Artesian Resources Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter report. Artesian is a regulated water and wastewater utility, with additional contract operations and service-line protection businesses, serving the Delmarva Peninsula.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Operating revenue | $82.2 million | $79.1 million |
| Operating income | $19.6 million | $18.8 million |
| Net income applicable to common stock | $14.0 million | $13.0 million |
| Diluted earnings per share | $1.51 | $1.41 |
| Cash from operating activities | $35.8 million | $29.8 million |
| Capital expenditures | $41.1 million | $28.3 million |
| Cash dividends paid | $8.5 million | $8.2 million |
| Total assets | $494.6 million | $451.0 million |
| Long-term debt, including current portion | $106.9 million | $103.6 million |
| Lines of credit outstanding | $9.6 million | $7.1 million |
Water sales were $73.1 million, 88.8% of revenue. Operating margin was approximately 23.8%, broadly unchanged from 2016; net margin increased to approximately 17.0% from 16.4%. The ratio of operating expenses excluding depreciation and income taxes to revenue rose to 55.7% from 54.1%, reflecting faster cost growth than revenue. Year-end cash was $1.0 million; current assets were $19.0 million and current liabilities $28.5 million. The company reported $50.4 million of unused capacity across its two credit facilities and a 47.8% debt-to-total-capitalization ratio.
Changes versus prior period
- Revenue grew 4.0%; water sales increased 3.5%, primarily from higher Distribution System Improvement Charge revenue, customer growth and increased consumption. Metered water customers rose to approximately 86,500 from 85,000.
- Operating income rose about 4.1% and net income about 7.9%. Operating and maintenance costs increased, particularly payroll and benefits, repair and maintenance, and purchased water.
- Interest expense declined $0.5 million after the January 2017 refinancing of Series O and Q bonds. The new $40 million Series T bond carries a 4.24% rate and matures in 2036.
- Operating cash flow increased $6.0 million, while capital expenditures rose $12.8 million. Operating cash flow was below capital spending before financing and developer contributions.
- For fourth-quarter context, revenue was $20.2 million versus $19.4 million, operating income $5.2 million versus $4.4 million, and net income $3.7 million versus $2.7 million.
Outlook, commentary and risks
- Management expects 2018 gross capital investment of approximately $65.0 million, offset by an estimated $6.2 million of developer contributions and advances, for net investment of about $58.8 million. Expected 2018 contractual obligations are approximately $10.8 million.
- Growth priorities include extending water and wastewater service territories, infrastructure renewal, wastewater expansion, and non-regulated contract and service-line protection operations. The company acquired Fort DuPont water assets for $852,000 in June 2017.
- Allen Harim wastewater service was not yet fully operational at year-end: sanitary wastewater transfer awaited a construction permit and customer-site improvements. A separate industrial wastewater pipeline and 90-million-gallon lagoon were expected to be completed in the third quarter of 2018.
- The Tax Cuts and Jobs Act reduced the federal corporate rate to 21%. Artesian recorded an approximately $23.5 million reduction in net deferred tax liabilities, including a $22.5 million regulatory liability expected to benefit customers over time, and an approximately $1.0 million benefit to continuing operations. Management expected lower 2018 tax expense, but anticipated passing tax savings to Delaware customers through lower rates or DSIC adjustments; actual effects remained subject to regulatory decisions.
- Credit facilities of $40 million and $20 million were due to expire in May and July 2018, respectively; management expected renewal. The Citizens facility is payable on demand. Interest-rate exposure includes variable-rate credit borrowings; other key risks include weather-driven demand, rate-case outcomes, water allocation and environmental permits, capital access, and wastewater system failures.
- Management said ordinary-course legal matters were not expected to materially affect results. BDO issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Confirm renewal and terms of the two credit facilities, and monitor liquidity needs against the elevated 2018 capital plan.
- Track actual capital spending, developer contributions, and progress and permitting for the Allen Harim wastewater projects.
- Review regulatory treatment and timing of TCJA-related customer refunds or rate reductions, including the resulting effect on earnings and cash flow.
- Assess whether operating-cost growth and the higher expense-to-revenue ratio persist, and how much future revenue growth depends on rate adjustments versus customer usage.
- Check the filing’s full debt, covenant and refinancing disclosures, including the January 2018 Series U bond issued to repay the $25 million Series P bond.