UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
For the fiscal year ended December 31, 2001
Commission file number 0-18516
ARTESIAN RESOURCES CORPORATION | |
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(exact name of registrant as specified in its charter) | |
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Delaware | 51-0002090 |
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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664 Churchmans Road, Newark, Delaware 19702 | |
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Address of principal executive offices | |
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(302) 453-6900 | |
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Registrant's telephone number, including area code | |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Non-Voting Common Stock
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
X | Yes | _ | No |
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
_ | Yes | X | No |
The aggregate market value of the non-voting and voting stock held by non-affiliates of the registrant at March 1, 2002 was $46,447,073 and $3,803,280, respectively.
As of March 1, 2002, 1,663,262 shares and 391,824 shares of Class A Non-Voting Common Stock and Class B Common Stock, respectively, were outstanding.
PART I
Item 1.-Business.
Artesian Resources Corporation ("Artesian Resources" the "Company") operates as the parent holding company of Artesian Water Company, Inc. ("Artesian Water") our principal subsidiary, Artesian Water Pennsylvania, Inc. and two non-regulated subsidiaries. Artesian Water Company was organized in 1927 as the successor to the Richardson Park Water Company, founded in 1905. In 1984, the name of Artesian Water Company was changed to Artesian Resources Corporation and the utility assets were contributed to the newly formed subsidiary, Artesian Water. In this Annual Report on Form 10-K, we frequently use the terms "we," "our" and the "Company" to refer to Artesian Resources and its subsidiaries, including Artesian Water.
We distribute and sell water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware. As of December 31, 2001, we had 66,173 metered customers and served a population of approximately 220,000 (including contract services), representing approximately 27% of Delaware's total population. We also provide water for public and private fire protection to customers in our service territories. Our gross water sales revenue for 2001 was approximately $31 million, and our percentages of gross water sales revenue by major customer classifications were 60% for residential, 32% for commercial, industrial, governmental, municipal and utility, and 8% for fire protection and other. These percentages have remained fairly constant for the past three years. We are currently seeking and anticipate the recognition of Artesian Water Pennsylvania Inc. as a regulated public water utility by the Pennsylvania P ublic Utility Commission.
Our current market area is the State of Delaware, which had a population of approximately 801,000 at December 31, 2001. According to the US Census Bureau, Delaware's population has increased 17.6% over the last 10 years, the 14th largest percentage increase among the states. Although New Castle is the most populous of Delaware's three counties, Sussex County, in southern Delaware, has experienced the most significant growth with a population increase of approximately 38.3% over the last ten years. The largest project we are currently undertaking with continued investment in 2002 is the Bayville Iron Removal Facilities project in Sussex County, Delaware, with a total cost of $2.68 million. Substantial portions of Delaware, particularly outside of New Castle County, are not served by a public water system and represent potential opportunities for Artesian Water to obtain new exclusive franchised service areas for Artesian Water. We continue to focu s resources on developing and serving existing service territories and obtaining new territories throughout the state.
In Delaware, a Certificate of Public Convenience and Necessity ("CPCN") grants a water company the exclusive right to serve all existing and new customers within a designated area. Effective July 1, 2001, the authority to issue CPCNs was transferred to the Delaware Public Service Commission ("PSC") from the Delaware Department of Natural Resources and Environmental Control ("DNREC"). In this Annual Report on Form 10-K, we refer to these Certificates as "CPCNs" or "franchises." We hold CPCNs for approximately 140 square miles of exclusive service territory, which is segmented into a number of service areas. Our largest connected regional water system, consisting of approximately 98.6 square miles and 62,500 customers, is located in northern Delaware. A significant portion of our exclusive service territory remains undeveloped, and if and when development occurs and there is population growth in these areas, we will increase our customer base by pr oviding water service to the newly developed areas and new customers. The total number of customers we serve has grown at an average annual rate of approximately 2.8% for the last ten years. Within our existing service territory, we hold CPCNs for nearly 5,000 acres zoned for industrial and manufacturing development.
Since 1993, we have been significantly expanding our service territory by acquiring new exclusive service areas in Delaware through grants of CPCNs. This expansion, which has occurred in southern New Castle, Kent and Sussex Counties, has increased our exclusive service area in Delaware by approximately 27% since 1993. The pursuit of new service territory in the State of Delaware by water companies is competitive.
We have identified sufficient sources of groundwater supply to serve our expanding customer base for the foreseeable future. Our self-supply has increased from 63% of our total water supply in 1992 to approximately 82% in 2001. Since 1992, we have increased our sources of groundwater supply from our own wells by 50%, or nearly nine million gallons per day, and plan to continue development of new sources of groundwater supplies previously identified.
Our primary sources of water are our wells that pump groundwater from aquifers and other formations. To supplement our groundwater supply, we purchase surface water through interconnections only in the northern service area of our New Castle County system. The purchased surface water is blended with our groundwater supply for distribution to our customers. Nearly 82% of the overall 7.3 billion gallons of water we distributed in all our systems during 2001 came from our groundwater wells, while the remaining 18% came from interconnections with other utilities and municipalities. During 2001, our average rate of water pumped was approximately 16.4 million gallons per day ("mgd") from our groundwater wells and approximately 3.6 mgd was supplied from interconnections. Our peak water supply capacity currently is approximately 43.0 mgd. Our peak water demand in 2001 was approximately 27.9 mgd. We believe that we have in place sufficient capacity to pro vide water service for the foreseeable future to all existing and new customers in all of our service territories.
We have 87 operating and 54 monitoring wells in our systems. Our northern New Castle County system is interconnected. In the remainder of the state, we have several satellite systems that have not yet been connected by transmission and distribution facilities. We intend to join these systems into larger integrated regional systems through the construction of a transmission and distribution network as development continues and our expansion efforts provide us with contiguous exclusive service territories.
