Artesian Resources Corporation — Q2 2023 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2023, compared with the same 2022 periods. Artesian primarily operates regulated water and wastewater utilities on the Delmarva Peninsula; regulated utilities generated 93.2% of first-half 2023 revenue. Water demand is seasonal and weather-sensitive.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $25.251m | $25.011m | $47.746m | $47.198m |
| Operating income | $6.208m | $6.843m | $10.269m | $11.587m |
| Net income | $4.443m | $5.046m | $8.148m | $9.529m |
| Diluted earnings per share | $0.44 | $0.53 | $0.84 | $1.01 |
| Operating cash flow | Not separately presented | Not separately presented | $15.221m | $13.588m |
- Margins: Operating margin was 24.6% in Q2 versus 27.4% a year earlier, and 21.5% for the first half versus 24.5%. Net income declined 12.0% in Q2 and 14.5% in the first half.
- Cash investment: First-half capital expenditures were $32.314m, up from $23.266m. Operating cash flow did not cover capital expenditures; the gap was funded through financing, developer advances and contributions, and other sources.
- Balance sheet at June 30: Cash was $5.923m; current assets were $30.115m and current liabilities $24.751m. Long-term debt, including its current portion, was $177.697m, all fixed-rate. The company had no borrowings outstanding on its credit lines and reported $60m of available capacity. Stockholders’ equity was $227.273m.
- Dividends and equity: The quarterly dividend was $0.284 per share, up from $0.2729. A May public offering and partial over-allotment raised approximately $36.2m net, principally to repay short-term borrowings used for capital spending and general corporate purposes.
Changes versus the prior comparable periods
- Revenue grew modestly, but operating expenses and interest charges rose faster, reducing earnings. First-half utility operating expenses increased $2.3m; payroll and benefits, repairs and maintenance, treatment chemicals, and power were among the increases.
- Water sales rose 4.6% in Q2 and 2.1% year to date, reflecting brief warm, dry weather and customer growth. First-half water-sales growth was partly offset by a one-time refund to Town of Frankford customers.
- Non-utility revenue fell 33.3% in Q2 and 16.6% year to date, mainly because a wastewater design-and-construction contract generated less revenue. Service Line Protection Plan revenue increased.
- Short-term borrowing costs increased substantially: average rates were 5.87% in Q2 and 5.94% for the first half, versus 1.68% and 1.84% in 2022. Capital expenditures also increased materially.
Outlook, risks, and notable items
- Rate case: Artesian Water filed with the Delaware Public Service Commission on April 28, 2023, seeking a 23.84% annualized revenue increase, approximately $17.5m. Because the existing 7.50% distribution system improvement charge would reset to zero when temporary rates take effect, the requested net customer increase would be 16.34% if granted in full. No outcome is assured. If the case remains unresolved, the company plans to implement temporary rates, subject to refund, beginning November 28, 2023.
- Funding and credit: Management expects available cash, operating cash flow, credit lines, state revolving-fund loans, and capital-market financing to support the next 12 months, but acknowledges that future acquisitions or investment may require additional debt or equity. The Citizens Bank line is a demand facility expiring no later than May 20, 2024; the CoBank line expires October 29, 2023. Both were expected to be renewed. The Citizens margin increased effective August 3, 2023.
- Capital and operating risks: Management cites inflation, construction and replacement costs, supply availability, interest rates, weather-driven water demand, regulatory rate decisions, and housing and economic conditions. Planned investment focuses on water and wastewater infrastructure. The company reported compliance with debt covenants at June 30.
- Superfund settlement: A trust is to reimburse Artesian Water approximately $10m for past treatment-related costs; approximately $2.5m was received in July 2023, with $5m due in 2024 and 2025. The company is required to refund past-cost reimbursements to customers in annual installments through 2025. Reimbursement of eligible future treatment costs is also provided for under the settlement, subject to regulatory rate-making treatment.
- Other notable item: Artesian Storm Water was dissolved effective June 20, 2023. Management reported no material changes to the risk factors in its 2022 Form 10-K and no material control changes; disclosure controls were judged effective.
Most important facts for investors to verify
- Progress, timing, and final approved revenue recovery in the Delaware rate case, including the effect of temporary rates and the DSIC reset.
- Whether expense growth, higher interest costs, and elevated capital spending continue to pressure earnings and cash generation.
- Renewal terms and availability of the CoBank and Citizens credit facilities, particularly given their near-term expiration and demand features.
- Receipt of future Superfund reimbursements and the timing and amounts of customer refunds, as well as any regulatory treatment of future treatment costs.
- Water-demand trends, customer growth, and execution of planned infrastructure investment and its recovery through rates.