Artesian Resources Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Artesian is a regulated water and wastewater utility with additional non-regulated service businesses, operating primarily in Delaware.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparator |
|---|---|---|
| Operating revenue | $19.901 million | $19.386 million; up 2.7% |
| Operating income | $4.462 million | $4.284 million |
| Net income applicable to common stock | $4.074 million | $3.590 million; up 13.5% |
| Diluted EPS | $0.44 | $0.39 |
| Operating margin | 22.4% | 22.1% |
| Net margin | 20.5% | 18.5% |
| Cash provided by operating activities | $7.129 million | $7.621 million |
| Capital expenditures | $9.212 million | $9.078 million |
| Cash and cash equivalents | $0.330 million at March 31, 2020 | $0.596 million at December 31, 2019 |
| Long-term debt, including current portion | $145.352 million at March 31, 2020 | $145.862 million at December 31, 2019 |
| Lines of credit outstanding | $8.638 million | $7.500 million at December 31, 2019 |
| Dividends per common share | $0.2496 | $0.2423 |
Operating cash flow less capital expenditures was negative $2.083 million. Q1 financing included $3.179 million in net developer advances and contributions and $2.319 million in dividends paid. Stockholders’ equity was $162.354 million at quarter-end.
Material changes and operating drivers
- Revenue increased $0.515 million, led by higher water sales and DSIC revenue. The Delaware DSIC rate rose to 7.50% effective January 1, 2020, from 5.55% a year earlier. Water sales represented 87.4% of operating revenue.
- Other utility revenue grew, principally from wastewater customer growth and inspection fees; non-utility revenue declined, mainly because of lower contract service revenue.
- Operating expenses increased $0.337 million overall. Higher payroll and benefits were partly offset by lower repair and maintenance costs. The reported expense ratio, excluding depreciation and income taxes, improved to 56.9% from 57.8%.
- Other income increased, including a CoBank patronage refund and higher allowance for funds used during construction. Interest expense rose $0.179 million, primarily due to the Series V bond issued in December 2019.
- Cash from operations declined $0.492 million year over year; capital spending remained elevated at $9.212 million.
Liquidity, debt and investment
At March 31, the company reported $38.9 million available under its $40 million Citizens line and $12.5 million available under Artesian Water’s $20 million CoBank line. The Citizens facility is a demand line expiring no later than May 23, 2020; the CoBank line expires July 20, 2020. The company said it expected to renew both. The filing reports compliance with debt covenants. Long-term debt is primarily fixed rate; the Series V bond carries a 4.42% rate and matures in 2049.
Management expected to fund the next 12 months with cash, credit lines, operating cash flow, state revolving fund loans and, if needed, capital-market financing. Q1 capital expenditures were directed to mains and distribution facilities, treatment facilities, equipment, meter reading systems, mandated relocations and wastewater projects.
Outlook, risks and notable events
- No specific earnings or revenue guidance was provided. Management described continued growth plans in water, wastewater, contract operations and service-line protection plans; results remain subject to weather, construction activity, rate decisions and capital needs.
- Management said COVID-19 had not materially adversely affected Q1 results, but warned that effects in future quarters were uncertain. Service-disconnection and late-fee restrictions may lengthen collections, increase bad-debt reserves and shift revenue between commercial and residential customers. No significant COVID-related adjustment had been recorded as of March 31. Maryland regulators authorized deferred regulatory treatment for incremental COVID-19 costs; management anticipated a similar Delaware order.
- On April 2, 2020, Artesian Water completed its $3.6 million purchase of substantially all of Frankford, Delaware’s water-system assets, serving about 360 customers.
- On April 28, Artesian Water entered into three Delaware revolving-fund financing agreements for up to approximately $4.0 million in total for water-main replacements, at 0.6% interest plus a 0.6% administrative fee on amounts drawn.
- Artesian Wastewater received a permit in March for an industrial wastewater disposal facility expected to serve a customer at about 1.5 million gallons per day; management expected operations to begin in Q2 2020.
- Rate recovery is not assured or necessarily timely. Other risks include weather-driven water demand, inflation in infrastructure costs, variable-rate borrowing costs, COVID-19 effects and dependence on refinancing maturing debt. The company reported no material change to previously disclosed risk factors other than adding pandemic-related risk.
Important facts for investors to verify
- Renewal terms and availability of the Citizens and CoBank credit facilities, especially given their near-term expiration dates and the Citizens demand feature.
- COVID-19 trends in collections, bad-debt expense, customer mix and any regulatory deferral or recovery approvals after quarter-end.
- Frankford acquisition integration and costs, and the timing and economics of the new wastewater disposal facility.
- Capital spending, funding needs and progress recovering infrastructure investment through approved rates and DSIC charges.
- Whether growth in revenue and earnings is sustained, given Q1’s higher miscellaneous income and construction-related AFUDC as well as seasonal water demand.