We have 14 interconnections with four neighboring water utilities and four municipalities that provide us with the ability to purchase or sell water. Interconnection agreements with the Chester Water Authority and the City of Wilmington have "take or pay" clauses requiring us to take, as of December 31, 2001, minimum draws totaling 1.3 billion gallons annually. We presently use the minimum draws under these agreements. The Chester Water Authority agreement, which expires in 2021, provides for a renewal period of an additional 25 years at our option, subject to the approval of the Susquehanna River Basin Commission. We decided not to renew one interconnection agreement with the City of Wilmington, which reduced our overall take or pay requirement by 100 million gallons annually. Our remaining take or pay agreement with that municipality was renewed in December 2001 for a period of five years. All of the interconnections provide Artesian Water the ability to sell water to neighboring water utilities or municipalities.
Under state laws and regulations, we are required to file applications with the DNREC for water allocation permits for each of our production wells pumping quantities of water above certain levels. Presently, we have permits for 73 wells, permit applications pending for 2 wells and 12 wells not requiring a permit. Our access to aquifers within our service territory is not exclusive. Water allocation permits control the amount of water which can be drawn from water resources and are granted with specific restrictions on water level draw down limits, annual, monthly and daily pumpage limits, and well field allocation pumpage limits. Our ability to supply the demands of our customers has not been affected by private usage of the aquifers by landowners or the limits imposed by the state. Because of the extensive regulatory requirements relating to the withdrawal of any significant amounts of water from the aquifers, we believe that third party usage of the aquifers within our service territory will not interfere with our ability to meet the present and future demands of our customers.
At the end of 2001, we were serving customers through 888 miles of transmission and distribution mains. Mains range in diameter from two inches to twenty-four inches, and most of the mains are made of ductile iron, cast iron or transite pipe. Ductile iron is more durable than plastic and we install ductile iron pipes wherever possible. We are installing a more durable type of plastic pipe only near ocean front property in southern Delaware where corrosive conditions of the surrounding ground affect the longevity of ductile iron pipe. We also supply public fire protection service through 3,611 hydrants installed throughout our service territories.
We have 24 storage tanks, most of which are elevated, providing total system storage of 36.0 million gallons. We also are developing and using an aquifer storage and recovery system. At some locations, we rely on hydropneumatic tanks to maintain adequate system pressures. Where possible, we will combine our smaller satellite systems with systems having elevated storage facilities.
We pump all of our water with electric power purchased from major electric utilities. We also have diesel and propane powered generating equipment at selected treatment and elevated storage facilities for the provision of basic water service during possible electrical outages.
We derive about 90% of our self-supplied groundwater from wells located in the Atlantic Coastal Plain. The remaining 10% comes from wells in the Piedmont Province. We use a variety of treatment methods, including aeration, pH adjustment, chlorination, fluoridation and iron removal, to meet federal, state and local water quality standards. Additionally, a corrosion inhibitor is added to all of our self-supplied groundwater and most of the supply from interconnections. We have 38 different water treatment facilities. All water supplies that we purchase from neighboring utilities are potable. We believe the costs of treating groundwater are significantly lower than those of treating surface water.
We are subject to regulation by federal, state and local agencies with respect to, among other things, rates charged for water service, awards of new service territory, water allocation rights, water quality and environmental matters.
Artesian Water, as a public utility, is regulated by the Public Service Commission with respect to rates and charges for service, the sale and issuance of securities, mergers and other matters. We periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business.
The Public Service Commission approved an increase in rates, Docket 00-647, for water service on June 19, 2001, to allow the Company to earn an increase in annual revenues of about $3.7 million (13.05%). Rates became effective July 1, 2001. We currently derive our water service revenues from water consumption upon which base rates are applied, which were last increased as of July 1, 2001. This increase also authorized a return on equity of 10.50% and an overall rate of return of 8.99%.
A public water utility operating in Delaware must obtain a CPCN for a service territory to begin or expand its operations, which is granted by the PSC. Currently the PSC grants a CPCN under circumstances where there has been a determination that the water in the proposed service area does not meet the regulations governing drinking water standards of the State Board of Health for human consumption, where the supply is insufficient to meet the projected demand, or where the applicant is in possession of one of the following: (i) a signed service agreement with the developer of a proposed subdivision or development, which subdivision or development has been duly approved by the respective county government; (ii) a petition requesting such service signed by a majority of the landowners of the proposed territory to be served; or (iii) a duly certified copy of a resolution from the governing body of a county or municipality requesting the applicant to provide service to the proposed territory to be served. CPCNs are not transferable, and a water utility must obtain the approval of the PSC to abandon a service territory once granted.
The United States Environmental Protection Agency (the "EPA"), DNREC, Delaware Division of Public Health ("DPH"), the Pennsylvania Public Utility Commission and the Wilmington City Council regulate the water quality of our treatment and distribution systems. We believe that we are in material compliance with all current federal, state and local water quality standards, including regulations under the federal Safe Drinking Water Act. Chester Water Authority, which supplies water to Artesian Water through interconnections in northern New Castle County, is regulated by the Pennsylvania Department of Environmental Protection as well as the EPA.
As required by the Safe Drinking Water Act, the EPA has established maximum contaminant levels for various substances found in drinking water. DPH has set maximum contaminant levels for certain substances that are more restrictive than the maximum contaminant levels set by the EPA. The DPH is the EPA's agent for enforcing the Safe Drinking Water Act in Delaware and, in that capacity, monitors the activities of Artesian Water and reviews the results of water quality tests performed by Artesian Water for adherence to applicable regulations. Artesian Water is also subject to other laws regulating substances and contaminants in water, including the Lead and Copper Rule, rules for volatile organic compounds and the Total Coliform Rule. Because we have no surface water sources of supply that we treat for consumption, the Surface Water Treatment Rule generally does not apply to us.
Delaware enacted legislation in 1998 requiring water utilities to meet secondary water quality standards that include limitations on iron content, odor and other water quality-related issues that are not proven health risks but may be objectionable for consumption. We believe our current treatment systems and facilities meet or exceed these secondary standards.
