Artesian Resources Corporation — FY2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter filing. Artesian is a regulated water and wastewater utility serving Delaware, Maryland and Pennsylvania, with non-regulated contract and service-line protection businesses. Water sales generated 86.8% of operating revenue.
Financial performance and condition
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Operating revenue | $88.1 million | $83.6 million | +5.4% |
| Operating income | $22.3 million | $19.9 million | +11.9% |
| Net income attributable to common stock | $16.8 million | $14.9 million | +$1.9 million |
| Diluted EPS | $1.79 | $1.60 | +11.9% |
| Cash from operations | $20.4 million | $18.9 million | +$1.5 million |
| Capital expenditures and acquisitions | $40.0 million | $40.6 million | — |
Operating margin was approximately 25.3%, up from 23.8%; net margin was approximately 19.1%, versus 17.9%. Operating expenses increased $2.2 million overall, while revenue rose $4.5 million. Cash dividends were $1.01 per share, compared with $0.9837 in 2019.
At year-end, total assets were $593.2 million and stockholders’ equity was $169.4 million. Long-term debt, including current maturities, was $144.1 million; lines of credit were $26.8 million. Cash was only $28,000. Current assets of $17.6 million compared with current liabilities of $43.7 million. The company reported $33.2 million of unused capacity across its two credit lines and compliance with debt covenants.
Operating cash flow did not cover capital investment: reported investing cash outflow was $40.0 million, including $5.7 million for acquisitions. Financing provided $19.0 million, including $19.3 million of net line-of-credit borrowings; developer advances and contributions provided $9.3 million. Dividends paid were $9.4 million.
Material changes and notable items
- Water-sales revenue grew $2.9 million, mainly from higher residential consumption, system-improvement charges and customer growth. Residential water volume increased 7.9%; commercial volume fell 5.4%, which management associated in part with lower non-residential consumption.
- Other utility revenue increased 32.7% to $6.5 million, principally from industrial wastewater services and wastewater customer growth. Non-utility revenue was broadly stable at $5.1 million.
- Bad-debt expense rose to approximately $0.8 million from $0.2 million, and the allowance for doubtful accounts increased to $0.9 million from $0.3 million. The company attributed the increase to longer collection cycles during pandemic-related restrictions on shutoffs and late fees.
- Artesian acquired the Frankford and Delaware City water systems for $3.6 million and $2.1 million, respectively. Together, the acquisitions added approximately 1,160 customers; the company recorded $5.7 million of acquisition investment, including $0.6 million of goodwill. Delaware City’s purchase-price allocation was preliminary.
- Year-end accounts receivable included a significant industrial wastewater customer representing approximately 24% of outstanding receivables.
Outlook, risks and contingencies
- Management estimated 2021 gross investment of approximately $58.0 million and net utility investment of approximately $48.1 million after expected developer contributions. It expected 2021 principal and interest, rent and water-interconnection obligations of approximately $12.6 million.
- Management said 2020 operations and financial results were not materially adversely affected by COVID-19, but it could not predict the pandemic’s future effects. Extended payment arrangements and future restrictions could affect collections and cash flow.
- The $40 million Citizens demand credit line expires by May 31, 2021, and the $20 million CoBank line expires July 30, 2021. Management expected to renew both; renewal was not assured. The Citizens line is payable on demand.
- The Chester Water Authority agreement requires minimum annual purchases of 1.095 billion gallons and expires December 31, 2021. Artesian said it did not intend to extend the agreement under its existing terms. Verify the replacement supply and financial impact.
- Water demand is seasonal and weather-sensitive; risks also include rate-case timing and sufficiency, environmental and water-allocation rules, aging infrastructure, drought, wastewater-system failures, cybersecurity and access to capital. The company depends on regulatory approvals to recover costs through rates.
- An industrial wastewater disposal facility received an operating permit in March 2020, but operations were contingent on the customer obtaining its own process-wastewater treatment permit.
- Management reported no material impairment or regulatory disallowance and no legal proceedings expected to materially affect the company. The auditor issued an unqualified opinion; valuation of tangible assets in the 2020 acquisitions was identified as a critical audit matter.
Important facts for investors to verify
- Whether the two credit lines were renewed on acceptable terms before their 2021 expirations, and how the company funds planned capital spending.
- How Artesian replaced or renegotiated the Chester Water Authority supply agreement after 2021, including effects on required purchases, costs and supply reliability.
- Subsequent collection experience, bad-debt reserves and the receivable exposure to the large industrial wastewater customer.
- Completion of the Delaware City acquisition valuation and regulatory treatment of both municipal acquisitions in future rates.
- Progress on the customer-dependent industrial wastewater facility and whether the 2021 capital-investment plan and expected developer contributions were realized.
- Future rate approvals and recovery of infrastructure, pandemic-related and environmental compliance costs; the filing provides no specific earnings or EPS guidance.