Artesian Resources Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Amounts are in millions of dollars unless otherwise noted. Comparisons are with FY2020.
Business context
Artesian is a regulated water and wastewater utility and holding company serving Delaware, Maryland and Pennsylvania, with related contract operations and service-line protection businesses. Water sales generated 85.7% of 2021 operating revenue. Its results are affected by regulated rates, customer growth, seasonal water demand, weather and infrastructure investment.
Key financial results
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Operating revenue | $90.9 | $88.1 | Up $2.7, or 3.1% |
| Water sales | $77.8 | $76.5 | Up 1.8%; customer growth and higher non-residential consumption contributed |
| Other utility revenue | $7.2 | $6.5 | Up 10.3%, primarily wastewater customer growth; partly offset by lower industrial wastewater revenue |
| Non-utility revenue | $5.8 | $5.1 | Up 13.7%, mainly contract work and service-line plans |
| Operating income | $22.3 | $22.3 | Essentially unchanged |
| Net income applicable to common stock | $16.8 | $16.8 | Essentially unchanged |
| Basic / diluted EPS | $1.79 / $1.79 | $1.80 / $1.79 | Basic EPS slightly lower |
| Operating margin | 24.5% | 25.3% | Calculated as operating income divided by revenue |
| Net margin | 18.5% | 19.1% | Calculated as net income divided by revenue |
| Cash from operating activities | $31.3 | $20.4 | Up $11.0 |
| Capital expenditures | $40.8 | $34.3 | Cash-flow statement presentation; utility investment continued at a high level |
| Cash dividends per share | $1.05 | $1.01 | Up 4.0% |
Operating expenses increased $2.7 million overall, matching the revenue increase. Utility and non-utility operating costs rose, including repair and maintenance, construction-contract and service-plan repair costs. Depreciation and amortization increased $0.7 million to $11.9 million. Income tax expense was $5.7 million versus $5.7 million in 2020, though the current and deferred tax components shifted materially.
Balance sheet, debt and liquidity
- Total assets were $625.2 million, up from $593.2 million; utility plant net of depreciation was $590.4 million, up from $559.6 million.
- Stockholders’ equity was $178.0 million. Long-term debt, including current maturities, was $144.9 million; lines of credit outstanding were $26.7 million. Cash was $0.1 million.
- Current assets were $19.2 million versus current liabilities of $47.7 million. The filing reports substantial reliance on operating cash flow, credit facilities, developer contributions and external financing to fund investment and obligations.
- At year-end, $31.3 million was available on the $40 million Citizens Bank line and $2.0 million on the $20 million CoBank line. The facilities were due to expire in May and July 2022, respectively; management expected renewal. The Citizens facility is a demand line that can be called at any time.
- Long-term debt was predominantly fixed-rate. Lines of credit were variable-rate; borrowings under them were $26.7 million at year-end. The company reported compliance with debt covenants.
- Operating cash flow of $31.3 million was below capital expenditures of $40.8 million. Financing cash flow included $15.8 million of net developer advances and contributions, $4.1 million of long-term debt proceeds and $9.8 million of dividends paid.
Material changes, outlook and notable items
- Water customers in Delaware grew approximately 1.5% and in Maryland 2.2%; wastewater customers in Delaware grew 14.8% in 2021. Management attributed revenue growth largely to customer growth and increased consumption.
- Management expected 2022 gross capital investment of approximately $67.2 million, offset by $10.8 million of developer contributions and $6.0 million of state grants, for net investment of about $50.4 million. The company expected 2022 principal and interest, rental, storage-tank and water-interconnection obligations of approximately $10.4 million.
- In January 2022, Artesian acquired Tidewater Environmental Services (TESI) for $6.4 million in cash plus forgiveness of a $2.1 million intercompany note. The acquisition more than doubled wastewater customers in Sussex County; purchase-price allocation was still preliminary at filing.
- In February 2022, Artesian agreed to seek a $30 million, 25-year first mortgage bond at a fixed 4.43% rate, subject to Delaware regulatory approval. Proceeds were intended to reduce line-of-credit borrowings and fund capital investment. Failure to borrow the full amount by the settlement date could trigger a broken-funding charge.
- A proposed $5.0 million purchase of the Town of Clayton water system was pending due diligence and Delaware Public Service Commission approval.
- Management said COVID-19 had not materially adversely affected FY2021 results or operations, but procurement delays and cost increases had occurred. Inflation, supply-chain constraints and construction delays could raise costs; recovery through regulated rates is not assured.
- Key risks include regulatory timing and adequacy of rate approvals, seasonal/weather-driven demand, drought and water-allocation limits, aging infrastructure, environmental requirements, wastewater-system failures, cybersecurity, access to capital and acquisition integration.
- The company reported material compliance with current water-quality standards. The revised Lead and Copper Rule had an expected 2024 compliance deadline; the company was assessing the requirements. A DEPSC audit of the amortization of a tax-related regulatory liability was ongoing, and the Maryland commission had not issued a final order on its related amount.
- The independent auditor issued an unqualified opinion on the financial statements. The audit identified valuation of tangible utility assets acquired in the Delaware City transaction as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to opine on internal-control effectiveness.
Investor verification priorities
- Confirm renewal of the expiring bank credit facilities and completion, terms and regulatory approval of the proposed $30 million bond financing.
- Track actual 2022 capital spending, developer contributions, grant receipts and recovery of investment through approved rates.
- Review TESI’s finalized purchase-price allocation, integration costs and realized customer or operating benefits; also monitor the pending Clayton transaction.
- Assess whether higher operating, construction and compliance costs are recovered in rates, and follow the DEPSC and MDPSC decisions on outstanding regulatory matters.
- Monitor cash generation against capital expenditures, debt maturities, variable-rate borrowing exposure and continued dividend funding.