Artesian Resources Corporation — Q2 2019 Form 10-Q
Business and period: Artesian provides regulated water and wastewater services, principally in Delaware, with smaller operations in Maryland and Pennsylvania and non-regulated utility services. This unaudited report covers the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless stated otherwise. Amounts below are in millions except per-share data and customer counts.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $20.652 | $20.238 | $40.037 | $39.144 |
| Operating income | $5.320 | $5.239 | $9.604 | $9.209 |
| Net income | $3.778 | $3.926 | $7.368 | $7.404 |
| Diluted EPS | $0.41 | $0.42 | $0.79 | $0.80 |
| Operating margin | 25.8% | 25.9% | 24.0% | 23.5% |
Revenue grew 2.0% in Q2 and 2.3% year to date, while net income declined 3.8% and 0.5%, respectively. Water sales were $18.2 million in Q2 and $35.1 million for six months. The six-month net margin was approximately 18.4%, versus 18.9% in 2018.
- Cash flow: Six-month operating cash flow was $9.0 million, down from $12.7 million. Investing used $18.1 million, including $18.2 million of capital expenditures; financing provided $9.0 million. Cash declined $0.1 million to $0.185 million. Operating cash flow less capital expenditures was approximately negative $9.2 million.
- Debt and liquidity: At June 30, long-term debt including current maturities was $116.8 million and lines of credit were $25.7 million. Lines of credit increased from $15.9 million at December 31, 2018. Cash was $0.185 million; current assets of $10.7 million compared with current liabilities of $43.7 million. The company reported $34.3 million of available capacity across its credit lines. It was in compliance with debt covenants.
- Capital and dividends: Stockholders’ equity was $154.5 million, versus $153.3 million at year-end 2018. The six-month dividend was $0.4882 per share, up from $0.4739.
Material changes and operating developments
- Operating revenue increased primarily from higher water consumption, customer growth, increased Distribution System Improvement Charge (DSIC) revenue, wastewater growth and service-line protection plans. Delaware water customers increased by about 1,300 year over year to 86,500; Delaware wastewater customers rose about 300, or 16.3%, to 2,300.
- Six-month operating expenses increased 1.7% overall. Depreciation and amortization rose 6.4% to $5.4 million, reflecting continued utility-plant investment. Income-tax expense declined 13.7% to $2.5 million, primarily due to amortization of the tax-reform regulatory liability.
- Interest expense increased $0.5 million year over year for the first half, mainly reflecting wastewater loans issued in 2018 and higher borrowing and rates on credit lines.
- Capital expenditures were $18.2 million in the first half, down from $23.0 million in 2018. Spending included water-system improvements and $3.1 million on wastewater projects, including a pipeline and storage lagoon for treated industrial wastewater.
- The company adopted lease accounting guidance in Q1 2019, recording $0.494 million of operating lease right-of-use assets. Management said adoption did not materially affect results or cash flows.
Outlook, risks and contingencies
- Management expects to fund the next 12 months with operating cash flow, available cash, credit lines and, if needed, capital-market financing. It expects to renew the $40 million Citizens Bank line, which expires no later than May 2020, and the $20 million CoBank line, which expires in October 2019. The Citizens line is payable on demand; the filing does not provide formal earnings guidance.
- Management’s strategy emphasizes customer growth, water and wastewater expansion, and growth in service-line plans and contract services. Water demand is seasonal and sensitive to rainfall and temperature; construction and economic conditions may affect customer growth and non-regulated activity.
- Delaware approved a 7.41% DSIC rate effective July 1, 2019, replacing the 5.55% rate. The 2019 DSIC rates remain subject to later regulatory audit. Rate recovery and approval timing remain important uncertainties.
- Approximately $3.8 million was credited or refunded to customers in Q2 for the Tax Cuts and Jobs Act rate reduction. This had been recorded as a refund liability and was not included in income. Delaware approved amortization of a related $22.2 million regulatory liability over 49.5 years; Maryland’s related $0.6 million amount had no final regulatory order.
- The Allen Harim sanitary-wastewater service began in Q2 2019. A separate industrial-wastewater pipeline and lagoon project was 98% complete, with commencement dependent on permit approval. Management anticipated completion during 2019.
- Risks include variable-rate borrowing costs on $25.7 million outstanding under credit lines, weather-driven water demand, capital needs, regulatory rate decisions, and inflation in operating and infrastructure costs. The company reported no material changes to its 2018 Form 10-K risk factors, no material expected effect from ordinary-course litigation, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Renewal terms, availability and demand features of the Citizens and CoBank credit lines, particularly given low cash and substantial current liabilities.
- Progress, permitting, cost and customer revenue contribution from the Allen Harim wastewater projects.
- Regulatory treatment and audit outcomes for DSIC rates and the remaining Maryland tax-reform customer benefit.
- Whether customer growth, water consumption and rate recovery sustain revenue and earnings as capital investment and interest costs rise.
- The filing’s cash-flow working-capital movements and the timing and cash impact of customer credits associated with the $3.8 million tax-related refund.