Artesian Resources Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results include eight wholly owned subsidiaries. Water sales are the principal revenue source; the company operates regulated water and wastewater utilities, primarily in Delaware, Maryland and Pennsylvania, as well as non-regulated service businesses.
Financial performance
| Metric | Three months 2012 | Three months 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $19.001 million | $17.730 million | $53.611 million | $48.997 million |
| Operating income | $4.495 million | $4.367 million | $12.378 million | $10.175 million |
| Net income applicable to common stock | $2.846 million | $2.238 million | $8.099 million | $5.000 million |
| Diluted earnings per share | $0.33 | $0.26 | $0.93 | $0.63 |
Revenue rose 7.2% in the quarter and 9.4% year to date; net income increased about 27% and 62%, respectively. Water sales were $17.353 million for the quarter and $48.597 million for the nine months, up 9.0% and 11.7%. The principal driver was the Delaware rate increase, with additional contribution from customer growth and higher consumption in Cecil County, Maryland.
Operating income was 23.7% of revenue for the quarter and 23.1% year to date, compared with 24.6% and 20.8% in the prior-year periods. Net income was 15.0% of revenue for the quarter and 15.1% year to date, versus 12.6% and 10.2%. Management reported that operating expenses excluding depreciation and income taxes were 55.8% of revenue year to date, down from 60.9%.
For the first nine months, operating cash flow was $18.273 million, versus $13.955 million; capital expenditures were $14.787 million, versus $10.785 million. Cash and cash equivalents were $512,000 at September 30, 2012, up from $311,000 at year-end 2011. Dividends paid were $5.086 million; cash dividends declared per common share were $0.5886 for the nine months.
Financial position and liquidity
At September 30, 2012, total assets were $388.353 million and stockholders’ equity was $115.826 million. Long-term debt, net of current portion, was $105.729 million; current long-term debt was $1.110 million; and lines of credit outstanding were $10.549 million. The company reported debt to total capitalization of 48.0% and compliance with its debt covenants. Current assets were $13.738 million and current liabilities were $27.165 million.
Available borrowing included $29.5 million under a $40 million Citizens Bank demand line, expiring no later than May 30, 2013, and an unused $20 million CoBank line expiring January 16, 2013. Management expected to fund the next 12 months from cash, credit lines and operating cash flow. Contractual cash obligations totaled $231.017 million, including principal and interest on debt and purchase commitments; the company said it intends to refinance specified debt maturities.
Changes, outlook and risks
- Delaware regulators approved a permanent 11.13% rate increase, approximately $6.25 million annualized, effective January 1, 2012. The settlement also set a 10% return on equity and authorized monthly billing, implemented in April.
- Year-to-date utility operating costs increased, particularly payroll, benefits, repairs and maintenance; reduced non-utility project activity and lower related expenses partly offset this. Interest expense declined with lower short-term borrowings.
- Year-to-date miscellaneous income included an approximately $168,000 refund of prior DEPSC assessments and an approximately $349,000 reclassification associated with previously terminated Maryland wastewater agreements. Management said such regulatory refunds are not typical and cannot be expected to recur.
- Capital spending was $14.8 million, including treatment and pumping improvements, meter upgrades, mains and wastewater projects. The company described continued expansion in water, wastewater and service-line protection plans as strategic priorities, but gave no quantified earnings or revenue guidance.
- Key operating uncertainties include weather-driven water demand, the timing and adequacy of rate approvals, construction and economic conditions, inflation and capital needs. Variable-rate borrowings expose the company to interest-rate increases; the Citizens facility is payable on demand.
- Artesian Water’s contract dispute with Chester Water Authority remained in litigation, with both a company claim and a counterclaim seeking monetary damages. The filing provides no clear estimate of potential exposure. The company reported no material change to previously disclosed risk factors.
Investor verification points
- Assess how much of revenue and earnings growth reflects the permanent Delaware rate increase and Cecil County customer additions versus underlying consumption growth.
- Review the repeatability of earnings given the one-time assessment refund and other miscellaneous-income items.
- Verify credit-line renewal and refinancing plans, particularly the near-term line expirations and demand feature, alongside planned capital expenditures.
- Monitor the Chester Water Authority litigation and any changes in rate proceedings, weather-related demand or regulatory cost recovery.