Artesian Resources Corporation — Q1 2012 Form 10-Q
Business context and period: This unaudited report covers the three months ended March 31, 2012, compared with Q1 2011. Artesian is a regulated water and wastewater utility operating primarily in Delaware, with operations in Maryland and Pennsylvania and additional non-regulated services. Water sales are its principal revenue source and are subject to seasonal weather variation.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Operating revenue | $16.698 million | $14.757 million |
| Operating income | $3.590 million | $2.219 million |
| Net income | $2.505 million | $1.009 million |
| Diluted earnings per share | $0.29 | $0.13 |
| Operating margin | 21.5% | 15.0% |
| Net margin | 15.0% | 6.8% |
| Operating cash flow | $7.582 million | $5.584 million |
| Capital expenditures | $3.597 million | $2.587 million |
| Cash and cash equivalents | $0.453 million | $0.311 million at Dec. 31, 2011 |
| Long-term debt, including current portion | $107.967 million | $108.257 million at Dec. 31, 2011 |
Revenue rose 13.2%, while net income increased about 148%. Water sales increased $2.128 million (16.5%). Management attributed the gain mainly to the 11.13% permanent Delaware rate increase effective January 1, 2012, plus additional Cecil County customers and consumption. Operating expenses excluding depreciation and income taxes declined 5.7%; lower non-utility and electric power costs helped, while depreciation and income tax expense increased. Interest expense fell 3.8%.
The company generated $7.582 million of operating cash, spent $3.597 million on capital projects, and used $3.854 million in financing activities, including $1.663 million of dividends and $2.662 million of net line-of-credit repayments. Cash increased $0.142 million during the quarter. The quarterly dividend was $0.1930 per share, versus $0.1892 a year earlier. At quarter-end, stockholders’ equity was $114.374 million and current liabilities were $22.060 million. Lines of credit outstanding were $9.078 million; Artesian reported $30.9 million available under its $40 million Citizens facility and no borrowings under its $20 million CoBank facility. Debt to total capitalization, including short-term debt, was 48.6%.
Material changes and business developments
- A Delaware rate settlement approved a permanent annualized revenue increase of approximately $6.25 million, effective January 1, 2012, and authorized a 10% return on equity. No refund was required because the permanent increase did not exceed temporary amounts already collected.
- Artesian Water Maryland completed its $2.2 million purchase of Cecil County water assets in December 2011, adding approximately 1,500 customers. The related wastewater asset agreements were terminated; the Maryland regulator approved termination of the wastewater franchise agreement on April 18, 2012.
- Capital spending increased to $3.6 million from $2.6 million, including treatment and pumping improvements, meter upgrades, mandated relocations and wastewater projects.
- Non-utility revenue declined 16.1%, primarily due to reduced design, permitting, municipal contract and consulting activity. Management had previously reorganized Artesian Consulting Engineers and ended its outside development and architectural services.
Outlook, risks and unusual items
Management expects to fund the next 12 months with available cash, bank credit lines and operating cash flow; it provided no specific earnings or revenue guidance. Its strategy emphasizes customer and service-territory growth, water and wastewater infrastructure investment, contract operations and service-line protection plans. Growth and results depend on rate approvals, customer demand, construction and economic conditions, weather, and recovery of capital and operating costs through rates.
- Liquidity and refinancing: The $40 million Citizens demand credit facility had a term expiring on the earlier of May 31, 2012 or a demand for repayment. Renewal terms are not stated in this filing. The company said it was in compliance with applicable debt covenants and expected to refinance long-term debt as it came due.
- Legal contingency: A federal grand jury and EPA investigation concerns prior operation of eight Pennsylvania wastewater facilities by a subsidiary. Artesian is cooperating, but cannot predict the outcome or estimate any potential loss; charges could result in significant fines, damages or regulatory consequences.
- Litigation: Artesian Water’s contract dispute with Chester Water Authority includes a counterclaim seeking monetary damages, costs and attorneys’ fees; outcome and recovery are uncertain.
- Rates and weather: Rate increases require regulatory approval and may be delayed or insufficient. Cooler temperatures or greater rainfall can reduce water demand. Interest-rate exposure includes variable-rate borrowings; the company also faces commodity-cost risk, partly mitigated by a fixed-price electricity contract.
- Balance-sheet presentation: A rate-settlement change reclassified approximately $1.2 million from accumulated depreciation to deferred credits and other liabilities; the filing describes this as a reclassification, not an earnings item.
Investor verification priorities
- Confirm the renewal or replacement of the Citizens credit facility, its terms, and subsequent borrowing availability.
- Monitor developments and potential financial exposure in the federal investigation and Chester Water Authority litigation.
- Assess whether the Delaware rate increase, customer additions and water consumption support continued revenue and earnings growth.
- Review planned capital expenditures, regulatory cost recovery and debt refinancing needs against operating cash generation.
- Check whether weather, construction activity and lower non-utility project volumes materially affect results in later periods.