Artesian Resources Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Dollars below are in millions unless otherwise stated. Artesian primarily provides regulated water and wastewater services in Delaware, Maryland and Pennsylvania, with additional contract operations and service-line protection plans. Water sales generated about 90% of first-half revenue.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $17.780 | $17.912 | $34.108 | $34.610 |
| Operating income | $4.145 | $4.294 | $6.883 | $7.881 |
| Net income | $2.512 | $2.748 | $4.151 | $5.250 |
| Basic EPS | $0.29 | $0.32 | $0.47 | $0.61 |
| Operating margin | 23.3% | 24.0% | 20.2% | 22.8% |
First-half operating cash flow was $9.345, down from $13.856. Capital expenditures were $8.541, versus $9.962, leaving approximately $0.804 of operating cash flow after capital expenditures, compared with $3.894 in the prior-year period. Dividends paid were $3.565; cash dividends per share were $0.4084 for the first half, up from $0.3908.
At June 30, cash was $0.501 and current assets were $12.281, against current liabilities of $21.767. Long-term debt, including its current portion, was $107.200; lines of credit were $8.700. The company reported debt at 47.1% of total capitalization and compliance with its debt covenants. Two credit facilities had $51.3 million of combined available capacity: $38.8 million on the $40 million Citizens facility and $12.5 million on the $20 million CoBank facility. The Citizens line is payable on demand; the facilities were scheduled to expire in May 2014 and January 2014, respectively.
Changes and management commentary
- First-half revenue fell 1.5% and net income fell 20.9% year over year. Q2 revenue declined 0.7% and net income declined 8.6%.
- Management attributed weaker water sales to record second-quarter rainfall, which reduced consumption. The weather-related sales impact was estimated at $1.1 million for the first half and $0.3 million for Q2; DSIC revenue partially offset the decline, increasing by approximately $0.5 million and $0.2 million, respectively.
- First-half utility operating expenses rose 5.9%, including a $0.6 million increase in administration costs, primarily legal expense from the Chester Water Authority rate dispute. Payroll and benefits, purchased water, electricity, and maintenance costs also increased. The expense-to-revenue ratio, excluding depreciation and income taxes, rose to 59.6% from 55.7% for the first half.
- First-half capital expenditures decreased to $8.5 million from $10.0 million. Utility plant increased to $370.6 million from $366.6 million at year-end 2012.
Outlook, regulation, risks and unusual items
- On August 6, 2013, after quarter-end, Artesian Wastewater and Delaware regulatory parties agreed to a proposed settlement of its rate application. It provides for two rate increases, with the second one year after the first; once fully implemented, the settlement is expected to add approximately $174,000 in annual revenue and provides for a 10% return on equity. The settlement remained subject to Delaware PSC approval. The original application sought approximately $343,000 of annualized additional revenue.
- Management expects to fund the next 12 months with cash balances, bank credit lines and operating cash flow. Its strategy includes expanding water, wastewater, contract-operation and service-line protection businesses; no specific earnings or revenue guidance was provided.
- Key risks include weather-sensitive water demand, timing and adequacy of regulatory rate decisions, construction and economic conditions, infrastructure investment needs, litigation costs, and interest-rate exposure on variable-rate borrowings. The company also noted commodity-cost exposure, partly mitigated by rate recovery and a two-year fixed-price electricity supply contract.
- Artesian Water’s ongoing dispute with Chester Water Authority concerns the contractual rate for purchased bulk water; the counterclaim seeks damages and related costs. The filing gives no clear estimate of potential financial exposure.
- Miscellaneous income was lower because 2012 included an atypical refund of prior Delaware PSC assessments; the company cautioned that such refunds are not assured in future periods.
Important facts for investors to verify
- Whether and when regulators approve the wastewater rate settlement, and the realized revenue after both steps.
- Whether water demand and sales recover from the unusually rainy first half, and the sensitivity of earnings to weather.
- Progress, cost and potential exposure in the Chester Water Authority litigation.
- Renewal and terms of the short-term credit facilities, including the demand feature on the Citizens line, and the company’s continuing covenant compliance.
- Whether operating cash generation can support planned capital investment and dividends while maintaining liquidity.