Artesian Resources Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial statements are unaudited; dollar amounts below are in millions unless noted.
Business context and reporting period
Artesian is a regulated water and wastewater utility operating primarily in Delaware, with water operations also in Maryland and Pennsylvania. Water sales remain its largest revenue source, while wastewater, service-line protection plans, and contract services add revenue less exposed to weather.
During the period, the company acquired Tidewater Environmental Services (TESI) in January, more than doubling its Delaware wastewater customer base, and purchased substantially all of the Town of Clayton water system assets in May. Purchase-price allocations remained preliminary at June 30.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $25.0 | $22.5 | $47.2 | $43.1 |
| Operating income | $6.8 | $6.1 | $11.6 | $10.5 |
| Net income | $5.0 | $4.5 | $9.5 | $8.7 |
| Diluted earnings per share | $0.53 | $0.48 | $1.01 | $0.93 |
Q2 revenue rose 11.3% and net income rose 12.0%; six-month revenue rose 9.5% and net income rose 9.4%. Growth reflected wastewater revenue, including TESI and industrial wastewater service, plus wastewater infrastructure design and construction and service-line protection plans. Water sales were down 1.8% in Q2 as lower consumption offset customer growth; six-month water sales were approximately flat.
Operating expenses increased faster than revenue in both comparisons. The ratio of operating expense excluding depreciation and income taxes to revenue rose to 53.5% from 52.8% in Q2 and to 55.8% from 55.0% for the six-month period. Higher maintenance, treatment, labor, power, acquisition-related, and contract costs contributed; lower purchased-water costs partly offset increases. Interest expense also increased, partly due to the new Series W bond.
For the first six months, operating cash flow was $13.6 versus $13.8 in 2021. Cash used in investing was $29.6, comprising $23.3 of capital expenditures and $6.3 net cash used for acquisitions. Financing provided $16.1, including $30.0 of new long-term debt, offset in part by $17.1 of line-of-credit repayments and $5.1 of dividends paid. Ending cash was $0.2.
At June 30, total assets were $674.1 and stockholders’ equity was $180.9. Long-term debt, including its current portion, was $175.6; lines of credit outstanding were $9.6. The company reported $34.0 available under its $40 million Citizens line and $16.4 available under its $20 million CoBank line. Current assets were $16.9 versus current liabilities of $33.5.
Material changes, outlook, and risks
- Artesian issued a $30 million Series W first mortgage bond in April, due in 2047 at a fixed 4.43% rate. Proceeds principally paid down lines of credit and an intercompany loan, with additional proceeds available for capital investment.
- Management expects to fund the next 12 months through operating cash flow, cash balances, credit lines, state revolving-fund loans, and capital-market financing, and believes available funds and facilities will meet working-capital and financing needs. It expects to renew both bank lines of credit; the Citizens facility expires in May 2023 or upon demand, and CoBank’s expires in October 2022. No quantified earnings or revenue guidance is provided.
- Management cited weather-driven water demand, inflation, supply-chain delays and material costs, rate-case timing and approvals, and the need to recover capital investment through regulated rates as risks. COVID-19 had not materially adversely affected results through June 30, although some procurement delays occurred.
- A July 19, 2022 court-approved Superfund settlement is a subsequent event. The Delaware Sand & Gravel Remedial Trust is to reimburse approximately $10 million of past treatment costs: about $2.5 million shortly after approval and the remaining $7.5 million in three annual installments. The Trust is also to reimburse qualifying future costs. Reimbursements’ regulatory rate treatment remains subject to DEPSC determination.
- The DEPSC’s May 2022 order continued amortization of the Delaware TCJA-related regulatory liability over 49.5 years, subject to review in the next base-rate filing. The Maryland regulator had not issued a final order on the related Maryland amount.
Important facts for investors to verify
- Progress on regulatory treatment and recovery of acquired-system costs, capital investment, and Superfund reimbursements.
- Renewal terms and borrowing costs for the Citizens and CoBank credit facilities, including exposure to variable rates and the SOFR transition.
- Whether revenue growth from TESI, Clayton, and wastewater contracts is sustained and how integration and operating costs affect margins.
- Actual customer water demand, inflation and procurement costs, and the timing and sufficiency of rate approvals.
- Final acquisition purchase-price allocations and the timing and collection of settlement reimbursements.