Artesian Resources Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Figures below are unaudited; dollar amounts are in millions except per-share data.
Business context
Artesian primarily provides regulated water service in Delaware, Maryland and Pennsylvania, and regulated wastewater service in Delaware. It also operates non-regulated water and wastewater services, including service-line protection plans and infrastructure design and construction. Water sales remain its principal revenue source and are seasonally affected by weather.
Growth during the period included the January acquisition of Tidewater Environmental Services (TESI), which more than doubled the Delaware wastewater customer base, and the May purchase of substantially all of Clayton, Delaware’s water operating assets. The company reported approximately 94,400 Delaware water customers and 7,400 Delaware wastewater customers at September 30.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Operating revenue | $26.6 million, up 6.7% from $24.9 million | $73.8 million, up 8.4% from $68.0 million |
| Operating income | $8.1 million, versus $6.9 million | $19.7 million, versus $17.4 million |
| Net income applicable to common stock | $6.1 million, up 21.5% from $5.1 million | $15.7 million, up 13.8% from $13.8 million |
| Diluted earnings per share | $0.65, versus $0.54 | $1.65, versus $1.46 |
| Operating margin | 30.4%, versus 27.7% | 26.7%, versus 25.6% |
For the nine-month period, water sales rose only 0.6% to $59.6 million, while other utility operating revenue increased $3.7 million, mainly from TESI, industrial wastewater service and organic wastewater customer growth. Non-utility revenue rose $1.7 million, including growth in design and construction work and protection plans. The company paid dividends of $0.8133 per common share for the nine months, compared with $0.7791 in 2021.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $25.1 million, up from $19.7 million. Investing used $43.0 million, including $36.7 million of capital expenditures and $6.3 million net cash for acquisitions. Financing provided $17.9 million. Period-end cash was $0.1 million.
- At September 30, total long-term debt, including current maturities, was $176.1 million; lines of credit were drawn by $9.4 million. The company had $34.2 million available on its $40 million Citizens facility and $16.4 million available on its $20 million CoBank facility.
- Current assets were $22.9 million and current liabilities were $32.9 million. The filing says management expects to fund the next 12 months through operating cash flow, credit lines, state revolving-fund loans and capital-market financing, and believes available sources will be adequate for normal operations and financing needs.
- In April, Artesian Water issued a $30 million, 25-year Series W first mortgage bond at a fixed 4.43% rate. The company also entered into Delaware revolving-fund loans of up to approximately $5.3 million at a 1% interest rate plus a 1% administrative fee; approximately $0.8 million had been borrowed by September 30.
Material changes and management commentary
- Revenue and earnings increased year over year, with acquisitions and wastewater-related activity contributing to growth. For the nine months, the company’s operating expense ratio excluding depreciation and income taxes improved to 53.9% from 54.3%; Q3 improved to 50.6% from 53.2%.
- Nine-month capital expenditures rose to $36.7 million from $30.4 million. Utility plant, at original cost less accumulated depreciation, increased to $656.0 million from $590.4 million at year-end 2021.
- Interest expense increased $0.5 million for the nine months, primarily due to the Series W bond. Total operating expenses increased $3.5 million, reflecting acquisition-related costs, maintenance, compensation, treatment chemicals and non-utility contract work, partly offset by lower purchased-water costs.
- The Delaware Sand and Gravel settlement provides approximately $10.0 million of reimbursement for past treatment costs: $2.5 million was received in August 2022 and $7.5 million is due in equal annual installments through 2025. In October 2022, the DEPSC approved refunding these past-cost reimbursements to eligible customers in annual bill credits. The company also expects reimbursement of certain documented future treatment costs, subject to regulatory treatment.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management describes continued growth opportunities in water, wastewater, service-line protection and contract services, and plans further infrastructure investment. It expects internally generated funds and existing credit facilities to support near-term needs, but notes acquisitions could require additional debt or equity financing and that financing may not be available on acceptable terms.
Key risks cited include weather-driven water demand; inflation and higher facility replacement costs; supply-chain delays and price increases; the timing, adequacy and approval of rate increases; variable borrowing costs and SOFR changes; and the ability to refinance debt. The Citizens credit line is a demand facility and expires in May 2023; the company expects renewal. Management reported compliance with debt covenants and no material changes to the risk factors in its 2021 Form 10-K. The filing states COVID-19 had not materially adversely affected results or operations as of quarter-end, though procurement delays persisted.
The company remains responsible for treating groundwater contaminants associated with the Delaware Sand & Gravel Landfill Superfund Site; the settlement provides reimbursement and financial assurances, but reimbursements for treatment costs are subject to regulatory determination. Management says ordinary-course legal matters are not expected to materially affect the company, while noting litigation can involve expense and management distraction.
Important facts for investors to verify
- Whether the company renews both credit facilities on acceptable terms and how much it must borrow to fund capital spending, acquisitions and debt maturities.
- Whether regulatory proceedings allow timely and sufficient recovery of rising operating and infrastructure costs through rates.
- Whether anticipated TESI and Clayton acquisition benefits materialize, including final purchase-price allocations and the DEPSC’s future ratemaking treatment.
- Whether the Sand and Gravel Trust makes the remaining reimbursements and covers eligible future costs, and how customer refunds affect cash flows and reported expenses.
- Whether customer growth, weather, inflation, supply availability and interest-rate changes alter revenue, margins and liquidity relative to management’s expectations.