As a normal by-product of iron removal, our treatment facility at Old County Road in New Castle County and our treatment facility in South Bethany in Sussex County generate iron removed from untreated groundwater plus residue from chemicals used in the treatment process. We have contracted with a licensed third party vendor to dispose of the solids produced at these facilities. Our other iron removal facilities rely on disposal through county-approved wastewater facilities. Management believes that compliance with existing federal, state or local laws and regulations regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has no material effect upon the business and affairs of Artesian Resources.
On December 19, 1996, Artesian Wastewater Management, Inc. ("Artesian Wastewater") was created as a non-regulated subsidiary of Artesian Resources. Artesian Wastewater provides wastewater treatment services in Delaware. In 1999, Artesian Wastewater began operating a wastewater facility for the town of Middletown in southern New Castle County. This subsidiary did not engage in any business activity in 1998 or 1997. On March 12, 1997, Artesian Wastewater became a one-third participant, along with heavy-construction contractor George and Lynch and engineering firm Woodward-Clyde International-Americas (a subsidiary of URS Greiner), in a limited liability company called AquaStructure Delaware, L.L.C. ("AquaStructure"), which is developing and marketing various proposals to provide wastewater treatment services. In the first quarter of 2001, D. Preston Lee, Jr. P. E., Inc. replaced Woodward-Clyde International-Americas as a member of the L.L.C. In 200 1, AquaStructure initiated design and construction of a 2.5 million gallon per day spring irrigation wastewater treatment facility for Middletown, Delaware. Upon completion in mid-2002, Artesian Wastewater will operate the plant under contract for a twenty-year term.
The business of Artesian Water is subject to seasonal fluctuations. The demand for water during the warmer months is generally greater than during cooler months due primarily to additional requirements for water in connection with cooling systems, private and public swimming pools and lawn sprinklers. Throughout the year, and particularly during warmer months, demand will vary with rainfall and temperature levels.
The Company has no collective bargaining agreements with any of its employees, and its work force is not union organized or union represented. As of December 31, 2001, we employed 170 full-time and six part-time employees, all of whom were non-unionized. Of this number, 19 were officers and managers; 105 were employed as operations personnel, including engineers, technicians, draftsman, maintenance and repair persons, meter readers and utility personnel; and 45 were employed in the accounting, budgeting, information systems, human resources, customer relations, public relations and conservation departments. The remaining seven employees were administrative personnel. We believe that our employee relations are good.
Item 2.-Properties.
The corporate headquarters of Artesian Resources, Artesian Water and its other non-regulated subsidiaries are located at 664 Churchmans Road, Newark, Delaware. The property is leased from White Clay Realty by Artesian Water through December 31, 2002. See Item 13, Certain Relationships and Related Transactions, for further disclosures. The lease may be extended at the Company's option for two consecutive five-year renewal terms subject to the terms set forth in the lease.
The Artesian Resources Company and the Artesian Development Company, Inc. ("ADC") (a wholly-owned subsidiary of the Artesian Resources Corporation), own various parcels of land in New Castle County, Delaware. The Artesian Water Company owns land, transmission and distribution mains, pump facilities, treatment plants, storage tanks and related facilities within New Castle, Kent and Sussex Counties, Delaware. In the aggregate we own rights-of-way and easements, totaling approximately 694 acres. Substantially all of Artesian Water's utility plant, except utility plant within the town of Townsend, Delaware, is pledged as security for First Mortgage Securities.
Of the 694 acres we own, 52 acres of land will be the site of a future well field and iron removal facility in northern New Castle County. ADC owns approximately 12 acres zoned for office buildings located immediately adjacent to our corporate headquarters. ADC has no present plans to purchase new land or develop the acreage it owns.
All of Artesian Water's existing facilities adequately meet current necessary production capacities and current levels of utilization.
Item 3.-Legal Proceedings.
On December 5, 2000, Artesian Water filed a petition with the PSC for an increase in rates. A settlement agreement was approved on June 19, 2001, for a revenue increase of 13.05%, or $3.7 million.
There are no other material legal proceedings pending at this date.
Item 4.-Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5.-Market for Company's Common Equity and Related Stockholder Matters.
Artesian Resources' Class A Non-Voting Common Stock ("Class A Stock") is listed on the Nasdaq National Market and trades under the symbol "ARTNA." On March 1, 2002 there were 747 holders of record of the Class A Stock. The following table sets forth, for the periods indicated, the high and low closing sale prices for the Class A Stock on the Nasdaq National Market and the cash dividends declared per share:
CLASS A NON-VOTING COMMON STOCK
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2000 |
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| First Quarter | $31.50 | $21.00 | $0.270 |
| Second Quarter | 26.00 | 22.00 | 0.275 |
| Third Quarter | 25.00 | 22.00 | 0.275 |
| Fourth Quarter | 26.50 | 21.77 | 0.275 |
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2001 |
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| First Quarter | $26.75 | $23.25 | $0.275 |
| Second Quarter | 26.98 | 23.55 | 0.275 |
| Third Quarter | 28.50 | 24.55 | 0.280 |
| Fourth Quarter | 30.94 | 26.25 | 0.280 |
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2002 |
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| First Quarter (through March 1, 2002) | $31.50 | $28.60 | $0.290 |
The closing sale prices shown above reflect prices between dealers and do not include retail markups or markdowns or commissions and may not necessarily represent actual transactions.
Our Class B Voting Stock ("Class B Stock") is quoted on the OTC Bulletin Board under the symbol "ARTNB." There has been a limited and sporadic public trading market for the Class B Voting Common Stock. As of February 26, 2002, the last reported trade of the Class B Voting Common Stock on the OTC Bulletin Board was at a price of $30.00 per share on January 10, 2002. As of February 27, 2002, we had 229 holders of record of the Class B Voting Common Stock.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any of the reports and other information we file at the SEC's public reference facilities located in Washington at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and in Chicago at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. Copies of such material can also be obtained from the Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Our SEC filings are also available to the public over the Internet at the SEC's web site which is located at the following address: http://www.sec.gov.
