Artesian Resources Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. Amounts below are in millions of dollars unless stated otherwise. Artesian is a regulated water and wastewater utility, primarily operating in Delaware, with operations in Maryland and Pennsylvania and related non-regulated services.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $22.55 | $21.92 | $62.59 | $61.07 |
| Operating income | $5.73 | $5.24 | $15.33 | $14.45 |
| Net income applicable to common stock | $4.46 | $3.93 | $11.83 | $11.33 |
| Diluted EPS | $0.48 | $0.42 | $1.27 | $1.22 |
| Cash dividends per share | $0.2459 | $0.2387 | $0.7341 | $0.7126 |
Operating revenue rose 2.9% in Q3 and 2.5% year to date. Operating margin, calculated as operating income divided by revenue, was about 25.4% in Q3 versus 23.9%, and 24.5% year to date versus 23.7%. Water sales represented 88.2% of revenue for the first nine months. The company attributed revenue growth principally to higher Distribution System Improvement Charge (DSIC) revenue and customer growth.
- Costs and interest: For the first nine months, total operating expenses increased $0.64 million; depreciation and amortization rose $0.49 million. Interest expense increased $0.69 million, reflecting debt issued for wastewater projects and higher short-term borrowing and rates. Lower income tax expense partly offset these increases.
- Cash flow and investment: Nine-month operating cash flow was $13.16 million, down from $21.07 million. Capital expenditures were $27.34 million, versus $34.96 million; operating cash flow less capital expenditures was negative $14.18 million. Financing cash flow was $14.30 million, including $15.75 million of net line-of-credit borrowings. Dividends paid were $6.80 million.
- Balance sheet and liquidity: At September 30, cash was $0.46 million and current assets were $14.86 million against current liabilities of $50.25 million. Long-term debt, including the current portion, totaled $116.23 million; line-of-credit borrowings were $31.69 million. The company reported $28.3 million of combined availability on its two credit lines. Stockholders’ equity was $156.90 million.
Material changes and notable items
- Delaware’s July 2019 DSIC rate increased to 7.41%, from 3.63% in the comparable prior-year quarter. DSIC revenue was $3.13 million for the first nine months, versus $2.20 million.
- Following DEPSC approval of customer rate relief related to the Tax Cuts and Jobs Act, approximately $3.8 million was refunded or credited to customers in Q2 2019. The amount had been reserved and was not included in revenue or net income.
- Capital spending continued on water-system rehabilitation and treatment improvements and Delaware wastewater projects, including an industrial wastewater pipeline and storage lagoon. The filing said construction was substantially complete and operation awaited permit approval.
- The company reported approximately 87,000 Delaware water customers, up about 1,400 year over year, and approximately 2,350 Delaware wastewater customers, up about 310. A purchase of utility assets serving approximately 400 High Point Park customers closed October 1, 2019.
- Adoption of the lease accounting standard added $0.49 million of operating lease right-of-use assets and $0.48 million of lease liabilities; the company said adoption did not materially affect results or cash flows. The Board approved dissolution of a dormant engineering subsidiary in September; the dissolution certificate was filed in October.
Outlook, risks and contingencies
The filing gives no quantified earnings or revenue guidance. Management expects to fund the next 12 months through operating cash flow, cash balances, credit lines and debt-market financing, and anticipates continued investment in water and wastewater systems. Management describes growth opportunities in customer additions, wastewater service, contract operations and service-line protection plans, while noting that construction and economic conditions can affect growth.
- Water demand and revenue are seasonal and weather-sensitive; cooler temperatures or greater rainfall can reduce consumption. Rate recovery depends on regulatory decisions, which may be delayed, insufficient or denied.
- Management cited aging infrastructure, more protective water-quality requirements, inflation and financing needs as drivers of continuing capital investment. The company was in compliance with its debt covenants at quarter-end and reported no material change in its disclosed risk factors.
- Short-term borrowings bear variable rates, exposing the company to higher interest costs. Credit lines are due in 2020; the Citizens facility is callable on demand. Commodity-cost increases may also affect expenses, although management cited rate recovery and fixed-price electricity contracts as mitigants.
- As a subsequent event, Artesian Water entered an October 8 interest-rate lock for a proposed $30 million, 30-year bond at 4.42%. Closing is subject to DEPSC approval; proceeds are intended to repay lines of credit and fund capital investment. Failure to borrow the full amount by December 31, 2019 could trigger a broken-funding charge.
- The company said ordinary-course legal matters are not expected to materially affect results, but noted litigation may incur expense or divert management attention. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the proposed $30 million bond received regulatory approval, closed on the stated terms and reduced variable-rate borrowings.
- Availability, renewal terms and demand-call exposure of the two credit facilities, alongside the company’s low cash balance and capital-spending requirements.
- Progress and permits for the Allen Harim wastewater project, and timing of related service and revenue.
- Future DSIC and general rate proceedings, including audits of DSIC rates and the unresolved Maryland treatment of the TCJA-related regulatory liability.
- Whether customer growth, weather and cost increases support operating cash flow sufficient to fund investment and dividends.