Artesian Resources Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Artesian is a regulated water and wastewater utility serving Delaware, Maryland and Pennsylvania, with contract services and water/sewer service-line protection plans. Figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $18.1 | $19.0 | $52.2 | $53.6 |
| Operating income | $4.3 | $4.5 | $11.2 | $12.4 |
| Net income applicable to common stock | $2.6 | $2.8 | $6.8 | $8.1 |
| Basic earnings per share | $0.30 | $0.33 | $0.77 | $0.94 |
| Cash dividends per share | $0.2057 | $0.1978 | $0.6141 | $0.5886 |
- Q3 revenue fell 4.9%; water sales declined 6.0%, primarily because heavy rainfall reduced consumption and water-sales revenue by approximately $1.3 million. Service-line protection-plan revenue and DSIC charges partly offset the decline.
- Nine-month revenue decreased 2.7%; water sales fell 3.3%, with weather-related lower consumption reducing revenue by approximately $2.4 million. DSIC revenue increased approximately $0.8 million year over year.
- Operating expenses excluding depreciation and income taxes decreased 6.6% in Q3, but increased 1.2% for the nine-month period. The corresponding expense-to-revenue ratio was 55.0% in Q3 versus 56.0%, and 58.0% for nine months versus 55.8%.
- Depreciation and amortization increased 5.6% in Q3 and 4.8% for nine months, reflecting utility-plant investment. Nine-month administration expense rose $0.6 million, including legal costs related to Chester Water Authority and customer-service software consulting.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $15.1 million, down from $18.3 million. Capital expenditures were $13.9 million, compared with $14.8 million. Cash at period-end was $0.6 million.
- Cash used in financing was $1.2 million, including $5.4 million in dividends paid. Net developer advances and contributions were $4.7 million; net proceeds from stock issuance were $1.7 million.
- At September 30, total assets were $400.4 million and stockholders’ equity was $119.5 million. Long-term debt, including its current portion, was $106.8 million; lines of credit outstanding were $9.7 million. Debt to total capitalization, including current long-term debt, was 47.2%.
- Current assets were $14.7 million and current liabilities were $26.4 million. The company reported $36.3 million available under its $40 million Citizens Bank line and $14.0 million available under its $20 million CoBank line. Both facilities had near-term expirations: May 29, 2014 and January 14, 2014, respectively; the Citizens facility is also payable on demand.
- Management said it expected to fund the next 12 months with available cash, bank credit lines and projected operating cash flow. No formal earnings or revenue guidance is provided.
Material developments, outlook and risks
- Artesian Wastewater’s Delaware rate case settlement was approved by the DEPSC on October 8, 2013, after quarter-end. The approved two-step increase is expected to add approximately $174,000 in annual revenue once fully implemented, versus the company’s original request for $343,000; the settlement authorized a 10% return on equity.
- Customer growth included approximately 500 additional metered Delaware water customers year over year and approximately 200 Maryland customers following the CECO system acquisition. The company continued investment in water and wastewater infrastructure and identified growth opportunities in service territories, wastewater capacity and service-line plans.
- Water demand is seasonal and weather-sensitive. Management attributed lower 2013 water sales to heavy precipitation; rate recovery, regulatory timing, construction and economic conditions, inflation, and operating and capital costs also affect results.
- Interest-rate exposure includes $9.7 million outstanding on variable-rate credit lines; long-term debt is fixed-rate. The company also cited commodity-cost exposure, partly mitigated by rate recovery and a two-year fixed-price electricity contract.
- In the Chester Water Authority dispute, a Special Master’s October 17 preliminary recommendation called for payment of approximately $2.3 million withheld from prior invoices; that amount was already accrued at September 30. The Special Master also recommended a disputed $230,000 late fee and rejected Chester Water Authority’s counterclaim. Artesian intended to object; final judgment remained pending.
- No material changes to the risk factors in the 2012 Form 10-K were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the wastewater rate increase is in effect, when the second step takes effect, and realized revenue versus the stated estimate.
- The District Court’s final decision on the Chester Water Authority dispute, including the disputed late fee and any resulting cash payment or recovery.
- Renewal terms, pricing and availability of the two credit facilities, particularly given their 2014 expirations and the demand feature.
- Whether water consumption and revenue recover as weather normalizes, and whether operating-cost and capital-investment increases are recovered through rates.
- Progress and funding needs for planned infrastructure and wastewater projects, alongside dividend payments and operating cash generation.