You may request a free copy of our Annual Report on Form 10-K for the year ended December 31, 2001, other than exhibits, by writing or telephoning us at: Artesian Resources Corporation, 664 Churchmans Road, Newark, Delaware 19702, Attention: Joseph A. DiNunzio, Senior Vice President and Secretary, Telephone
(302) 453-6900.
Item 6.-Selected Financial Data.
SUMMARY OF FIVE YEARS OF OPERATIONS | ||||||||||||||||
(In thousands, except per share and operating data) | ||||||||||||||||
| FOR THE YEAR ENDED DECEMBER 31, | |||||||||||||||
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| 2001 |
| 2000 |
| 1999 |
| 1998 |
| 1997 | ||||||
STATEMENT OF OPERATIONS DATA |
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Operating revenues |
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Water sales | $ | 31,362 | $ | 27,090 | $ | 26,310 | $ | 25,096 | $ | 22,003 | ||||||
Other revenue |
| 625 |
| 461 |
| 467 |
| 370 |
| 337 | ||||||
Total operating revenues | $ | 31,987 | $ | 27,551 | $ | 26,777 | $ | 25,466 | $ | 22,340 | ||||||
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Operating expenses |
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Operating and maintenance |
| 17,619 |
| 15,399 |
| 14,690 |
| 14,273 |
| 12,775 | ||||||
Depreciation and amortization |
| 3,001 |
| 2,706 |
| 2,417 |
| 2,183 |
| 2,441 | ||||||
State and federal income taxes |
| 2,184 |
| 1,619 |
| 1,960 |
| 1,808 |
| 1,278 | ||||||
Property and other taxes |
| 1,782 |
| 1,616 |
| 1,620 |
| 1,535 |
| 1,439 | ||||||
Total operating expenses | $ | 24,586 | $ | 21,340 | $ | 20,687 | $ | 19,799 | $ | 17,933 | ||||||
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Operating income |
| 7,401 |
| 6,211 |
| 6,090 |
| 5,667 |
| 4,407 | ||||||
Other income, net |
| 457 |
| 295 |
| 188 |
| 215 |
| 158 | ||||||
Total income before interest charges | $ | 7,858 | $ | 6,506 | $ | 6,278 | $ | 5,882 | $ | 4,565 | ||||||
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Interest charges |
| 4,537 |
| 4,055 |
| 3,298 |
| 3,162 |
| 2,580 | ||||||
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Net income |
| 3,321 |
| 2,451 |
| 2,980 |
| 2,720 |
| 1,985 | ||||||
Dividends on preferred stock |
| 51 |
| 61 |
| 71 |
| 82 |
| 93 | ||||||
Net income applicable to common stock | $ | 3,270 | $ | 2,390 | $ | 2,909 | $ | 2,638 | $ | 1,892 | ||||||
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Net income per share of common stock: |
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Basic | $ | 1.61 | $ | 1.19 | $ | 1.48 | $ | 1.47 | $ | 1.07 | ||||||
Diluted | $ | 1.58 | $ | 1.17 | $ | 1.46 | $ | 1.45 | $ | 1.07 | ||||||
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Avg. shares of common stock outstanding |
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Basic |
| 2,026 |
| 2,007 |
| 1,961 |
| 1,796 |
| 1,762 | ||||||
Diluted |
| 2,072 |
| 2,044 |
| 1,996 |
| 1,816 |
| 1,775 | ||||||
Cash dividends per share of common stock | $ | 1.11 | $ | 1.10 | $ | 1.06 | $ | 0.97 | $ | 0.92 | ||||||
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| AS OF OR FOR THE YEAR ENDED DECEMBER 31, | |||||||||||||||
BALANCE SHEET DATA |
| 2001 |
| 2000 |
| 1999 |
| 1998 |
| 1997 | ||||||
Utility plant, at original cost |
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less accumulated depreciation | $ | 152,356 | $ | 134,038 | $ | 122,481 | $ | 109,780 | $ | 97,694 | ||||||
Total assets | $ | 163,534 | $ | 144,407 | $ | 132,482 | $ | 119,376 | $ | 107,867 | ||||||
Notes payable | $ | 16,118 | $ | 2,000 | $ | 7,617 | $ | 7,704 | $ | 1,164 | ||||||
Long-term obligations and |
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redeemable preferred stock, |
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including current portions | $ | 50,998 | $ | 52,236 | $ | 36,165 | $ | 32,696 | $ | 32,861 | ||||||
Stockholders' equity | $ | 34,445 | $ | 32,829 | $ | 32,356 | $ | 27,933 | $ | 26,587 | ||||||
Total capitalization | $ | 84,015 | $ | 83,846 | $ | 67,285 | $ | 60,486 | $ | 59,290 | ||||||
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OPERATING DATA |
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Average water sales per customer | $ | 474 | $ | 417 | $ | 420 | $ | 419 | $ | 376 | ||||||
Water pumped (millions of gallons) |
| 7,321 |
| 6,886 |
| 6,758 |
| 6,739 |
| 6,637 | ||||||
Number of metered customers |
| 66,173 |
| 64,902 |
| 62,621 |
| 60,688 |
| 59,218 | ||||||
Miles of water main |
| 888 |
| 872 |
| 842 |
| 820 |
| 797 | ||||||
Item 7.-Management's Discussion and Analysis of Financial Condition and Results of Operations.
General Information
Artesian Resources Corporation (Artesian Resources) is a non-operating holding company, whose income is derived from the earnings of our four wholly owned subsidiary companies and our one-third interest in AquaStructure, a Limited Liability Corporation whose primary activity is marketing wastewater services. Artesian Water Company, Inc. (Artesian Water), our principal subsidiary, is the oldest and largest public water utility in the State of Delaware and has been providing water service within the state since 1905. We distribute and sell water to residential, commercial, industrial, governmental, municipal and utility customers throughout Delaware. In addition, we provide services to other water utilities, including operations and billing functions. We also have contract operation agreements with six private and municipal water providers. In 2001, approximately 99.6% of our earnings are attributable to Artesian Water's service to customers, with the remaining 0.4% related to the other subsidiaries.
