Business context and reporting period
Artesian Resources Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. It operates regulated water and wastewater utilities, principally in Delaware, alongside water, wastewater, and service-line protection services. Water sales generated 86.7% of revenue for the first nine months of 2021.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $25.0 million | $24.7 million | $68.3 million | $66.4 million |
| Operating income | $6.9 million | $6.9 million | $17.4 million | $17.5 million |
| Net income applicable to common stock | $5.1 million | $5.1 million | $13.8 million | $13.7 million |
| Diluted earnings per share | $0.54 | $0.54 | $1.46 | $1.46 |
- Revenue increased 1.0% in Q3 and 2.9% year to date. Year-to-date revenue growth reflected higher water sales, wastewater revenue, and non-utility services.
- Year-to-date operating expenses rose 3.9% to $50.9 million; depreciation and amortization increased 8.2% to $9.0 million. The stated operating-expense-to-revenue ratio, excluding depreciation and income taxes, was 54.5% versus 54.2% year to date, and 53.4% versus 53.6% in Q3.
- Cash provided by operating activities was $19.0 million for the first nine months, compared with $14.3 million. Capital expenditures were $29.7 million, versus $26.0 million.
- At September 30, cash was $0.6 million; current assets were $19.2 million and current liabilities $48.0 million. Lines of credit outstanding were $27.6 million. Long-term debt was $143.3 million, plus $1.5 million current portion. The company reported $32.4 million of available capacity across its two credit lines.
- Total assets were $616.4 million and stockholders’ equity was $174.6 million. Cash dividends per common share were $0.2610 in Q3, compared with $0.2496.
Material changes versus the prior comparable period
Year-to-date revenue growth was largely offset by higher operating costs, leaving operating income slightly lower while net income increased modestly. Water-sales revenue was nearly flat in Q3, as lower residential consumption was mostly offset by customer-related fixed fees. Utility maintenance costs, depreciation, and non-utility contract costs increased. Operating cash flow improved year over year, while capital spending remained substantial. The company had no acquisition investment cash outflow in the first nine months of 2021, compared with $5.7 million in 2020.
Outlook, commentary, risks and unusual items
- Management expects available cash, operating cash flow, credit facilities, state revolving-fund loans, and capital-market financing to support the next 12 months’ needs. It may seek additional debt or equity to fund acquisitions or other purposes; no quantified earnings or revenue guidance is provided.
- The company’s growth strategy centers on expanding water and wastewater service, acquisitions, infrastructure investment, and service-line protection plans. Delaware and Maryland water customer counts increased 1.4% and 1.8%, respectively; Delaware wastewater customers increased 13.8% year over year.
- Artesian Wastewater agreed to acquire TESI for $6.4 million in cash and other consideration, including forgiveness of a $2.1 million intercompany note. The DEPSC approved the transaction on October 27, 2021; closing was expected before year-end, subject to customary conditions. TESI serves approximately 3,600 customers.
- Management said COVID-19 had not materially adversely affected results or operations as of September 30, 2021, but noted delays in obtaining some materials and supplies. Weather, customer consumption, inflation, supply delays, regulatory rate decisions, interest rates, and financing availability could affect results.
- The $40 million Citizens credit line is a demand facility, subject to repayment on demand, and expires in May 2022; a $20 million CoBank line expires in July 2022. The company expected to renew both. It reported compliance with debt covenants. Existing long-term debt is fixed-rate; borrowings on credit lines are variable-rate, and LIBOR transition remains a consideration.
- Industrial wastewater revenue and minimum-volume terms were affected by a settlement; the 2021 minimum volume was prorated over seven months beginning June 1. The company also received forgiveness of approximately $1.5 million of state revolving-fund financing related to the Frankford water system.
- Ordinary-course legal matters were not expected to materially affect results, though litigation could involve expense and management distraction. No material changes to the company’s previously reported risk factors were disclosed.
Important facts for investors to verify
- Confirm the TESI transaction’s closing, final consideration, and integration effects.
- Track renewal terms and availability of the two credit lines, variable-rate borrowing costs, and LIBOR replacement arrangements.
- Assess whether rate approvals and cost recovery keep pace with infrastructure investment, inflation, and higher operating expenses.
- Monitor water consumption, weather, receivables and bad-debt reserves, and ongoing supply-chain delays.
- Reconcile operating cash flow: the cash-flow statement reports $19.0 million for the nine months, while the MD&A liquidity discussion cites $19.6 million; the filing text does not clearly explain the difference.