Artesian Resources Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The requested “2018 Q4” is covered in the annual filing; unaudited fourth-quarter results are noted separately below. Amounts are in millions except per-share data.
Business context
Artesian is a regulated water and wastewater utility holding company serving Delaware, Maryland and Pennsylvania, with additional contract operations and service-line protection businesses. Water sales generated 88.1% of 2018 operating revenue. Its principal utility serves about 85,900 metered water customers in Delaware; the company added approximately 1,700 Delaware water customers during the year.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Operating revenue | $80.4 | $82.2 |
| Operating income | $19.0 | $19.6 |
| Net income | $14.3 | $14.0 |
| Diluted EPS | $1.54 | $1.51 |
| Operating margin | 23.6% | 23.8% |
| Net margin | 17.8% | 17.0% |
| Cash from operating activities | $29.1 | $35.8 |
| Capital expenditures | $49.1 | $41.1 |
| Cash dividends paid | $8.8 | $8.5 |
Revenue declined 2.2%, mainly because approximately $3.3 million was reserved for customer refunds related to the Tax Cuts and Jobs Act (TCJA), despite higher water consumption and customer growth. Excluding depreciation and income taxes, operating expenses rose 0.9%; the related expense-to-revenue ratio increased to 57.4% from 55.7%. Lower income-tax expense and higher CoBank patronage income helped lift net income 2.1%. The 2018 dividend was $0.9549 per share, up from $0.9269.
Fourth quarter: Revenue was $19.3 million versus $20.2 million in Q4 2017; operating income was $4.5 million versus $5.2 million; net income was $2.9 million versus $3.7 million; diluted EPS was $0.32 versus $0.40.
At year-end, cash was $0.3 million, current assets $16.1 million and current liabilities $37.7 million. Long-term debt including current maturities was $117.6 million; lines of credit totaled $15.9 million, giving reported debt and credit-line balances of approximately $133.5 million. Available capacity under the two credit lines was $44.1 million. Stockholders’ equity was $153.3 million. Operating cash flow less capital expenditures was negative $19.9 million.
Material changes and notable developments
- Utility plant, net of accumulated depreciation, increased to $498.7 million from $460.5 million. Capital spending rose to $49.1 million, including $12.4 million for wastewater projects; $10.6 million supported an industrial wastewater pipeline and storage lagoon.
- Artesian Wastewater borrowed $12.0 million at 5.12% for a 20-year repayment period. Artesian Water issued a $25.0 million Series U first mortgage bond at 4.71% to repay Series P debt. First mortgage bonds are secured by substantially all Artesian Water utility plant.
- The company acquired Slaughter Beach Water Company’s assets for $450,000, adding 265 customers. It also purchased Fort DuPont water assets in 2017; planned development there could support future customer growth.
- Water sales were partly supported by customer growth and increased consumption. Delaware wastewater customers rose approximately 16.6% to 2,100. An industrial wastewater agreement with Allen Harim is expected to begin in 2019, subject to permits and related work.
Outlook, risks and contingencies
Management expects 2019 gross investment of approximately $48.2 million, offset by about $4.6 million of developer contributions and advances, for net investment of approximately $43.6 million. Estimated 2019 principal, interest and other listed contractual obligations are approximately $11.7 million. Management expects to fund operations and investment with operating cash, available cash, credit facilities and potentially capital-market financing, and believes existing resources should cover normal working-capital needs.
The approximately $3.3 million TCJA-related customer refund was approved by Delaware regulators on January 31, 2019 and was to be returned primarily as bill credits in Q2 2019. The Delaware Public Service Commission approved amortization of most of the related tax regulatory liability over 49.5 years, subject to audit; Maryland’s regulator had not issued a final order on its related amount. Both credit lines were due to expire in 2019; the company expected renewal. The Citizens facility is a demand line and may be called at any time. The company reported compliance with debt covenants at year-end.
Key risks include rate-case timing and adequacy, weather-driven demand, water availability and allocation permits, stricter environmental standards, wastewater overflow or treatment failures, capital-market access and variable-rate borrowing costs. The business is also exposed to water contamination, cybersecurity and operational disruptions, and competition for new service territories. Management reported material compliance with current water-quality requirements.
BDO issued an unqualified audit opinion on the financial statements and internal controls; management also reported effective disclosure controls and internal control over financial reporting. Adoption of the new revenue standard had no material financial-statement impact. The company expected the 2019 lease-standard adoption to add approximately $0.5 million of right-of-use assets and related liabilities, without a material effect on earnings or cash flows.
Important facts for investors to verify
- Whether customer refunds, primarily bill credits, were completed as planned in Q2 2019 and how the final TCJA regulatory treatment affected rates and earnings.
- Renewal terms and availability of the Citizens and CoBank credit facilities, including the demand feature and interest-rate exposure.
- Progress, permitting and expected service commencement for the Allen Harim wastewater projects, and whether they generate the anticipated revenue and cash flows.
- Execution and funding of the 2019 capital plan, particularly wastewater construction, and the resulting debt, cash-flow and rate-recovery needs.
- Whether customer growth and usage, rate approvals, and seasonal or drought conditions support future revenue and earnings growth.