Our other water utility subsidiary, Artesian Water Pennsylvania, Inc., is currently seeking recognition, in the form of an application for a Certificate of Convenience and Necessity, from the Pennsylvania Public Utility Commission as a regulated utility and was not active in 2001. We do expect to begin operations in Pennsylvania in 2002, providing water service to a residential community, consisting of 41 homes, in Chester County.
Our other subsidiaries, neither of which is regulated, include Artesian Wastewater Management, Inc., which provides wastewater services in Delaware, and Artesian Development Corporation, whose sole activity has been ownership of an eleven-acre parcel of land.
Strategic Direction
Our profitability is primarily attributable to the sale of water by Artesian Water, the amount of which is dependent on seasonal fluctuations in weather, particularly during the summer months when water demand may vary with rainfall and temperature.
Ensuring our customers have a dependable supply of safe, high-quality water has been, and will continue to be, a high priority. We expect to make investments in 2002 that will increase our sources of water by approximately two million gallons per day and enhance our ability to deliver supply from our Aquifer Storage and Recovery Program. We are the first and only water utility in Delaware to utilize this technology that capitalizes on Delaware's unique geology to provide storage capacity for water to be used during periods of peak water demand.
While customer growth in our utility subsidiary will continue to be a major focus in 2002, we are aggressively seeking opportunities, which produce non-weather-affected revenue streams. These opportunities include our wastewater management subsidiary's operation of a new 2.5 million gallon per day spray irrigation wastewater treatment facility for the town of Middletown, Delaware, which we expect to begin in the third quarter of 2002. In addition, we will continue to focus attention on expanding our contract operations opportunities with municipalities and private water providers in Delaware and surrounding areas.
Regulatory Matters and Inflation
As of December 31, 2001, we had approximately 66,000-metered customers and serviced a population of approximately 220,000, representing approximately 27% of Delaware's total population. The Delaware Public Service Commission ("PSC") regulates Artesian Water's rates charged for water service, the sale and issuance of our securities and other matters. We periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business. Increases in customers served by Artesian Water also contribute to increases in our operating revenues. Our business is also subject to seasonal fluctuations and the effects of weather.
We are affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand our service capability. The cumulative effect of inflation results in significantly higher facility costs, compared to investments made 20 to 40 years ago, which must be recovered from future cash flows. In 2001, Delaware passed a statute permitting water utilities to put into effect, on a semi-annual basis, increases related to specific types of distribution system improvements through a Distribution System Improvement Charge (DSIC). This charge is available to water utilities to be implemented between general rate increase applications, which normally recognize changes in a water utility's overall financial position, and significantly reduces expenses associated with general rate increase requests. The first effective date for the implementation of DSIC was January 1, 2002. We requested on November 30, 2001, and subsequently i mplemented, a 0.53% overall surcharge for bills rendered subsequent to January 1, 2002.
Significant Accounting Policies
We record water service revenue, including amounts billed to customers on a cycle basis and unbilled amounts, based upon estimated usage from the date of the last meter reading to the end of the accounting period. These estimates are made on an individual customer basis, based on the previous year's consumption in the same period, and are adjusted to reflect current changes in water demand on a system wide basis. While actual usage for individual customers may differ materially from the estimate, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption, as the overall estimate has been adjusted to reflect any change in overall demand on the system for the period.
Our regulated water utility records deferred regulatory assets under Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," which are expenses that may be recovered over various lengths of time as prescribed by the PSC. As the utility incurs certain expenses, such as expenses related to rate case applications, a deferred regulatory asset is created. Adjustments to these deferred regulatory assets are made when the PSC determines whether the expense is recoverable in rates, the length of time over which an expense is recoverable, or, because of changes in circumstances, whether a remaining balance of deferred expense is no longer recoverable in rates charged to customers. Adjustments to reflect changes in recoverability of certain deferred regulatory assets may have a material affect on our financial results.
Results of Operations
2001 Compared to 2000
Operating Revenues
Revenues totaled $32.0 million in 2001 and were 16.1% above revenues in 2000 of $27.6 million, reflecting an increase in water sales of 15.8% due to customer growth and rate increases approved by the PSC in 2001. We realized 98.0% of our total revenue in 2001 from the sale of water.
We filed an application with the PSC on December 5, 2000, to increase rates for water service for all of Artesian Water's customers. A temporary rate increase, calculated to increase annualized revenues $2.5 million, was approved by the PSC and placed into effect on February 3, 2001. In Delaware, utilities are permitted to place rates into effect on a temporary basis pending completion of a rate increase proceeding. If such rates are found to be in excess of rates the PSC finds to be appropriate, the utility must refund the portion found in excess to customers with interest. We received final approval, in PSC Docket 00-647 on June 19, 2001, to increase rates up to a total annualized increase in revenues of $3.7 million, or $1.2 million more than permitted under temporary rates. The approval was the result of a stipulated settlement reached by the PSC Staff and Division of Public Advocate. The increase in revenues for the various customer classes will not consistently match changes in consumption levels for the class primarily due to our use of a multiple rate block structure. This structure charges different rates for different levels of consumption. In addition, rate increases are distributed among the rate blocks and service charges through a cost of service analysis and may not reflect, on an individual class or charge basis, the overall increase in rates approved by the PSC.
