Artesian Resources Corporation — Q2 2020 Form 10-Q
Business context and reporting period. Artesian is a regulated water and wastewater utility operating primarily in Delaware, with smaller operations in Maryland and Pennsylvania and non-regulated service businesses. This unaudited report covers the three and six months ended June 30, 2020; dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $21.752 | $20.652 | $41.653 | $40.037 |
| Operating income | $6.124 | $5.320 | $10.585 | $9.604 |
| Net income applicable to common stock | $4.566 | $3.778 | $8.640 | $7.368 |
| Diluted EPS | $0.49 | $0.41 | $0.92 | $0.79 |
| Operating margin | 28.2% | 25.8% | 25.4% | 24.0% |
| Net margin | 21.0% | 18.3% | 20.7% | 18.4% |
Revenue was primarily from water sales, which accounted for 88.4% of six-month operating revenue. Water sales increased 6.8% in Q2 and 4.8% for the six months, principally from higher residential consumption, fixed fees and distribution system improvement charge (DSIC) revenue. The six-month DSIC rate rose to 7.50% from 5.55% at the start of 2019.
- Cash flow: Six-month cash from operations was $11.837, compared with $8.928 in 2019. Investing used $20.550, including $16.952 of capital expenditures and $3.632 for the Frankford acquisition. Financing provided $8.490. Cash ended at $0.373.
- Capital investment: Cash capital expenditures were $16.952, net of equity AFUDC; management reported total capital expenditures of $20.6 for the first half, including the Frankford purchase. Utility plant, net, was $544.575 at June 30, 2020, versus $530.721 at year-end 2019.
- Debt and liquidity: Long-term debt, including current portion, had a carrying value of $144.982; lines of credit outstanding were $14.735. Total current assets were $14.500 and current liabilities $36.473. The company reported $32.8 available on its $40 million Citizens line and $12.5 available on its $20 million CoBank line. Both facilities were due to expire in 2020, and the company expected renewal. The Citizens facility is callable on demand.
- Equity and dividends: Stockholders’ equity was $162.910, compared with $160.268 at December 31, 2019. Dividends per common share were $0.2496 for Q2 and $0.4992 for the first half.
Material changes versus prior periods
- Q2 net income rose $0.788, or about 20.9%; first-half net income rose $1.272, or about 17.3%. Higher revenue and other income outweighed increased operating costs and interest expense.
- First-half operating cash flow increased $2.909 year over year. Accounts receivable movements differed materially between periods, and 2020 cash flow included a $4.497 increase in income taxes payable.
- Interest expense increased $0.3 for the first half, mainly reflecting the Series V First Mortgage Bond issued in December 2019, partly offset by lower short-term borrowing costs.
- Current liabilities increased to $36.473 from $25.599 at year-end 2019, including higher lines-of-credit borrowings, income taxes payable and dividends payable.
Outlook, commentary, risks and unusual items
- COVID-19: Management said the pandemic had not materially adversely affected first-half results, but its future impact was uncertain. State orders barred late fees and service disconnections for nonpayment, potentially extending collections and increasing bad-debt exposure. The company increased its bad-debt reserve by $0.3 effective June 30 and had not recorded a COVID-related regulatory asset.
- Operating outlook: No quantified earnings or revenue guidance was provided. Management expects continued customer and service-area growth and plans continued investment in water and wastewater systems. Results remain exposed to weather, construction activity, rate-case timing and regulatory approvals.
- Projects and acquisitions: Artesian acquired the Frankford water system on April 2 for $3.6, serving about 360 customers. The preliminary allocation included $2.412 of utility plant and $1.220 of goodwill/other deferred assets; regulatory treatment remains subject to a future rate case. On August 3, after quarter-end, Artesian completed its $2.1 purchase of Delaware City’s water system, serving about 800 customers, and committed to certain system upgrades.
- Other developments: The company received an operating permit in March for a wastewater disposal facility serving Allen Harim, with operations anticipated in Q3 2020 pending the customer’s permit. Three state revolving fund loans of up to approximately $4.0 in aggregate were approved for water-main replacements; no funds had been drawn by June 30.
- Debt and contingencies: The company was in compliance with debt covenants at June 30. Long-term debt is fixed-rate; variable-rate borrowings expose the company to rising rates. Rate increases require regulatory approval and may be delayed or insufficient. Ordinary-course litigation was not expected to materially affect results, though costs and management distraction remain possible.
- Unusual prior-period comparison: Approximately $3.8 was refunded to customers in Q2 2019 for tax-reform-related rate relief; it had been reserved previously and was not recorded as income.
Important facts for investors to verify
- Whether the Citizens and CoBank credit facilities were renewed on acceptable terms before their 2020 expirations, and the effect of callable borrowing on liquidity.
- Future customer payment and bad-debt trends, and whether regulators authorize recovery of incremental COVID-related costs.
- Frankford acquisition valuation and ratemaking treatment, and the capital commitments and integration costs for Delaware City.
- Timing and economics of the Allen Harim facility start-up, subject to the customer obtaining its permit.
- Ongoing capital spending, weather-driven water demand and regulatory rate approvals, given low cash balances and reliance on operating cash flow and external financing.