ARTESIAN RESOURCES CORP quarterly report, Q2 FY2021

Business context and reporting period

Artesian Resources Corporation is a regulated water and wastewater utility, principally serving Delaware, with additional operations in Maryland and Pennsylvania and non-regulated service businesses. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021; comparisons are with the same 2020 periods. Financial statement amounts below are in millions unless stated otherwise.

Financial performance and position

Revenue growth reflected higher water sales and customer-related fixed fees, wastewater customer growth, and increased service-line protection and contract design revenues. Water sales represented 87.6% of first-half revenue. Q2 net income declined 1.3% year over year; first-half net income increased 0.8%. First-half dividends declared were $0.5181 per share, versus $0.4992 a year earlier.

First-half cash from operations was $16.5, up from $11.8 in 2020. Capital expenditures were $22.1, versus $17.0; investing cash use was $22.1. Cash at June 30 was $0.4. The balance sheet reported current assets of $16.4 and current liabilities of $49.7, implying a current ratio of about 0.33. Stockholders’ equity was $171.9.

At June 30, long-term debt, including its current portion, was approximately $144.9 on the balance sheet, and lines of credit were $25.7. The company reported $34.3 of available credit across its two revolving facilities ($32.3 Citizens Bank and $2.0 CoBank). The facilities total $60.0 and are variable-rate; the Citizens facility is payable on demand. Long-term debt is primarily fixed-rate. The company stated it was in compliance with debt covenants.

Material changes versus the prior comparable period

• Q2 revenue rose 3.7%, while operating income was nearly flat and net income fell 1.3%; first-half revenue rose 3.9% and net income rose 0.8%.
• Operating costs increased faster than revenue. The company’s expense ratio, excluding depreciation and income taxes, rose to 53.0% from 52.4% for Q2 and to 55.2% from 54.6% for the first half. Higher payroll, purchased water, maintenance, treatment and non-utility contract costs contributed.
• Depreciation and amortization increased 10.5% for Q2 and 10.0% for the first half, reflecting continued utility-plant investment.
• First-half operating cash flow improved, while capital expenditures also increased. No acquisition investment was reported for the first half of 2021, compared with $3.6 in the first half of 2020.
• Delaware metered water customers increased about 2.3% year over year, Maryland customers 1.5%, and Delaware wastewater customers 14.1%.

Outlook, commentary, risks and unusual items

No numerical earnings or revenue guidance is provided. Management expects to fund the next 12 months through operating cash flow, cash balances, bank credit lines, state revolving fund loans and capital-market financing, and believes available sources should meet normal working-capital and financing needs. Planned investment includes water and wastewater infrastructure; management’s longer-term strategy emphasizes customer growth, acquisitions, wastewater services and non-regulated offerings.

Management said COVID-19 had not materially adversely affected results or operations through June 30, 2021, but continues monitoring its effects. Bad-debt reserves remain subject to estimates; the company reduced its reserve by $0.3 in Q2 2021 after customer disconnection and late-fee restrictions were lifted. Weather-related water demand, rate-case timing and approvals, inflation and rising infrastructure costs, environmental and water-quality requirements, customer growth and access to financing are key uncertainties.

Industrial wastewater tariff revenue included an approximately $0.4 reduction related to a settlement adjustment for minimum contracted wastewater volume. The industrial process-wastewater facility began operating in late June 2021; the minimum volume for 2021 is prorated over seven months. On July 15, 2021, Artesian Water entered a state revolving-fund financing agreement for up to approximately $2.5 to support the Frankford system and related upgrades. An initial draw of about $1.5 for the acquisition is subject to automatic forgiveness; outstanding drawn amounts bear 1.0% interest plus a 1.0% administrative fee.

Other risks include variable-rate borrowing and the transition away from LIBOR, refinancing of long-term debt, and water purchase contracts with take-or-pay minimums. The company disclosed ordinary-course legal proceedings but does not expect their resolution to materially affect results; it noted litigation could still entail expense and management distraction. It reported no material changes to its previously disclosed risk factors.

Important facts for investors to verify

• Whether revenue growth and customer additions translate into sustained earnings growth as operating expenses and depreciation rise.
• Regulatory decisions and timing for recovery of infrastructure spending, acquisition costs and other costs through rates.
• Liquidity and refinancing capacity given low cash, negative working capital, the demand feature on the Citizens credit line and planned capital spending.
• Industrial wastewater volumes, the settlement adjustment and expected contribution from the facility that began operating in late June.
• Bad-debt trends after pandemic-related customer protections, and exposure to weather-driven water demand and commodity costs.
• Final terms, drawdowns and forgiveness under the post-quarter Frankford state revolving-fund financing.