Artesian Resources Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Financial statements are unaudited. Artesian is primarily a regulated water utility operating in Delaware, Maryland, and Pennsylvania, with wastewater and non-regulated service businesses.
Financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $16.327 million | $16.698 million | Down 2.2% |
| Operating income | $2.738 million | $3.590 million | Down 23.7% |
| Net income applicable to common stock | $1.640 million | $2.505 million | Down 34.5% |
| Basic and diluted EPS | $0.19 | $0.29 | Down $0.10 |
| Operating margin | 16.8% | 21.5% | Down 4.7 percentage points |
| Net margin | 10.0% | 15.0% | Down 5.0 percentage points |
| Operating cash flow | $4.751 million | $7.582 million | Down 37.3% |
| Capital expenditures | $4.087 million | $3.597 million | Up $0.490 million |
Revenue, expenses, and material changes
- Water sales were $14.567 million, down $0.477 million, or 3.2%, primarily from lower water consumption. Water sales represented 89.2% of quarterly revenue, according to MD&A.
- DSIC revenue increased by approximately $0.3 million year over year; the charge generated about $258,000 in Q1 2013 and was not in effect in Q1 2012.
- Other utility revenue rose about $51,000, primarily from wastewater revenue. Non-utility revenue rose about $55,000, including approximately $76,000 of additional service-line protection plan revenue, partly offset by lower contract-services revenue.
- Operating expenses increased: utility operating expense rose $0.9 million, principally from legal costs related to the Chester Water Authority dispute and higher wages and medical benefits. Depreciation and amortization increased $81,000. Lower income-tax expense partly offset the pressure on earnings.
- Management attributed the $0.9 million decline in net income primarily to lower water sales and higher legal costs. The operating-expense ratio excluding depreciation and income taxes increased to 63.9% from 56.7%.
Cash, debt, and liquidity
- Cash and cash equivalents were $321,000 at March 31, 2013, down from $617,000 at year-end. Operating cash flow of $4.751 million was below capital expenditures of $4.087 million by approximately $664,000.
- At quarter-end, long-term debt was $106.022 million, with $1.120 million classified as current; lines of credit totaled $10.087 million. Debt to total capitalization, including the short-term portion, was 47.5%. The fair value of long-term debt was reported as $133.536 million versus a $107.142 million carrying amount.
- Available credit was $33.9 million on the $40 million Citizens Bank facility and $16.0 million on the $20 million CoBank facility. The Citizens facility is a demand line and was due to expire May 30, 2013; CoBank’s facility expires January 14, 2014. Both carry floating LIBOR-based rates.
- Management expected to fund the next 12 months with cash balances, bank credit lines, and operating cash flow. It reported compliance with CoBank covenants at quarter-end.
- Contractual cash obligations totaled $222.673 million, including $175.426 million for first mortgage bonds (principal and interest), $12.001 million for state revolving-fund loans, and $33.112 million for unconditional purchase obligations. Management said certain debt maturities are intended to be refinanced.
- Cash dividends per common share were $0.2027, up from $0.1930 in Q1 2012.
Outlook, risks, and contingencies
- No numerical earnings or revenue guidance was provided. Management described plans to expand water, wastewater, contract-operation, and service-line protection services across the Delmarva Peninsula, and noted that results are seasonal and sensitive to weather and water consumption.
- Artesian Wastewater filed a Delaware rate application on January 18, 2013 seeking an annualized revenue increase of approximately $343,000, or 34.8%, for Kent and Sussex County territories. If approved, the company estimated an approximately 30.1% increase for the average residential customer. Approval and timing were not assured.
- The Chester Water Authority litigation concerns the price charged for bulk water under contract. Artesian Water’s complaint and the Authority’s counterclaim remain unresolved; the filing gives no clear estimate of potential outcome or financial exposure. Management cited related legal expense as a material contributor to higher costs.
- Risks include regulatory decisions and rate recovery, weather-driven demand, inflation and capital costs, construction and economic conditions, variable-rate borrowing costs, and potential litigation expense. The company reported no material changes to the risk factors in its 2012 Form 10-K and no off-balance-sheet arrangements.
Important facts for investors to verify
- Subsequent status and terms of the Citizens Bank credit-line renewal or replacement, given its May 30, 2013 expiry and demand feature.
- Progress, timing, and final customer impact of the wastewater rate application.
- Developments and any financial consequences in the Chester Water Authority litigation.
- Whether water consumption, operating costs, and legal expenses improve after the quarter, and whether rate mechanisms offset ongoing cost increases.
- Funding needs for planned capital investment and the company’s ability to refinance debt maturities while sustaining dividends.