Percentage of Revenues by Customer Class | |||
2001 | 2000 | 1999 | |
Residential | 60.28% | 59.64% | 60.50% |
Commercial | 24.80% | 25.67% | 24.71% |
Industrial | 1.25% | 0.75% | 0.68% |
Government and Other | 11.71% | 12.27% | 12.36% |
Other water revenues | 1.60% | 1.51% | 1.60% |
Non-utility operating revenues | 0.36% | 0.16% | 0.15% |
Total | 100.00% | 100.00% | 100.00% |
Residential
Residential water service revenues in 2001 amounted to $19.3 million, an increase of 17.4% over the $16.4 million recorded in 2000. The increase in 2001 follows an increase of 1.4% in 2000. The volume of water sold to residential customers, however, decreased marginally from 3,817 million gallons in 2000 to 3,809 million gallons in 2001. The number of residential customers served increased 2.0% in 2001.
Commercial
Revenues from commercial customers in 2001 increased by 12.1% to $7.9 million, from $7.1 million in 2000. The volume of water sold to commercial customers increased by 16.9% from 2,039 million gallons in 2000 to 2,384 million gallons in 2001. The number of commercial customers served increased 1.1% in 2001.
Industrial
Revenues from industrial customers in 2001 increased by 93.9% to $400,000, from $207,000 in 2000. The volume of water sold to industrial customers increased 108.9% from 79 million gallons in 2000 to 165 million gallons in 2001 primarily as a result of the addition of one new customer.
Government and Other
Government and other revenues in 2001 increased by 10.9% to $3.7 million, from $3.4 million in 2000. Revenues derived from state, federal and local governmental agencies totaled $700,000 in 2001, exceeding 2000 revenue by 41.8%. The remaining revenue increase was derived from the sale of water to neighboring utilities, public fire protection service, pools and other temporary and seasonal customers.
Other Utility Operating Revenue
Other utility operating revenue, derived from contract operations, antenna leases on water tanks and finance charges increased 21.8% in 2001 to $509,000, from $418,000 in 2000. The increase is primarily a result of a 28.3% increase in revenues for antenna leases and the addition of contract operation agreements.
Operating Expenses
Operating expenses, excluding depreciation and taxes, increased approximately $2.2 million, or 14.4%, to $17.6 million in 2001. The increase in operating expenses resulted primarily from an increase in payroll and related expense of $1.2 million, or 15.7%, due to the addition of new employees and increases in annual merit compensation. Purchased water expenditure increased $201,000 over 2000 levels despite continuing to maintain minimum purchase requirements primarily due to the recognition of a credit in 2000 for water sold back to a provider in 2000. Repair and maintenance expenses increased as a result of an increase of $244,000 for tank painting expense, which reflects the first year of a five-year tank painting and maintenance agreement, which we entered into in 2000. Water treatment expense increased $86,000 reflecting the increased amount of chemicals used as a result of an increase in water pumped and a $42,000 increase related to the exp anded testing of our sources of supply. Finally, our administrative expenses increased approximately $481,000, which primarily reflects the one-time $280,000 expense recognition for legal costs associated with the suspended negotiations for the purchase of Tidewater Utilities, a subsidiary of Middlesex Water Company, as well as, an additional $73,000 increase in our auditing and tax expense was recorded and reflects an increase in fees associated with the 2001 year end audit and additional fees related to our 2000 year end audit services. The remaining increase of $128,000 represents increases in a number of administrative expenses including bank fees, customer survey expense, regulatory commission expense and training expenses. The ratio of operating expense, excluding depreciation and taxes, to total revenue was 55.1% for the year ended December 31, 2001, compared to 55.9% for the year ended December 31, 2000.
Operation and Maintenance Expenses | |||
2001 | 2000 | 1999 | |
Payroll and associated expense | 50.46% | 49.88% | 47.60% |
Purchased water | 15.62% | 16.57% | 16.61% |
Repair and maintenance | 5.11% | 4.22% | 4.24% |
Water treatment | 3.50% | 3.45% | 3.20% |
Administrative | 24.90% | 25.63% | 28.10% |
Non-utility operating | 0.41% | 0.25% | 0.25% |
Total Operations and Maintenance Expenses | 100.00% | 100.00% | 100.00% |
Depreciation and amortization expense increased $295,000, or 10.9%, due to increases in our utility plant in service. Income tax expense increased $565,000, or 34.9% due to increased profitability in 2001. Our total effective income tax rate for 2000 and 2001 was 39.8% and 39.7%, respectively.
Interest Charges
Interest charges increased $482,000, or 11.9%, primarily due to an increase of $949,000 in interest related to long-term debt due to a full year recognition of interest on the Series O First Mortgage bonds issued December 29, 2000, and the interest associated with the $4.3 million note issued by the Delaware Department of Health and Social Services on January 31, 2001. This increase is partially offset by a $353,000 decrease in interest associated with our short-term debt. The average outstanding lines of credit during 2001 of $14.2 million increased by $1.4 million, compared to the average outstanding lines of credit during 2000 of $12.8 million, however, the average interest rate applied to these balances decreased from 7.2% in 2000 to 4.8% in 2001. In addition, interest charges related to the early redemption of the Series K First Mortgage Bond of $47,000 and $65,000 for refunds of revenues collected under bond which were in excess of the fina l rate increase award in 2000 were reflected in 2000 for which no similar entry was recorded in 2001.
Net Income
For the year ended December 31, 2001, our net income applicable to common stock increased $880,000, or 36.8%, compared to the same period in 2000. The increase in net income was primarily due to rate increases authorized in 2000 and 2001, increases in consumption following a period of reduced consumption in 2000, a year with unusual frequency of summer rainfall, continued customer growth and lower interest rates on short-term lines of credit.
2000 Compared to 1999
Operating Revenues
Revenues totaled $27.6 million in 2000 and were 2.9% above revenues in 1999 of $26.8 million, reflecting an increase in water sales due to customer growth of 3.64% and rate increases approved by the PSC in 2000. We realized 98.3% of our total revenue in 2000 from the sale of water.
We received approval from the PSC on August 30, 2000, in PSC Docket 99-197, to increase rates for water service. We reflected in revenues water sales totaling $173,000 of the $720,000 in operating revenues we deferred in 1999 pending the completion of the rate increase proceeding. The remaining $547,000 deferred in 1999, and an additional $808,000 collected under bond in 2000, was refunded to customers with interest. These operating revenues were a result of a temporary increase we had placed into effect, on July 1, 1999. The increased revenues from the approved rate increase were offset by a decrease in usage per customer. The decrease in our rate of consumption per customer was a result of the unusual frequency of rainfall during the summer of 2000.
