Artesian Resources Corporation — Q3 2017 Form 10-Q
Business and period: Artesian is a regulated water and wastewater utility, primarily operating in Delaware, with operations in Maryland and Pennsylvania and non-regulated service businesses. This unaudited report covers the quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods unless stated otherwise. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $22.36 | $21.83 | $62.05 | $59.67 |
| Operating income | $5.45 | $5.95 | $14.43 | $14.47 |
| Net income applicable to common stock | $3.94 | $4.36 | $10.28 | $10.23 |
| Diluted earnings per share | $0.42 | $0.48 | $1.11 | $1.12 |
| Operating margin | 24.4% | 27.2% | 23.3% | 24.2% |
- Revenue grew 2.4% in Q3 and 4.0% for the nine months. Water sales were 89.7% of Q3 revenue and 89.0% of nine-month revenue. Management attributed growth principally to DSIC charges and customer growth; nine-month water sales also benefited from slightly higher consumption.
- Q3 net income declined about 9.6%, while nine-month net income was essentially flat. Operating expenses rose faster than revenue: the reported ratio of operating expense excluding depreciation and income taxes to revenue increased to 53.6% from 50.9% in Q3 and to 55.1% from 53.5% for nine months.
- Q3 operating income fell about 8.3%; nine-month operating income was nearly unchanged. Interest expense declined to $1.53 million from $1.65 million in Q3 and to $4.61 million from $5.00 million for nine months, mainly following refinancing of Series O and Q bonds. Lower interest costs partly offset higher operating expenses.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $25.59 million, versus $21.93 million in 2016. Capital expenditures were $28.28 million, versus $20.00 million; cash used in investing was $28.21 million.
- Financing activities provided $2.65 million, including $8.40 million in developer advances and contributions and $1.24 million in common-stock proceeds; dividends paid were $6.33 million. Cash increased $24,000 to $250,000.
- At September 30, cash was $0.25 million, current assets $16.39 million and current liabilities $23.23 million. The company reported $6.30 million drawn on lines of credit and $34.7 million available on its $40 million Citizens facility, plus $19.0 million available on its $20 million CoBank facility.
- Long-term debt, net of current portion, was $105.86 million; current long-term debt was $1.34 million. Total long-term debt carrying amount was $107.20 million, versus $103.65 million at year-end 2016. Debt to total capitalization, including the current portion, was 48.2%; the company reported compliance with debt covenants.
- Utility plant, net, increased to $447.76 million from $425.50 million at December 31, 2016. Nine-month capital investment included water-system rehabilitation and upgrades and wastewater projects, including the Allen Harim pipeline and storage lagoon.
Changes, outlook and risks
- Delaware water customers increased by about 1,400 year over year to 83,800; Delaware wastewater customers increased by about 170, or 10.9%, to 1,700. The company completed its $852,000 purchase of Fort DuPont water assets in June 2017.
- Management’s strategy is to expand water, wastewater, contract operations and service-line protection offerings. It expects to fund the next 12 months through operating cash flow, cash balances, credit facilities and, as needed, capital-market financing; it stated that available resources should be adequate. No specific earnings or revenue guidance was provided.
- DSIC revenue was approximately $0.86 million in Q3 and $2.4 million for nine months, compared with $0.43 million and $0.94 million, respectively, in 2016. The cumulative DSIC rate was 4.71%, subject to later regulatory audit and reset upon approval of new base rates.
- Allen Harim sanitary wastewater service was pending a construction permit and customer-side improvements. A second project, for disposal of about 1.5 million gallons per day of treated industrial wastewater, was under construction; completion of its pipeline and lagoon was expected in Q2 2018.
- As a subsequent event, Artesian arranged a forward fixed rate of 4.71% for refinancing the $25 million Series P bond, due January 31, 2018, replacing its existing 6.58% rate. The agreement was entered into October 10, 2017.
- Key risks include weather-driven water demand, timing and sufficiency of regulatory rate relief, capital investment and financing needs, variable-rate borrowing costs, and construction, permit and customer-readiness timing for wastewater projects. The filing reported no material change to previously disclosed risk factors and no material expected effect from ordinary-course litigation.
Important facts for investors to verify
- Whether higher operating costs, particularly payroll, maintenance and purchased water, continue to outpace revenue growth.
- Progress and required permits or customer improvements for the Allen Harim projects and the timing of associated revenue.
- Completion and final terms of the Series P refinancing, and renewal of the Citizens and CoBank credit facilities.
- Regulatory audits, rate proceedings and continued recovery of system investment through DSIC or base rates.
- Capital spending, operating cash generation and dividend coverage given low cash balances and capital expenditures exceeding operating cash flow.