Artesian Resources Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Artesian is a regulated water and wastewater utility operating mainly in Delaware, with services in Maryland and Pennsylvania, plus non-regulated contract operations and service-line protection plans. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $21.83 | $20.78 | $59.67 | $58.27 |
| Operating income | $5.95 | $5.39 | $14.47 | $14.05 |
| Net income applicable to common stock | $4.36 | $3.70 | $10.23 | $9.47 |
| Diluted earnings per share | $0.48 | $0.41 | $1.12 | $1.06 |
- Revenue grew 5.1% in Q3 and 2.4% year to date; net income increased 17.9% and 8.0%, respectively.
- Operating margin was approximately 27.2% in Q3 versus 26.0% a year earlier, and 24.2% for nine months versus 24.1%. The company’s operating-expense ratio, excluding depreciation and income taxes, was 50.9% versus 51.4% in Q3 and 53.5% in both nine-month periods.
- Water sales accounted for 90.2% of Q3 revenue and 89.6% of nine-month revenue. Nine-month DSIC revenue was $0.94 million, up from $0.34 million in 2015.
Cash flow, investment, debt and liquidity
- Nine-month operating cash flow was $21.93 million, compared with $22.13 million in 2015. Capital expenditures were $20.00 million, up from $15.88 million. Cash increased $0.04 million to $0.24 million.
- Financing activities used $1.95 million; cash dividends paid were $6.10 million. Developer advances and contributions provided $9.87 million, and common-stock issuance generated $1.44 million.
- At September 30, total long-term debt, including its current portion, was $103.91 million; lines of credit outstanding were $4.01 million. The company reported debt to total capitalization of 43.3% and compliance with its debt covenants.
- The company had $60 million in bank credit lines, with $56 million available. The $40 million Citizens facility is payable on demand and expires by May 2017; the company expected to renew both facilities. Current liabilities were $20.89 million, versus current assets of $15.88 million.
- Contractual cash obligations totaled $184.33 million, including principal and interest, operating leases and purchase obligations. The filing says certain bond maturities are intended to be refinanced.
Material changes and management commentary
- Q3 water-sales growth reflected increased consumption and a higher Distribution System Improvement Charge; the nine-month increase also reflected higher fixed customer and fire-protection charges. Customer growth included approximately 1,200 additional Delaware metered customers year over year.
- Interest expense declined $0.11 million in Q3 and $0.26 million year to date, primarily after the Series S bond rate fell from 6.73% to 4.45% effective March 1, 2016, and as short-term borrowings decreased.
- Management attributed higher earnings to stronger water-utility margins and lower interest expense. It expects to fund the next 12 months with operating cash flow, available cash and credit facilities, and believes these sources will cover normal operations and financing needs.
- The DEPSC approved a 2.30% cumulative DSIC effective July 1, 2016, subject to later audit. The final order on the prior general rate case was issued in January 2016; temporary-rate refunds had been applied to customer bills in October 2015.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management describes growth opportunities in water and wastewater service, contract operations and service-line protection plans, alongside planned capital investment in water and wastewater infrastructure.
- Water demand and cash generation are exposed to weather and seasonal consumption. Other risks include regulatory rate decisions and recovery of costs, construction and economic conditions, and increases in interest rates, chemicals, electricity and other commodities. The company has fixed-price electric supply through May 2019.
- Utility expenses included increased legal costs related to a developer dispute over Contributions in Aid of Construction. On October 20, 2016, the company petitioned the DEPSC for deferred accounting treatment; approval could defer and amortize the costs in a future rate period. The outcome is not stated.
- An IRS review of the 2014 federal filing concluded in Q2 2016 with no change to tax liability; the company reversed approximately $0.20 million of previously recorded reserves. It continued to accrue interest and penalties relating to potential disallowance of a repair deduction and remained subject to examination for specified tax years.
- Management said ordinary-course litigation was not expected to materially affect results, but noted litigation can incur significant expense and divert management attention. No material changes to the 2015 Form 10-K risk factors were reported.
Important facts for investors to verify
- Whether the demand credit facility and other credit lines were renewed on acceptable terms before expiry, and whether liquidity remains adequate given cash of $0.24 million and current liabilities exceeding current assets.
- The resolution of the developer dispute, the DEPSC’s response to the deferred-accounting petition, and any resulting expense or rate recovery.
- Whether the 2.30% DSIC and prior rate-case award continue to support recovery of capital investment and operating costs.
- Capital spending, debt refinancing needs and the pace of customer and water-demand growth, including weather effects.
- The remaining tax uncertainty over the repair deduction and any subsequent examination developments.