Residential
Residential water service revenues in 2000 amounted to $16.4 million, an increase of 1.4% over the $16.2 million recorded in 1999. The increase in 2000 followed an increase of 3.4% in 1999. The volume of water sold to residential customers increased by 4.5% from 3,651 million gallons in 1999 to 3,817 million gallons in 2000. The number of residential customers served increased 3.8% in 2000.
Commercial
Revenues from commercial customers in 2000 increased by 6.9% to $7.1 million, from $6.6 million in 1999. The volume of water sold to commercial customers increased by 0.3% from 2,033 million gallons in 1999 to 2,039 million gallons in 2000. The number of commercial customers served decreased 1.0% in 2000.
Industrial
Revenues from industrial customers in 2000 increased by 13.1% to $207,000, from $183,000 in 1999. The volume of water sold to industrial customers decreased 6.3% from 84 million gallons in 1999 to 79 million gallons in 2000.
Government and Other
Public and other revenues in 2000 increased by 2.1% to $3.4 million, from $3.3 million in 1999. Revenues derived from state, federal and local governmental agencies totaled $500,000 in 2000, declining from 1999 revenue by 23.3%. The remaining revenue increase was derived from the sale of water to neighboring utilities, public fire protection service, pools and other temporary and seasonal customers.
Other Utility Operating Revenue
Other utility operating revenue, derived from finance charges on customer accounts, leases for communications antenna space and other miscellaneous customer charges, decreased 2.3% in 2000 to $418,000, from $427,000 in 1999.
Operating Expenses
Operating expenses, excluding depreciation and taxes, increased $709,000, or 4.8%, primarily due to increased payroll and related expenses, increased purchased water expenditures of $111,000 and an increase of $75,000 in transportation expenses related to fuel. These increases were partially offset by a $130,000 reduction in legal expenses due, in part, to the hiring of in-house counsel. The ratio of operating expense, excluding depreciation and taxes, to total revenue was 55.9% for the year ended December 31, 2000, compared to 54.9% for the year ended December 31, 1999. Payroll and related expenses increased $689,000, or 8.7%, primarily due to the addition of new employees, increases in annual merit compensation and a 17.0% increase in medical insurance premiums.
Depreciation and amortization expense increased $289,000, or 12.0%, due to increases in our utility plant in service. Income tax expense decreased $341,000, or 17.4% due to decreased profitability in 2000. Our total effective income tax rate for 1999 and 2000 was 39.8%.
Interest Charges
Interest charges increased $757,000, or 23.0%, primarily due to an increase of $497,000 in interest related to short term debt due to increases in the average outstanding lines of credit during 2000 of $12.8 million, compared to the average outstanding lines of credit during 1999 of $7.1 million. Interest on long term debt increased by $119,000, or 4.4%, primarily due to a full year of interest expense related to the $4.5 million note issued to Ellis and Helena Taylor in exchange for our purchase of 24,165 shares of Class A Non-Voting Common Stock and 126,353 shares of Class B Common Stock. In addition, we expensed $47,000 of unamortized issuance cost for our First Mortgage Bonds, Series K, as a result of their early redemption. Finally, we paid customers $65,000 in interest on the refund of operating revenues collected under bond but which were found to be in excess of the final rate award discussed above.
Net Income
For the year ended December 31, 2000, our net income applicable to common stock decreased $519,000, or 17.8%, compared to the same period in 1999. The decrease in net income was primarily due to reduced consumption as a result of the unusual frequency of rainfall experienced during the summer of 2000. In addition, we incurred approximately $500,000 in interest expense related to $15.9 million invested in utility plant since June 30, 1999, the end of the test period in our prior rate application. Because of the length of the prior rate proceeding, which was filed on April 30, 1999 but not concluded until August 29, 2000, we were delayed in filing a new rate increase request to take into consideration new investment in utility plant placed in service after June 30, 1999.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity for 2001 were $4.3 million in proceeds from the issuance of Artesian Water's 4.48% state revolving fund loan, $8.9 million provided by cash flow from operating activities and an increase of $9.8 million in our outstanding lines of credit. Cash flow from operating activities was primarily provided by our utility operations, and was impacted by the timeliness and adequacy of rate increases and weather conditions.
A significant part of our ability to maintain and meet our financial objectives is to assure our investments in utility plant are recovered in the rates charged to customers. As such, we file rate increase requests to recover increases in operating expenses and investments in utility plant, the timing of which is dependent upon the estimated cost of the administrative process in relation to the deficiency which is to be alleviated. On February 1, 2002, we provided notice to the Delaware Public Service Commission of our intent to file a rate increase request in 2002. Under the PSC's administrative procedures, a utility must tell the PSC of its intent to file a rate increase application at least 60 days prior to such filing. However, a company is not obligated to file any request for increase if circumstances change.
We rely on our sources of liquidity for investments in our utility plant and to meet our various payment obligations. We expect that our aggregate investments in our utility plant and systems in 2002 will be approximately $22.8 million. Our total obligations related to dividend and sinking fund payments on preferred stock, interest and principal payments on indebtedness, rental payments and water service interconnection agreements for 2002 are anticipated to be approximately $7.7 million.
Investment in Utility Plant and Systems
Capital expenditures increased by approximately $6.9 million for the year ended December 31, 2001, or approximately 48.6%, from $14.4 million in 2000 to $21.3 million in 2001. Investment in utility plant, excluding advances and contributions in aid of construction received from real estate developers, increased by $6.3 million, or 49.6%, from $12.8 million in 2000 to $19.1 million in 2001. Developers financed $2.2 million for the installation of water mains and hydrants serving their developments, compared to $1.6 million financed by developers in 2000.
