Artesian Resources Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Artesian provides regulated water and wastewater services, primarily in Delaware, plus non-regulated contract and service-line protection offerings.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenue | $22.2 million | $20.6 million | +7.5% |
| Operating income | $4.7 million | $4.4 million | +6.8% |
| Net income applicable to common stock | $4.5 million | $4.2 million | +6.6% |
| Diluted EPS | $0.47 | $0.45 | +4.4% |
| Operating cash flow | $11.8 million | $10.2 million | +15.4% |
| Cash dividends per common share | $0.2675 | $0.2571 | +4.0% |
Water sales were $18.1 million, up 1.8%; other utility operating revenue increased to $2.5 million from $1.4 million, primarily reflecting wastewater customer growth and operations. Non-utility revenue was $1.5 million. Operating expenses rose 7.7% to $17.4 million. The company’s reported operating-expense ratio, excluding depreciation and income taxes, increased to 58.3% from 57.4%.
Cash flow, investment and financial position
- Cash from operations was $11.8 million. Investing activities used $12.6 million, including $9.8 million of capital expenditures and $2.8 million invested in acquisitions. Financing activities provided $1.2 million. Cash ended the quarter at $0.5 million.
- Capital expenditures, as described in MD&A, were $12.6 million, compared with $6.3 million a year earlier; this presentation includes the acquisition investment separately identified in the cash-flow statement.
- At March 31, total assets were $652.8 million and stockholders’ equity was $180.6 million. Long-term debt was $142.9 million, with $1.6 million current; lines of credit totaled $27.4 million. Cash and cash equivalents were $0.5 million.
- Current assets were $15.6 million versus current liabilities of $51.9 million. The company reported $30.6 million available under its $40 million Citizens line and $2.0 million available under its $20 million CoBank line.
- Net contributions and advances from developers were $2.8 million. The company said existing cash, operating cash flow, credit lines, state revolving fund loans and capital-market financing were expected to fund needs over the next 12 months.
Material changes and transactions
- In January 2022, Artesian acquired Tidewater Environmental Services, Inc. (TESI), more than doubling wastewater customers in Sussex County and adding the Town of Milton. TESI contributed $0.7 million of Q1 revenue. Purchase accounting remained preliminary; the filing describes $6.4 million of cash and other consideration, including forgiveness of a $2.1 million note, and reports $3.1 million paid at closing. The final allocation is pending valuation work.
- Artesian Water agreed to acquire substantially all of the Town of Clayton’s water-system assets for $5.0 million, less associated secured debt. Closing was expected in Q2 2022, subject to due diligence; the DEPSC approved transfer of the franchise territory on April 20.
- After quarter-end, Artesian Water agreed to issue a $30 million first mortgage bond to CoBank, due in 2047, at a fixed 4.43% annual rate. Proceeds were intended to reduce lines of credit and an intercompany loan, with any remainder for capital investment. The bond is secured by substantially all of Artesian Water’s utility plant.
Outlook, risks and other matters
No numerical earnings or revenue guidance was provided. Management’s strategy is to expand water, wastewater and service-line protection services, with continued investment in infrastructure and growth through acquisitions and partnerships. Management expected internally generated funds and existing facilities to meet near-term needs, while noting that additional financing may be sought for acquisitions or other purposes.
Management said Q1 results and operations had not been materially adversely affected by COVID-19, but reported procurement delays and price increases for some materials and equipment. Inflation, supply-chain constraints, weather-related water demand, capital requirements, and the timing and sufficiency of regulator-approved rate increases may affect results and cash flows. The Citizens credit line was a demand facility expiring May 22, 2022, and the CoBank line expired July 30, 2022; the company expected to renew both. Variable-rate borrowings expose the company to interest-rate and LIBOR transition risk. Debt covenants were in compliance at quarter-end. The company reported no material changes to the risk factors in its 2021 Form 10-K and no legal proceedings expected to materially affect it.
Important facts for investors to verify
- Completion and final purchase-price allocation of TESI, including the regulatory treatment of acquisition costs in a future rate case.
- Whether the Clayton transaction closed, its final cost and the timing of integration.
- Renewal terms and pricing for the Citizens and CoBank credit facilities, and application of the $30 million CoBank bond proceeds.
- Whether rate recovery keeps pace with rising operating and infrastructure costs, and the outcome of ongoing regulatory audits or proceedings.
- Actual capital spending, acquisition funding needs and cash generation relative to management’s stated liquidity expectations.