Business context and reporting period
Artesian Resources Corporation’s Form 10-K covers the fiscal year ended December 31, 2019. The company operates regulated water and wastewater utilities and non-regulated contract and service-line protection businesses, primarily on the Delmarva Peninsula. Water sales generated 88.1% of 2019 operating revenue. The filing also provides unaudited fourth-quarter results.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Operating revenue | $83.6 million | $80.4 million | +4.0% |
| Operating income | $19.9 million | $19.0 million | +5.1% |
| Net income applicable to common stock | $14.9 million | $14.3 million | +4.5% |
| Diluted EPS | $1.60 | $1.54 | +3.9% |
| Cash dividends per share | $0.9837 | $0.9549 | +3.0% |
| Cash flow from operating activities | $18.9 million | $29.1 million | Down $10.3 million |
| Capital expenditures | $40.7 million | $49.1 million | Down $8.4 million |
Operating margin was approximately 23.8% and net margin approximately 17.9% in 2019, compared with 23.6% and 17.8%, respectively, in 2018. Operating and maintenance expenses, excluding depreciation and income taxes, were 57.0% of revenue versus 57.4%.
Fourth-quarter revenue was $21.0 million versus $19.3 million; operating income was $4.6 million versus $4.5 million; net income was $3.1 million versus $2.9 million; and diluted EPS was $0.33 versus $0.32.
At year-end, total assets were $560.4 million, cash and cash equivalents $0.6 million, current assets $14.2 million, and current liabilities $25.6 million. The resulting current ratio was approximately 0.55. Long-term debt, including current maturities, was $145.9 million; lines of credit outstanding were $7.5 million. Total borrowings were therefore approximately $153.4 million, compared with $133.5 million a year earlier. Stockholders’ equity was $160.3 million. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue growth reflected higher DSIC revenue, water consumption and customer counts. Delaware water customers increased by approximately 1,900; wastewater customers increased by approximately 300, or 15.3%.
- Operating expenses increased $2.2 million overall. Higher payroll and benefits, administration, water treatment and non-utility costs were partly offset by lower repair and maintenance expense.
- Interest expense rose $0.8 million, mainly due to wastewater borrowings issued in 2018 and higher average short-term borrowing and rates.
- Operating cash flow declined to $18.9 million, including the $3.3 million reduction in the recorded customer-refund liability and other working-capital movements. The $3.8 million TCJA-related customer refund in 2019 had been reserved and was not included in revenue or net income.
- Utility plant, net of accumulated depreciation, rose to $530.7 million from $498.7 million. The company invested $40.7 million in capital expenditures, including water system rehabilitation and treatment work and wastewater projects.
Outlook, commentary, risks and unusual items
- Management expects 2020 gross investment of approximately $63.4 million, offset by about $9.1 million in developer contributions and advances, for net investment of approximately $54.3 million. Funding is expected from operating cash flow, cash balances, credit facilities, revolving-fund loans and, if needed, capital-market financing.
- Expected 2020 contractual cash obligations were approximately $12.6 million. Management believes available funding sources are sufficient for normal operations and financing needs, but notes that future acquisitions could require additional debt or equity and financing is not assured.
- The $30 million Series V First Mortgage Bond was issued in December 2019 at 4.42%, due in 2049; proceeds paid down credit-line balances and an intercompany loan. Substantially all Artesian Water utility plant secures its first mortgage bonds.
- The $40 million Citizens demand credit line expires no later than May 23, 2020, and the $20 million CoBank line expires July 20, 2020. Management expected to renew both. The company had $40.0 million and $12.5 million available, respectively, at year-end.
- The Delaware DSIC rate reached its 7.50% cap effective January 1, 2020; applicable rates remain subject to regulatory audit. Regulatory rate decisions, permits, water availability, weather-driven consumption, environmental requirements, infrastructure needs, and access to capital remain key risks.
- The Allen Harim industrial wastewater disposal facility, including a 90-million-gallon lagoon and pipeline, was substantially complete but still required permit approval before operation; management expected completion during 2020.
- On February 27, 2020, Artesian Water agreed to buy substantially all of the Town of Frankford’s water-system assets for $3.6 million, serving about 360 customers, subject to Delaware Public Service Commission approval.
- BDO issued an unqualified opinion on the financial statements and internal controls. The company reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Renewal terms, borrowing availability and pricing for the two credit lines expiring in 2020, and the effect of variable rates on interest costs.
- Progress, permitting and operating economics for the Allen Harim project, and whether expected wastewater revenue and costs materialize.
- Approval and closing of the Frankford asset purchase, including final purchase terms and integration costs.
- Whether planned 2020 investment, developer contributions and regulatory recovery proceed as expected, and the resulting need for external financing.
- DSIC audit outcomes and future rate-case decisions, including any required customer refunds or changes in allowed cost recovery.
- Water-demand sensitivity to weather and the company’s minimum-purchase obligations under interconnection agreements, including its stated intention not to extend the Chester Water Authority agreement under existing terms.