Artesian Resources Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. Artesian provides regulated water and wastewater services, primarily in Delaware, as well as related non-regulated services.
Key financial results
Amounts in millions of dollars except per-share data. Comparisons are with Q1 2018 unless otherwise stated.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $19.386 | $18.906 | +2.5% |
| Operating income | $4.284 | $3.971 | +7.9% |
| Net income applicable to common stock | $3.590 | $3.478 | +3.2% |
| Diluted earnings per share | $0.39 | $0.37 | Up $0.02 |
| Net cash provided by operating activities | $7.641 | $5.867 | +30.2% |
| Capital expenditures | $9.098 | $9.879 | −7.9% |
| Cash dividends paid | $2.241 | $2.168 | +3.4% |
- Revenue and margins: Water sales were $16.934 million, up 1.7%; total operating revenue rose by $0.480 million. Operating margin was approximately 22.1%, compared with 21.0%; net margin was approximately 18.5%, compared with 18.4%.
- Drivers: Management attributed revenue gains mainly to customer growth and higher Distribution System Improvement Charge (DSIC) revenue. The DSIC rate rose to 5.55% effective January 1, 2019. Customer growth also increased wastewater and service-line protection plan revenue.
- Expenses and interest: Total operating expenses were $15.102 million, up 1.1%. Depreciation and amortization increased 5.7% with continued utility-plant investment; income tax expense declined 11.9%, partly due to amortization of a tax-related regulatory liability. Interest expense rose about $0.2 million, reflecting recent wastewater loans and higher short-term borrowing costs.
- Cash flow: Operating cash flow exceeded the prior-year quarter, but was below capital expenditures. Investing activities used $9.084 million; financing activities provided $1.415 million. Cash decreased $28,000 to $265,000.
- Balance sheet and liquidity: At March 31, total assets were $533.790 million and stockholders’ equity was $155.042 million. Interest-bearing debt was approximately $135.790 million, comprising $117.179 million of long-term debt including its current portion and $18.611 million drawn on lines of credit; operating lease liabilities are excluded. Current assets were $13.234 million versus current liabilities of $40.491 million (current ratio approximately 0.33).
- Credit facilities: The company reported $41.4 million available across its $40 million Citizens facility and $20 million CoBank facility. Both facilities were due to expire in 2019, and management expected to renew them. The Citizens line is payable on demand. The company said it expected available cash, operating cash flow and credit facilities to meet its next-12-month needs.
Material changes and notable items
- Delaware regulators approved passing the Tax Cuts and Jobs Act benefit to customers through reduced rates. At quarter-end, approximately $3.8 million was reserved for customer refunds or bill credits, with repayment required in Q2 2019; the reserve is not reflected in income.
- Capital spending included water-main rehabilitation, treatment-facility and equipment upgrades, meter automation, and wastewater projects. Approximately $0.8 million was invested in an industrial wastewater pipeline and storage lagoon project, which was 95% complete and awaiting permit approval and commencement of operations.
- Delaware water customers increased by approximately 1,700 year over year to 86,200; Delaware wastewater customers increased by about 300, or 19.9%, to 2,200. Management reported approximately 2,400 Maryland water customers and stable Pennsylvania water customers.
- The company adopted the new lease accounting standard in Q1. It recorded a $499,000 operating-lease right-of-use asset and $486,000 of lease liabilities; adoption did not materially affect results or cash flows.
- Common dividends were $0.2423 per share, versus $0.2352 a year earlier.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management’s stated strategy is to expand water, wastewater, contract-operation and service-line protection services across the Delmarva Peninsula, supported by continued infrastructure investment.
- Management expects to fund the next 12 months through operating cash flows, available cash, credit lines and, as needed, capital-market financing. It reported compliance with debt covenants at March 31, 2019.
- Key risks identified include weather-driven water demand, the timing and sufficiency of regulatory rate approvals and cost recovery, capital requirements, and general economic and construction conditions. The company also has variable-rate exposure on line-of-credit borrowings; fixed-rate long-term debt reduces some interest-rate exposure.
- Management said ordinary-course legal matters were not expected to materially affect the business, financial position or results, while noting litigation could entail expense and management distraction. No material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Whether the Citizens and CoBank credit lines were renewed on acceptable terms before their 2019 expirations, and how much was subsequently borrowed.
- Whether the approximately $3.8 million customer refund or bill-credit obligation was discharged in Q2 2019 as required.
- Whether the Allen Harim wastewater project obtained permits, began service and achieved the anticipated revenue and utilization.
- Whether rate approvals and DSIC collections keep pace with rising operating costs and infrastructure investment, particularly if weather reduces water demand.
- How continued capital spending will be funded and whether operating cash flow can support investment and dividends without materially increasing borrowing.