Artesian Resources(US:ARTNA)2020-11-06 18:03Part I - Financial Information This section details the company's financial statements, management's discussion and analysis, market risk disclosures, and internal controls Item 1 - Financial Statements This section presents the unaudited condensed consolidated financial statements for Artesian Resources Corporation as of September 30, 2020, including balance sheets, statements of operations, cash flows, and changes in stockholders' equity, along with detailed notes on accounting policies Condensed Consolidated Balance Sheets The balance sheet shows an increase in total assets to $587.4 million as of September 30, 2020, from $560.4 million at year-end 2019, primarily driven by utility plant assets, with total liabilities and stockholders' equity also increasing Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $587,431 | $560,368 | +4.8% | | Net Utility Plant | $553,387 | $530,721 | +4.3% | | Total Current Assets | $17,852 | $14,207 | +25.7% | | Total Liabilities | $421,577 | $400,100 | +5.4% | | Lines of Credit | $20,078 | $7,500 | +167.7% | | Long-term Debt, net | $142,651 | $144,156 | -1.0% | | Total Stockholders' Equity | $165,854 | $160,268 | +3.5% | Condensed Consolidated Statements of Operations For the nine months ended September 30, 2020, total operating revenues increased by 6.1% year-over-year to $66.4 million, driven by higher water sales, with net income applicable to common stock rising 15.9% to $13.7 million, resulting in a diluted EPS of $1.46 Statements of Operations Summary (in thousands, except per share amounts) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | YoY Change | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $66,390 | $62,586 | +6.1% | | Operating Income | $17,454 | $15,333 | +13.8% | | Net Income | $13,703 | $11,826 | +15.9% | | Diluted EPS | $1.46 | $1.27 | +15.0% | | Cash Dividends per Share | $0.7488 | $0.7341 | +2.0% | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2020, net cash from operating activities was $14.3 million, while $31.7 million was used in investing activities, and $17.0 million was provided by financing activities Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $14,298 | $13,103 | | Net Cash Used in Investing Activities | ($31,667) | ($27,240) | | Net Cash Provided by Financing Activities | $17,022 | $14,302 | | Net (Decrease) Increase in Cash | ($347) | $165 | - Key investing activities included $26.0 million in capital expenditures and $5.7 million for acquisitions. Key financing activities included $12.6 million in net borrowings under lines of credit and $8.1 million in net advances for construction, offset by $7.0 million in dividend payments10 Notes to the Condensed Consolidated Financial Statements The notes provide detailed explanations of the company's accounting policies and financial results, covering subsidiaries, revenue recognition, COVID-19 impact, business combinations, regulatory proceedings, debt, and equity - Due to the COVID-19 pandemic, the company anticipates a longer receivable cycle and increased reserves for bad debt. An adjustment of $0.5 million was made to increase the reserve for bad debt as of September 30, 202049117 - The company completed two acquisitions in 2020: the water system assets from the Town of Frankford for $3.6 million and from the City of Delaware City for $2.1 million. These acquisitions added approximately 1,160 new water customers112114 Disaggregated Revenue for Nine Months Ended Sep 30 (in thousands) | Revenue Source | 2020 | 2019 | YoY Change | | :--- | :--- | :--- | :--- | | Consumption charges | $36,217 | $34,320 | +5.5% | | Fixed fees | $20,192 | $19,525 | +3.4% | | DSIC | $3,810 | $3,129 | +21.8% | | Industrial wastewater services | $866 | $14 | +6085.7% | | Service line protection plans | $3,267 | $3,117 | +4.8% | | Total Operating Revenue | $66,390 | $62,586 | +6.1% | Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, strategic direction, and liquidity, highlighting revenue growth from water consumption and customer additions, COVID-19 impacts, growth through acquisitions, and significant capital investments Overview and Strategic Direction The company's profitability is primarily driven by water sales, constituting 87.6% of revenues for the first nine months of 2020, with a core strategy to expand water, wastewater, and Service Line Protection Plan services across the Delmarva Peninsula through acquisitions and partnerships - The company's strategy focuses on expanding its water and wastewater services through strategic acquisitions, partnerships with local governments, and developing new service areas. Recent acquisitions include systems from High Point Associates (2019), the Town of Frankford (2020), and the City of Delaware City (2020)130132134135 - As of September 30, 2020, the company served approximately 90,000 metered water customers in Delaware, an increase of 3,100 from the prior year. Wastewater customers in Delaware grew by 16.2% to approximately 2,730126127 COVID-19 Pandemic Impact While the COVID-19 pandemic did not materially adversely affect financial results for the first nine months of 2020, management is actively monitoring its impact, as state-mandated moratoriums on service disconnections and late fees led to an anticipated longer receivable cycle and increased bad debt