Artesian Resources Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; financial statements are unaudited. Artesian operates regulated water and wastewater utilities in Delaware, Maryland and Pennsylvania, plus non-regulated utility services, including service-line protection plans and contract operations. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $20.50 | $19.40 | $39.69 | $37.85 |
| Operating income | $4.99 | $4.67 | $8.98 | $8.52 |
| Net income applicable to common stock | $3.25 | $3.04 | $6.34 | $5.87 |
| Diluted earnings per share | $0.35 | $0.33 | $0.69 | $0.64 |
| Cash dividends per common share | $0.2317 | $0.2249 | $0.4600 | $0.4465 |
- Revenue increased 5.7% in Q2 and 4.9% year to date. Water sales, about 89% of revenue, rose 5.3% in Q2 and 4.2% year to date, supported by higher water consumption and Distribution System Improvement Charge (DSIC) revenue.
- Net income rose approximately 6.9% in Q2 and 8.0% for the first half. Operating margin, calculated as operating income divided by revenue, was approximately 24.3% in Q2 2017 versus 24.1% in Q2 2016, and 22.6% versus 22.5% for the first half.
- Six-month operating cash flow was $15.8 million, up from $13.2 million. Capital expenditures were $17.1 million, versus $12.1 million; operating cash flow less capital expenditures was therefore approximately negative $1.3 million.
- Cash and cash equivalents were $0.3 million at June 30, 2017. Current assets were $12.9 million and current liabilities $44.2 million; current liabilities include $26.3 million of current long-term debt.
- Long-term debt carrying value, including its current portion, was $107.6 million, compared with $103.6 million at year-end 2016. Lines of credit outstanding were $5.2 million and overdraft payable was $1.2 million. The company reported debt to total capitalization, including short-term debt, of 43.0% and compliance with debt covenants.
Material changes and operating developments
- Operating expenses excluding depreciation and income taxes increased 9.2% in Q2 and 6.8% year to date, outpacing revenue growth. Payroll and benefits, purchased water, and maintenance were key increases. The corresponding expense-to-revenue ratio rose to 55.7% in Q2 from 53.9%, and to 55.9% for the first half from 55.0%.
- Interest expense declined 7.4% in Q2 and approximately $0.3 million for the first half, mainly following a January 2017 refinancing. Artesian issued a $40 million Series T bond at 4.24%, due in 2036, and used proceeds to prepay Series O and Q bonds. A $4.5 million Series O prepayment cost was deferred as a regulatory asset for recovery over the new debt term.
- Regulatory assets increased to $7.8 million from $3.4 million at year-end 2016, primarily reflecting deferred debt-related costs.
- Delaware water customers increased by approximately 1,300 year over year to 83,400; Delaware wastewater customers increased by approximately 170, or 11.2%, to 1,685. The company completed the sanitary wastewater pipeline for Allen Harim, but service awaited customer-side improvements. A separate industrial wastewater pipeline and 90-million-gallon lagoon were under construction, with completion expected in Q1 2018.
- Artesian Water acquired Fort DuPont water assets for $0.852 million in June 2017. The company also formed Artesian Storm Water in January 2017 to pursue storm-water services.
Liquidity, outlook and risks
- At June 30, the company had $36.8 million available on its $40 million Citizens line and $18.0 million available on its $20 million CoBank line. Both facilities were expected to be renewed; the CoBank line expired in September 2017 and the Citizens line in May 2018, subject to demand rights.
- Management said available cash, credit facilities, operating cash flow and access to capital markets were expected to fund the next 12 months and support normal operations. It identified utility-system investment as an ongoing need; first-half capital spending was substantially above the comparable period.
- The $25 million Series P bond, bearing 6.58%, was due in January 2018; management intended to refinance it. The filing’s contractual-obligation schedule reports $36.5 million due in less than one year, including principal and interest, purchase obligations and other commitments.
- No numerical earnings or revenue guidance was provided. Management’s strategy emphasizes growth in water and wastewater customers, regional wastewater facilities, contract operations and service-line plans.
- Key risks include weather-driven water demand, timing and sufficiency of regulatory rate approvals, construction and customer-growth conditions, refinancing and variable-rate borrowing costs, and operating costs. The $60 million of bank lines are variable rate; outstanding interim borrowings were approximately $5.2 million.
- Routine litigation was not expected by management to materially affect results, though costs and management distraction remain possible. The company accrued tax-related penalties and interest associated with uncertain repair deductions and remains subject to tax examinations. A related-party construction contract with a company owned by an officer’s spouse totaled approximately $100,000; $87,000 was paid in the first half of 2017 and the Audit Committee reviewed and approved the transaction.
Important facts for investors to verify
- Progress and timing of the Allen Harim industrial wastewater pipeline and lagoon, and when contracted wastewater service begins.
- Renewal of the CoBank and Citizens credit facilities and refinancing of the Series P bond due January 2018.
- Whether DSIC and other rate recovery keep pace with rising operating and capital costs; DSIC approvals remain subject to audit.
- Actual capital spending, cash generation and liquidity as major utility and wastewater projects proceed.
- Resolution of the uncertain tax deduction matters and any material developments in regulatory proceedings or litigation.