Artesian Resources Corporation — Q1 2017 Form 10-Q
Business context and reporting period. The unaudited report covers the three months ended March 31, 2017, compared with Q1 2016. Artesian is a regulated water and wastewater utility operating primarily in Delaware, with operations in Maryland and Pennsylvania, plus non-regulated contract services and service-line protection plans. Water sales generated 88.3% of Q1 2017 operating revenue.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Operating revenue | $19.190 million | $18.449 million; up 4.0% |
| Operating income | $3.991 million | $3.853 million |
| Net income applicable to common stock | $3.086 million | $2.830 million; up approximately 9% |
| Diluted earnings per share | $0.34 | $0.31 |
| Cash dividends per common share | $0.2283 | $0.2216 |
| Net cash from operating activities | $10.114 million | $6.938 million |
| Capital expenditures | $7.664 million | $4.270 million |
| Cash and cash equivalents | $0.209 million at March 31 | $0.226 million at December 31, 2016 |
| Long-term debt, including current portion | $107.859 million | $103.647 million at December 31, 2016 |
Operating margin was approximately 20.8% of revenue, versus 20.9% a year earlier. The company reported total current assets of $12.181 million and current liabilities of $42.966 million at March 31, 2017. It reported a debt-to-total-capitalization ratio of 43.4% and $56.1 million of available capacity under its two bank credit lines.
Material changes versus Q1 2016
- Revenue rose $0.741 million. Water sales increased 3.0%, primarily reflecting higher Distribution System Improvement Charge (DSIC) revenue and water consumption. DSIC revenue was approximately $0.756 million, compared with $0.249 million.
- Other utility revenue grew 17.9%, mainly from water service charges, wastewater development inspection fees, and customer growth. Non-utility revenue rose 7.6%, principally from service-line protection plans.
- Operating expenses excluding depreciation and income taxes increased 4.4%. Higher purchased-water, repair and maintenance, treatment, and service-plan repair costs contributed.
- Interest expense declined 8.6%, primarily following the January 2017 refinancing of Series O and Q bonds. Net income increased $0.256 million.
- Operating cash flow increased to $10.114 million; capital spending also rose substantially, to $7.664 million. Cash declined by $0.017 million during the quarter.
Outlook, risks, and unusual items
- Financing and refinancing: In January, Artesian Water issued a $40 million Series T first mortgage bond due in 2036 at 4.24%, using proceeds to prepay Series O and Q debt. The filing says Series P debt of $25 million, bearing 6.58%, is due January 2018 and management intends to refinance it. The company expects to renew its $40 million Citizens line, expiring May 26, 2017, and its $20 million CoBank line, expiring July 20, 2017.
- Capital investment and growth: Management expects to fund the next 12 months through operations, credit facilities, available cash, and, as needed, capital-market financing. Planned investments include water-system improvements and Delaware wastewater projects. The company did not provide numerical earnings or revenue guidance.
- Projects: Wastewater service agreements with Allen Harim include a sanitary-wastewater pipeline expected to be completed in Q2 2017 and a separate industrial-wastewater pipeline and storage lagoon expected in Q1 2018. Artesian also agreed to purchase Fort DuPont water assets for $1.0 million; closing and planned development remain subject to the agreement’s terms.
- Key risks: Water demand and revenue are seasonal and weather-sensitive. Results also depend on regulatory rate decisions, construction and customer growth, infrastructure requirements, refinancing, and interest rates. Credit-line borrowings are variable-rate and the Citizens facility is a demand line. DSIC approvals are subject to later audit.
- Tax and other matters: The company accrued approximately $1,500 of interest and penalties for Q1 2017 related to potential disallowance of a tax repair deduction; tax authorities had not agreed with the deduction methodology. Management said ordinary-course litigation was not expected to materially affect the company, but noted litigation costs and management distraction are possible. No material changes to the 2016 Form 10-K risk factors were reported.
Most important facts for investors to verify
- Whether the expiring bank credit lines were renewed on acceptable terms and how the company plans to refinance the January 2018 Series P maturity.
- Whether higher capital expenditures translate into rate-base growth and timely recovery through approved rates and DSIC collections.
- Progress, costs, and timing of the Allen Harim and Fort DuPont projects, and whether projected customer and wastewater growth materializes.
- Whether operating cash flow can support planned investment and dividends, given low cash balances and current liabilities exceeding current assets.
- Any developments in the tax deduction review or DSIC audits that could affect future results or customer refunds.