Artesian Resources Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. Unaudited consolidated results. Artesian primarily operates regulated water and wastewater utilities in Delaware, Maryland and Pennsylvania, alongside non-regulated service and contract businesses.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Operating revenue | $20.238m | $20.502m | $39.144m | $39.691m |
| Operating income | $5.239m | $4.990m | $9.209m | $8.979m |
| Net income applicable to common stock | $3.926m | $3.251m | $7.404m | $6.337m |
| Diluted earnings per share | $0.42 | $0.35 | $0.80 | $0.69 |
| Cash provided by operations | — | — | $12.664m | $15.831m |
| Capital expenditures | — | — | $22.994m | $17.140m |
Revenue declined 1.3% in Q2 and 1.4% in the first half. Operating income increased 5.0% and 2.6%, respectively; net income rose 20.8% and 16.8%. Operating margin was approximately 25.9% in Q2 and 23.5% for the first half, versus 24.3% and 22.6% a year earlier. Water sales remained the main revenue source, representing 88.2% of first-half operating revenue.
At June 30, 2018, total assets were $509.0m and stockholders’ equity was $148.2m. Cash was $0.216m, current assets $16.0m and current liabilities $39.3m. Long-term debt, including its current portion, was $106.3m; lines of credit were $19.4m. The company reported debt to total capitalization of 47.6% and compliance with applicable covenants. First-half dividends paid were $4.373m; cash dividends per share were $0.4739.
Changes and key drivers
- Regulated revenue fell year over year, primarily because $1.548m of first-half Delaware DSIC revenue was reserved pending a regulatory decision on passing Tax Cuts and Jobs Act (TCJA) benefits to customers. The comparable 2017 period recognized $1.543m of DSIC revenue. The Q2 reserve was $0.800m.
- Customer growth and higher water consumption partly offset the reserved DSIC revenue. Delaware water customers increased by about 1,800 year over year to approximately 85,200; Delaware wastewater customers increased by about 250 to approximately 1,950.
- Lower utility operating costs, lower income tax expense following federal tax-rate reduction, and higher CoBank patronage refunds supported earnings. Q2 other income also benefited from the absence of a $0.3m charitable pledge made in 2017. First-half interest expense decreased partly because the Series P bond was refinanced at 4.71%, down from 6.58%.
- Depreciation and amortization increased 9.9% in the first half, reflecting continued utility-plant investment. Capital spending rose about 34% year over year, including $8.7m for Delaware wastewater projects, primarily the Allen Harim pipeline and storage lagoon.
Liquidity, outlook and risks
First-half operating cash flow was below the prior-year period while capital expenditures exceeded it; the company funded the gap through $9.823m of net line-of-credit borrowings, $4.076m of net developer advances and contributions, and $0.612m of stock issuance proceeds. Cash declined by $0.736m to $0.216m. Management expects operations, available credit facilities and, as needed, capital-market financing to support the next 12 months and states these sources should be adequate for normal operations and financing needs.
At June 30, available borrowing capacity was reported as $30.6m on a $40m Citizens line and $10.0m on a $20m CoBank line. Both facilities were expected to be renewed; the Citizens facility is payable on demand and expires no later than May 24, 2019. Borrowings under the lines are variable-rate and expose the company to higher interest costs if rates rise. Most long-term debt is fixed-rate.
On August 8, 2018, after quarter-end, Artesian Wastewater entered into CoBank financing for up to $12m at 5.12%, guaranteed by the parent. Proceeds are intended to finance the Allen Harim wastewater project and Stonewater facility upgrades. The loans carry a minimum 1.25 debt-coverage ratio covenant beginning in 2019 and a maximum 65% debt-to-capitalization covenant.
Management’s strategy emphasizes customer growth, expansion of water and wastewater services, and growth in service-line protection plans and contract operations. Allen Harim industrial wastewater infrastructure was expected to be completed by year-end 2018; sanitary wastewater service remained subject to permits and customer-side improvements. Results are subject to seasonal water demand, weather, construction and economic conditions, rising infrastructure costs, rate-setting outcomes, and regulatory approvals. The July 2018 Delaware DSIC rate of 3.63% was under audit. The company had no material change to previously reported risk factors.
A $10m-or-more damages claim in an antitrust case filed by Wetherby, LLC was withdrawn with prejudice on May 15, 2018. The filing says other ordinary-course proceedings are not expected to materially affect the company, but litigation may entail costs and management distraction.
Important facts for investors to verify
- Whether and when Delaware regulators determine the TCJA customer benefit and the final treatment of the $1.548m DSIC refund liability.
- Progress, remaining cost, permits and expected service commencement for the Allen Harim projects and Stonewater upgrades, including use of the new $12m financing.
- Renewal terms and availability of the Citizens and CoBank credit lines, given low cash balances and increased short-term borrowing.
- Whether elevated capital spending and customer growth translate into approved rate recovery and sustained operating cash flow.
- The impact of weather, inflation, variable interest rates and regulatory decisions on water sales, margins and future funding needs.