Artesian Resources Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. Artesian is a regulated water and wastewater utility, principally serving Delaware, with additional Maryland and Pennsylvania operations and non-regulated service businesses. Figures below are in millions of dollars except per-share data and where noted.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Operating revenue | $18.906 | $19.190 | Down 1.5% |
| Operating income | $3.971 | $3.991 | Down slightly; operating margin approximately 21.0% vs. 20.8% |
| Net income applicable to common stock | $3.478 | $3.086 | Up 12.7% |
| Basic / diluted EPS | $0.38 / $0.37 | $0.34 / $0.34 | Higher year over year |
| Operating cash flow | $5.867 | $10.114 | Down $4.247 |
| Capital expenditures | $9.879 | $7.664 | Up $2.215; operating cash flow did not cover investment spending |
| Cash and cash equivalents | $0.293 | $0.952 at Dec. 31, 2017 | Quarter-end cash declined |
| Long-term debt, including current portion | $109.855 | $114.440 at Dec. 31, 2017 | Excludes lines of credit and overdraft |
Water sales were $16.645 million, down 1.7%. The company reserved $748,000 of Q1 Delaware Distribution System Improvement Charge (DSIC) revenue pending a regulatory determination of customer relief related to the Tax Cuts and Jobs Act (TCJA). Without that reserve, reported revenue would have been higher; the filing attributes the revenue decline primarily to the reserve, partly offset by consumption and customer growth.
Operating expenses totaled $14.935 million versus $15.199 million. Utility operating costs rose 2.0%, primarily from payroll and employee compensation, while depreciation and amortization increased 10.7% with continued utility-plant investment. Income tax expense fell 36.1%, principally reflecting the lower federal corporate tax rate. Management also cited higher CoBank patronage income and lower interest expense as contributors to higher net income. The statement of operations text appears inconsistent on the 2018 interest-charge figure; MD&A says interest expense decreased about $0.1 million, so the precise reported amount should be checked against the filed financial statements.
Liquidity, debt and capital investment
- Q1 investing cash outflow was $9.869 million. Financing provided $3.343 million, including $4.837 million of net line-of-credit borrowings; cash declined by $659,000.
- At March 31, lines of credit totaled $14.447 million drawn, with $35.6 million available on Citizens’ $40 million facility and $10.0 million available on CoBank’s $20 million facility. The Citizens facility was due to expire May 25, 2018 and the CoBank facility July 20, 2018; management expected to renew both.
- Including the short-term portion of debt, debt to total capitalization was 47.5%; Artesian reported compliance with its debt covenants. Long-term debt is fixed-rate; revolving credit borrowings are variable-rate and expose the company to higher borrowing costs if rates rise.
- Q1 capital spending included about $3.0 million on Delaware wastewater projects, including the Allen Harim pipeline and storage lagoon. The company said completion was expected in Q3 2018. It expects to fund the next 12 months with operating cash flow, available cash and bank credit lines, with capital-market financing as needed.
Material developments, outlook and risks
- TCJA and regulation: Management expected a lower 2018 effective tax rate but said the overall tax-law impact remained uncertain. Delaware regulators were considering customer relief; the $748,000 Q1 DSIC amount remained reserved. The regulator’s final determination will affect revenue and customer rates.
- Growth: Delaware water customers increased by about 1,800 year over year to approximately 84,800; Delaware wastewater customers increased by about 200, or 13.2%, to approximately 1,900. Artesian acquired the Slaughter Beach water system for $450,000, serving 265 customers, subject to future ratemaking treatment.
- Allen Harim: Sanitary wastewater service awaited a construction permit and customer-site work. A separate industrial wastewater project was under construction, with pipeline and lagoon completion expected in Q3 2018; timing and execution remain relevant to anticipated growth.
- Legal contingency: On April 3, 2018, Wetherby, LLC sued Artesian Resources and Artesian Wastewater, alleging attempted or actual monopolization in wastewater-service negotiations. The complaint seeks injunctive and declaratory relief, damages of at least $10 million, treble damages and legal costs. Artesian says the claims lack merit and intends to defend them; the filing does not provide a clear estimate of potential financial exposure.
- Other risks: Water sales are seasonal and weather-sensitive. Results also depend on timely and adequate rate approvals, capital availability, construction and customer growth, regulatory requirements, and costs including labor, infrastructure and commodities. Management reported no material change to the risk factors in the 2017 Form 10-K.
- Guidance: The filing provides no numerical earnings or revenue guidance. Management described strategic growth plans and expected the credit facilities to be renewed; these are expectations, not guaranteed outcomes.
Most important facts for investors to verify
- The exact interest-charge amount in the Q1 statement of operations, given the apparent discrepancy in the filing text, and the reconciliation to net income.
- The regulator’s final TCJA customer-relief decision and disposition of the $748,000 DSIC refund reserve.
- Renewal terms and availability of both credit facilities, and funding needs if capital spending remains above operating cash flow.
- Permitting, completion, cost and expected start of Allen Harim wastewater services and related pipeline and lagoon projects.
- Developments in the Wetherby lawsuit, including any assessment of potential loss or impact on wastewater operations.