Artesian Resources Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. Artesian is primarily a regulated water utility, with wastewater and non-regulated service businesses. Water sales generated about 90% of operating revenue in the first half of 2012.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $17.9 million | $16.5 million | $34.6 million | $31.3 million |
| Operating income | $4.3 million | $3.6 million | $7.9 million | $5.8 million |
| Net income | $2.75 million | $1.75 million | $5.25 million | $2.76 million |
| Diluted EPS | $0.32 | $0.23 | $0.61 | $0.36 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $13.9 million | $10.4 million |
Q2 revenue increased 8.5%; first-half revenue rose 10.7%. Water sales grew 10.3% in Q2 and 13.2% for the first half, mainly reflecting the 11.13% Delaware permanent rate increase effective January 1, 2012, plus customer growth and higher consumption in Cecil County, Maryland. First-half non-utility revenue declined 13.2%, partly offset by growth in service-line protection plans.
The reported ratio of operating expense excluding depreciation and income taxes to revenue improved to 54.8% in Q2 from 59.6%, and to 55.7% for the first half from 63.6%. First-half capital expenditures were $10.0 million, versus $6.6 million a year earlier. Dividends paid were $3.37 million; dividends per share were $0.1978 for Q2 and $0.3908 for the first half.
Balance sheet and liquidity
At June 30, 2012, cash was $0.4 million and current assets were $10.9 million, compared with current liabilities of $23.0 million. Long-term debt was $106.0 million, with $1.7 million current; lines of credit were $8.8 million and overdrafts $1.3 million. Total stockholders’ equity was $115.8 million. Debt to total capitalization, including short-term debt, was 48.2%; the company reported compliance with its debt covenants.
First-half operating cash flow of $13.9 million funded most of $9.9 million in net investing outflows; financing cash outflow was $3.8 million, and cash increased $0.08 million. The company had $31.2 million available on its $40 million Citizens Bank demand line, which expires no later than May 30, 2013, and no borrowings on its separate $20 million CoBank line, expiring January 16, 2013. Management expects to fund the next 12 months with cash, credit facilities and operating cash generation.
Material changes and notable items
- The Delaware rate settlement authorized an annualized revenue increase of approximately $6.25 million, or 11.13%, effective January 1, 2012; the approved permanent rates did not require refunds of prior temporary collections.
- Water customer additions included approximately 1,500 customers from the Cecil County asset purchase completed in December 2011. A Maryland water-system asset transfer serving about 200 customers was expected to close by year-end 2012.
- Utility operating expenses were broadly stable, while first-half non-utility expenses fell 38.9%, largely with reduced project activity and lower legal costs. Interest expense declined as short-term borrowing decreased.
- Miscellaneous income included an approximately $168,000 refund of Delaware Public Service Commission assessments for 2007–2010. Management said such refunds are not typical and may not recur.
- A regulatory accounting change reclassified approximately $1.2 million from accumulated depreciation to deferred credits and other liabilities; this was a balance-sheet presentation change.
Outlook, risks and contingencies
Management’s strategy is to expand water, wastewater and service-line protection services across the Delmarva Peninsula, supported by infrastructure investment and customer growth. No specific earnings or revenue guidance was provided. The company noted that water demand is weather-sensitive and that growth in development-related services depends on construction and economic conditions. It plans significant ongoing capital investment in treatment, pumping, metering and distribution systems.
Key risks include regulatory approval and timing of rate relief, weather-driven consumption, rising infrastructure and operating costs, interest-rate exposure on variable-rate borrowings, and the need to refinance debt as it matures. The Citizens facility is payable on demand. A pending contract dispute with Chester Water Authority includes claims and a counterclaim for damages; the company cannot assure the outcome. Management reported no material changes to the risk factors in its 2011 Form 10-K and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of continued revenue and earnings growth reflects the 11.13% rate increase versus customer growth, consumption and weather.
- Whether the company renews or replaces its near-term bank credit facilities and maintains covenant compliance and refinancing access.
- The future capital-spending pace and the extent to which approved rates recover infrastructure costs.
- Whether service-line protection plan enrollment and revenue growth can offset weaker non-regulated project activity.
- Developments and potential financial exposure in the Chester Water Authority litigation, and whether any further regulatory assessment refunds occur.