reserves - State government executive orders prohibiting service disconnections and late fees due to COVID-19 are expected to result in a longer receivable cycle and increased bad debt reserves124 - The moratorium on service disconnections was lifted in Delaware in July 2020, with late fees and disconnections resuming in September and October 2020, respectively. Moratoriums in Maryland and Pennsylvania were lifted effective November 2020124 Results of Operations For the nine months ended September 30, 2020, revenues grew 6.1% to $66.4 million, and net income increased 15.9% to $13.7 million compared to the same period in 2019, driven by higher residential water consumption, customer growth, and increased industrial wastewater revenue, while operating expenses rose due to bad debt, payroll, and wastewater treatment costs Revenue Analysis - Nine Months Ended Sep 30, 2020 vs 2019 (in millions) | Revenue Category | Change (in millions) | Reason | | :--- | :--- | :--- | | Water Sales Revenue | +$3.0 | Increased residential consumption and customer growth. | | Other Utility Operating Revenue | +$0.9 | Increased industrial wastewater service revenue. | | Total Operating Revenues | +$3.8 | Overall growth across segments. | - For the nine months ended Sep 30, 2020, utility operating expenses increased by $0.7 million (2.3%), primarily due to a $0.6 million increase in bad debt expense related to COVID-19 payment suspensions and a $0.6 million increase in payroll costs158159 - Net income for the nine months ended Sep 30, 2020 increased by $1.9 million year-over-year, driven by a $3.8 million increase in operating revenues, which outpaced the $1.7 million increase in operating expenses and $0.5 million increase in interest expense163 Liquidity and Capital Resources The company's primary liquidity sources were cash from operations ($14.3 million), borrowings on lines of credit ($12.6 million), and developer contributions ($8.1 million), with capital expenditures totaling $31.7 million focused on infrastructure and acquisitions, and $39.9 million available on lines of credit Capital Expenditures - First Nine Months of 2020 (in millions) | Category | Amount | | :--- | :--- | | Transmission & Distribution Main Rehabilitation | $8.6 | | Treatment Facility Enhancements | $5.5 | | Acquisitions (Frankford & Delaware City) | $5.7 | | Wastewater Projects | $2.4 | | Governmental Highway Relocations | $3.0 | | Other (Equipment, Meters, etc.) | $6.5 | | Total Capital Expenditures | $31.7 | - As of September 30, 2020, the company had a $40 million line of credit with Citizens Bank and a $20 million line of credit with CoBank, with a total of $20.1 million drawn and $39.9 million available168169 - On December 17, 2019, Artesian Water issued a $30 million First Mortgage Bond, Series V, due 2049, with an annual interest rate of 4.42%. Proceeds were used to pay down outstanding lines of credit173174 Item 3 - Quantitative and Qualitative Disclosures about Market Risk The company is primarily exposed to interest rate risk on its $60 million variable-rate lines of credit, with $20.1 million outstanding, and manages commodity price risk through cost recovery mechanisms and multi-year fixed-price electricity contracts - The company has interest rate exposure on $60 million of variable-rate lines of credit. An increase in interest rates would increase borrowing costs on the $20.1 million outstanding as of September 30, 2020183 - Commodity price risk is managed through rate recovery mechanisms and multi-year fixed-price contracts for electricity supply, with current contracts effective through May 2022177183 Item 4 - Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter, and no material impact from the COVID-19 pandemic - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period184185 - No material changes to internal control over financial reporting occurred during the third quarter of 2020185 Part II - Other Information This section covers legal proceedings, updated risk factors, and a list of exhibits filed with the report Item 1 - Legal Proceedings The company is periodically involved in litigation arising in the ordinary course of business but does not believe the ultimate resolution of these matters will materially affect its business, financial position, or results of operations - There are no legal proceedings mentioned that are expected to have a material impact on the company186 Item 1A - Risk Factors This section updates the company's risk factors to include the potential adverse effects of pandemics, specifically COVID-19, highlighting impacts on operations, receivable cycles, bad debt reserves, and financial market volatility - A new risk factor was added to address the potential adverse effects of pandemics like COVID-19 on the company's business, financial condition, cash flows, and stock price187188 - Specific risks from COVID-19 include a longer receivable cycle and increased bad debt reserves due to government-mandated prohibitions on service disconnections and late fees, which have since been lifted190 Item 6 - Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial statements formatted in Inline eXtensible Business Reporting Language (iXBRL) - Exhibits filed include certifications by the CEO and CFO as required by the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act193