Artesian Resources Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Artesian is a regulated water and wastewater utility operating primarily in Delaware, with operations in Maryland and Pennsylvania and additional non-regulated services.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $24.7 million | $22.5 million | $66.4 million | $62.6 million |
| Operating income | $6.9 million | $5.7 million | $17.5 million | $15.3 million |
| Net income | $5.1 million | $4.5 million | $13.7 million | $11.8 million |
| EPS, diluted | $0.54 | $0.48 | $1.46 | $1.27 |
| Operating margin | 27.8% | 25.4% | 26.3% | 24.5% |
Margins are calculated as operating income divided by operating revenue. Water sales were 87.6% of nine-month revenue. Cash dividends per common share were $0.2496 for Q3 and $0.7488 for the first nine months.
- Cash flow, nine months: Operating activities provided $14.3 million, versus $13.1 million a year earlier. Investing activities used $31.7 million, including $26.0 million of capital expenditures and $5.7 million for acquisitions. Financing activities provided $17.0 million. Cash ended the period at $0.25 million.
- Balance sheet, September 30: Total assets were $587.4 million and stockholders’ equity was $165.9 million. Long-term debt, including current portion, was $144.5 million; lines of credit were $20.1 million. Current liabilities totaled $43.6 million against current assets of $17.9 million.
- Liquidity: The company reported $32.9 million available on its $40 million Citizens line and $7.0 million available on its $20 million CoBank line. Both lines were expected to be renewed; the Citizens facility is a demand line. The company said it expected to fund the next 12 months with cash, credit facilities, operating cash flow, state revolving-fund loans and, if needed, capital-market financing.
Changes versus the prior comparable period
- Q3 revenue increased 9.7%, operating income increased $1.1 million, and net income rose $0.6 million. For the first nine months, revenue grew 6.1% and net income increased $1.9 million.
- Growth reflected higher residential water consumption and customer-related fixed fees, higher DSIC revenue, and increased industrial wastewater revenue. Q3 other utility revenue also benefited from contract minimum wastewater volumes.
- Operating costs rose, including payroll and benefits and bad-debt expense. The reported ratio of operating expense excluding depreciation and income taxes to revenue improved to 53.6% in Q3 and 54.2% for nine months, from 56.1% in both 2019 periods.
- Interest expense increased $0.5 million for the nine-month period, primarily due to the Series V bond issued in December 2019. This was partly offset by lower short-term borrowing costs.
- Accounts receivable increased to $9.2 million from $6.9 million at year-end, while the allowance for doubtful accounts rose to $0.9 million from $0.3 million. Management recorded a $0.5 million bad-debt reserve increase in Q3.
- Artesian acquired the Frankford water system for $3.6 million in April and Delaware City’s water assets for $2.1 million in August, together serving approximately 1,160 customers. The acquisitions were not material to reported results; ratemaking treatment remains subject to the DEPSC’s next base-rate case.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance was provided. Management described ongoing plans to expand water, wastewater, service-line protection and contract operations, supported by customer growth, acquisitions and infrastructure investment.
- Management said COVID-19 had not materially adversely affected results or operations through September, but the full effects remained uncertain. Moratoria on disconnections and late fees lengthened collection cycles and increased bad-debt reserves. Delaware reinstated late fees in September and began disconnections in October; Maryland and Pennsylvania lifted moratoria effective November. Required customer payment arrangements may continue to affect collections.
- Water sales are seasonal and sensitive to weather and consumption. Other risks include construction and inflation costs, regulatory approval and timing of rate increases, customer growth and economic conditions, and interest-rate exposure on variable-rate borrowings. Most long-term debt is fixed-rate; the company was in compliance with debt covenants at September 30.
- Capital investment remains substantial: reported nine-month capital expenditures were $31.7 million, including the two water-system acquisitions. Management cited planned treatment-plant, distribution and wastewater projects and expects ongoing reliance on operating cash flow and external financing.
- The Sussex Regional Recharge Facility received an operating permit in March 2020, but operation for the industrial customer’s treated process wastewater depends on that customer obtaining its operating permit.
- Ordinary-course legal matters were not expected by management to materially affect the company. No material changes to previously reported risk factors were identified apart from the added COVID-19 risk disclosure.
Important facts for investors to verify
- Whether the higher customer receivables and bad-debt allowance stabilize as disconnection policies and payment arrangements take effect.
- Renewal terms and continued availability of the Citizens and CoBank credit lines, especially given the demand feature of the Citizens facility and low cash balance.
- DEPSC ratemaking treatment of the Frankford and Delaware City acquisitions, and the timing of the next base-rate case.
- Progress toward the industrial customer’s permit and commencement of the planned process-wastewater service.
- Whether operating cash flow and financing can support the planned capital program while maintaining dividends and covenant compliance.