Business context and reporting period
Artesian Resources Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. It provides regulated water and wastewater services, primarily in Delaware, and also operates contract services and water and sewer service-line protection plans. Water sales accounted for 89.2% of first-half operating revenue. Results are seasonal and may vary with weather and water consumption.
Financial results
Dollar amounts are in millions except per-share data. Comparisons are with the corresponding 2013 period.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $17.891 | $17.780 | $34.791 | $34.108 |
| Operating income | $3.649 | $4.145 | $6.795 | $6.883 |
| Net income applicable to common stock | $1.962 | $2.512 | $4.045 | $4.151 |
| Diluted earnings per share | $0.22 | $0.28 | $0.45 | $0.47 |
| Cash dividends per share | $0.2119 | $0.2057 | $0.4207 | $0.4084 |
Q2 operating margin was approximately 20.4%, versus 23.3% a year earlier; first-half operating margin was approximately 19.5%, versus 20.2%. Revenue increased 0.6% in Q2 and 2.0% year to date, while net income declined 21.9% and 2.6%, respectively.
First-half operating cash flow was $10.028 million, compared with $9.345 million in 2013. Capital expenditures were $9.704 million, leaving approximately $0.324 million of operating cash flow after capital expenditures. Cash declined $28,000 to $394,000. At June 30, total assets were $407.905 million and stockholders’ equity was $123.439 million. Long-term debt, including current maturities, was $106.627 million; lines of credit were $10.639 million and overdraft payable was $0.882 million. Debt to total capitalization, including short-term debt, was 46.4%. Available funds under two credit lines totaled approximately $49.4 million; one facility is a demand line.
Material changes and management commentary
- Q2 water sales declined 1.0% as consumption eased, partly offset by increased distribution-system improvement charge revenue and other utility and service-line plan revenue. First-half water sales rose 1.1%, with rate and infrastructure charges contributing.
- Q2 operating expenses excluding depreciation and income taxes rose 9.0%; first-half expenses on that basis rose 3.3%. Payroll and employee benefits increased $1.0 million in Q2 and $1.2 million in the first half. Management attributed lower earnings chiefly to weaker water-utility margins and higher labor and benefit costs.
- Capital expenditures were $9.7 million in the first half, up from $8.5 million. Spending included treatment-facility work, pumping equipment, meter-reading upgrades, and water-main rehabilitation.
- Management expects to fund the next 12 months with operating cash flow, cash balances, and bank credit lines, and believes these sources will meet working-capital and financing needs. No quantified earnings or revenue guidance is provided.
Outlook, risks and contingencies
- Artesian Water’s April 2014 Delaware rate application seeks an annualized revenue increase of approximately $10.0 million, or 15.9%. Temporary rates effective June 10 are designed to generate approximately $2.5 million annually, or 3.98%; the remaining requested increase is subject to regulatory approval.
- Key risks include weather-driven water demand, timing and sufficiency of rate approvals, rising operating and capital costs, construction and economic conditions, and variable-rate borrowing costs. The company had $10.6 million drawn under variable-rate credit lines at June 30.
- In its dispute with Chester Water Authority, a Special Master recommended payment of approximately $3.0 million withheld under the water-supply contract and a further $300,000 late fee. The withheld amount was accrued; the late fee is disputed. Artesian filed objections, and the District Court had not entered final judgment by the filing.
- A related-party construction contract with W.F. Construction was valued at approximately $340,000 at June 30. The company said it was reviewed by the Audit Committee and conducted on terms it believes comparable to arm’s-length terms.
- Management reported no material changes to the risk factors in the 2013 Form 10-K, no material adoption impact from accounting standards in the period, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Progress and final outcome of the Delaware water rate case, including any permanent rates, refunds, or changes to the temporary rates.
- Resolution of the Chester Water Authority litigation and whether the disputed late fee or other amounts become payable.
- Whether operating costs, especially payroll and benefits, continue to outpace revenue growth, and how water consumption and weather affect results.
- Capital-spending needs, available credit-line capacity and renewal terms, and compliance with debt covenants.
- Whether planned customer growth and expansion in wastewater and service-line protection plans translate into sustained revenue and earnings growth.