its May 28, 2015 expiration, and the availability and terms of other facilities.
- The final outcome and timing of the pending Delaware Water rate case, including treatment of temporary rates and amounts held in reserve.
- Whether customer growth, consumption and operating cash flow support the planned infrastructure program and dividend.
- Debt maturities, refinancing access, variable-rate exposure and ongoing compliance with debt covenants.
- Any material developments in the Chester Water Authority matter or other litigation; the filing reports the specified court-ordered amounts as paid.