Artesian Resources Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results include regulated water and wastewater utilities and non-regulated businesses. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $21.9 | $22.4 | $61.1 | $62.0 |
| Operating income | $5.2 | $5.5 | $14.5 | $14.4 |
| Net income applicable to common stock | $3.9 | $3.9 | $11.3 | $10.3 |
| Diluted earnings per share | $0.42 | $0.42 | $1.22 | $1.11 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $21.1 | $25.6 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $35.0 | $28.3 |
For the nine months, operating margin was approximately 23.7% versus 23.3%; net margin was approximately 18.6% versus 16.6%. In Q3, operating margin was approximately 23.9% versus 24.4%. The company paid dividends of $0.7126 per common share in the first nine months, compared with $0.6917 a year earlier.
Financial position and liquidity
- At September 30, 2018, total assets were $520.7 million, up from $494.6 million at December 31, 2017; stockholders’ equity was $150.1 million, up from $146.6 million.
- Cash was $0.2 million. Interest-bearing debt comprised $111.8 million of long-term debt, $1.5 million current maturities, and $15.4 million drawn on lines of credit.
- The company reported $21.1 million of operating cash flow, while investing activities used $34.9 million. Financing activities provided $13.1 million; cash decreased $0.7 million over the nine-month period.
- Available credit was $32.1 million on a $40 million Citizens facility and $12.5 million on a $20 million CoBank facility. The company said it expected to renew both facilities, which expire in 2019, and believed available funding and operating cash flows would cover the next twelve months. It was in compliance with debt covenants at quarter-end.
Material changes and operating developments
- Nine-month revenue declined 1.6%, mainly because $2.2 million of Delaware Distribution System Improvement Charge (DSIC) revenue was reserved pending a regulatory decision on passing Tax Cuts and Jobs Act (TCJA) benefits to customers. The comparable 2017 DSIC revenue was recognized. Water consumption and customer growth partly offset the reduction.
- Nine-month net income rose 10.3% despite lower revenue. Management attributed the increase principally to a larger CoBank patronage payment, lower income tax expense following federal tax reform, reduced utility operating expenses, and lower interest expense. Other income included significant non-recurring items; a one-time additional CoBank patronage payment also contributed to Q3 other income.
- Operating cash flow fell $4.5 million year over year, while capital expenditures increased $6.7 million. The company invested $10.6 million in wastewater projects, including $9.8 million toward an eight-mile pipeline and storage lagoon for an industrial wastewater customer.
- Long-term debt increased during the period. Artesian issued a $25 million Series U bond in January to refinance Series P debt and drew $7.5 million under a new CoBank wastewater loan facility, which permits borrowing up to $12 million.
- In March, Artesian Water acquired the Slaughter Beach, Delaware water system for $0.45 million; it serves 265 customers. The filing says the acquisition’s pro forma effect was not material.
Outlook, risks and contingencies
- Management expects continued customer and non-regulated business growth and plans substantial water and wastewater investment. It said future investment is expected to be financed through operations and external sources.
- Management expected the 2018 effective tax rate to be lower under the TCJA, but said the final impact remains uncertain and may depend on further tax analysis and regulatory proceedings. Delaware DSIC revenue remains reserved until the regulator determines customer relief; the recorded refund liability was $2.2 million at September 30.
- Water demand and revenue are seasonal and sensitive to rainfall and temperature. Rate approvals, construction activity, inflation, higher operating and infrastructure costs, and regulatory timing also affect results. The company cautioned that rate increases may not be approved promptly or at a sufficient level.
- Variable-rate borrowings expose the company to higher interest costs if rates rise. The credit facilities are demand or near-term-renewal obligations; the Citizens facility may be called for repayment at any time.
- The Allen Harim wastewater service agreements are expected to begin in 2019, subject to permits and customer-side improvements; the industrial wastewater pipeline and lagoon were expected to be completed by year-end 2018. Execution and timing remain important to the planned growth.
- The company reported no material change to previously disclosed risk factors and no material effect from ordinary-course legal proceedings was expected. It reported no off-balance-sheet arrangements. Adoption of the new lease standard was still under evaluation.
Important facts for investors to verify
- Resolution and timing of the Delaware regulator’s TCJA-related customer relief decision, including treatment of the $2.2 million DSIC refund liability.
- Completion, permitting, costs, and expected revenue contribution of the Allen Harim wastewater projects and planned 2019 service commencement.
- Renewal terms and availability of the Citizens and CoBank credit facilities, and the effect of variable rates on borrowing costs.
- Sustainability of earnings growth given lower reported revenue, reduced operating cash flow, higher capital spending, and non-recurring components of other income.
- Progress on the capital program and the recovery of infrastructure costs through regulated rates.
- Related-party legal fees: the company paid Morris Nichols Arsht & Tunnell approximately $0.45 million in the first nine months of 2018 after a firm partner was elected to the board; the filing describes Audit Committee review and approval.