We invested over $10.6 million in new transmission and distribution facilities, including refunds of advances for developer-financed infrastructure. Approximately $2.9 million of the $10.6 million investment for transmission and distribution facilities was made for the relocation of infrastructure as a result of roadway improvements and relocations. $2.1 million was invested in our rehabilitation program for transmission and distribution facilities, replacing aging or deteriorating mains. In addition, we invested $5.6 million in new infrastructure to serve 1,271 new customers, which included construction of a $1.4 million new elevated storage tank in Sussex County.
Capital expenditures of $7.1 million were made to enhance or improve existing treatment facilities, rehabilitation of pumping equipment and installation of new wells to increase supply capabilities. We invested $4.9 million of the $7.1 million for new sources of supply throughout Delaware which made available approximately two million gallons a day for customers. In addition, we invested approximately $2.2 million for sources of supply to add new treatment processes and upgrade existing facilities. In particular, we added activated carbon treatment processes to two facilities to remove a contaminant, which was detected at these well fields and for which a new temporary standard was imposed by Delaware's Division of Public Health.
The remaining $1.4 million of capital investment in 2001 was made for general plant, including fleet vehicles and computer equipment.
Investment in Utility Plant and Systems (in thousands) |
|
|
|
|
|
|
|
| 2001 |
| 2000 |
| 1999 |
Source of supply | $ | 1,217 | $ | 470 | $ | 1,567 |
Treatment and pumping |
| 5,935 |
| 1,526 |
| 3,666 |
Transmission and distribution |
| 10,657 |
| 10,476 |
| 7,086 |
General plant and equipment |
| 1,428 |
| 177 |
| 333 |
Developer financed utility plant |
| 2,108 |
| 1,717 |
| 2,697 |
Total Investment in utility plant and systems | $ | 21,345 | $ | 14,366 | $ | 15,349 |
We have planned to invest approximately $22.8 million in utility plant in 2002. Developers are expected to finance an additional $3.6 million in utility plant construction. The largest portion of projected investment is primarily a result of our efforts to identify, develop, treat and protect sources of water supply to assure uninterrupted service to our customers. We expect to invest approximately $9.6 million in new treatment facilities, equipment and wells throughout Delaware expecting to produce two million gallons per day in additional water supply. Approximately $4 million of this expected investment would be made at two new facilities. Approximately $1.6 million is needed to supply southern New Castle County at Willow Grove and $2.4 million to supplement a rapidly growing Sussex County system near Bayville. Another $1.4 million is to be invested in two new facilities to increase available sources of supply in northern New Cast le County. In addition to the investment in new facilities, we continue to maximize and enhance our existing treatment facilities and expect to invest over $4.2 million in 2002 to provide the highest quality water, which surpass state and federal water quality standards. The largest single enhancement is scheduled for our Windsong treatment facility in Kent County where changes in state and federal standards have required us to invest nearly $1.0 million in new treatment processes and equipment.
As part of our total utility plant investment, we expect to invest over $10.2 million in transmission and distribution facilities. We project approximately $3.8 million will be invested in the relocations of facilities as a result of government mandates and renewals associated with the rehabilitation of aging infrastructure. We will also invest approximately $6.4 million in new transmission and distribution facilities to improve our system hydraulics and address service needs in growth areas of our service territory.
The remaining $3.0 million of expected utility plant investment represents expenditures for our general plant and equipment, such as fleet vehicles, computer equipment and tools, and refunds paid to developers for investments that they made in infrastructure to service developments in our service territory.
Financing
We have several sources of liquidity to finance our investment in utility plant and other fixed assets. We estimate that the projected investment of approximately $22.8 million will be financed by our operations and external sources, including a combination of capital investment and short-term borrowings under our revolving credit agreements discussed below. Developers are expected to finance, through advances and contributions in aid of construction, an additional $3.6 million of capital expenditures, which includes the installation of mains and hydrants in new developments.
Our cash flow from operations are primarily derived from water sales revenues and may be materially affected by a changes in water sales due to weather and the timing and extent of increases in rates approved by the Delaware Public Service Commission.
At December 31, 2001, Artesian Water had lines of credit with three separate financial institutions totaling $35.0 million to meet its temporary cash requirements. These revolving credit facilities are unsecured. As of December 31, 2001, we had $18.9 million of available funds under these lines. The interest rate for borrowings under each of these lines is the London Interbank Offering Rate plus 1.0% or the banks' federal funds rate plus 1.0%, at our discretion. All the facilities are reviewed annually by each bank for renewal.
We may, from time to time, sell our securities to meet capital requirements. The amount and timing of future sales of our securities will depend upon market conditions and our specific needs. Our trust indentures, which set certain criteria for the issuance of new long-term debt, limits long-term debt, including the short-term portion thereof, to 66 2/3% of total capitalization. Our debt to total capitalization, including the short-term portion thereof, was 59.34% at December 31, 2001.
In order to meet the expected level of investment in utility plant and retain future financing flexibility, we anticipate that we will sell either debt and/or equity to the public in 2002. Additionally, Artesian Water anticipates it will refinance its Series L 8.03% First Mortgage Bonds when they come due on February 1, 2003, along with any outstanding short-term debt under our lines of credit.
Contractual |
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| Payments Due by Period (in thousands) |
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| ||||||||
| Less than |
| 1-3 |
| 4-5 |
| After 5 |
|
| |||
Long-term debt | $ |
| $ | 10,000 | $ |
| $ | 35,000 | $ | 45,000 | ||
State revolving fund loan |
| 137 |
| 449 |
| 334 |
| 3,387 |
| 4,307 | ||
Operating leases |
| 246 |
| 222 |
| 13 |
|
|
| 481 | ||
Unconditional purchase |
| 2,670 |
| 8,017 |
| 5,340 |
| 33,327 |
| 49,354 | ||
Other long-term obligations |
| 1,362 |
| 1,024 |
|
|
|
|
| 2,386 | ||
Total contractual cash |
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Long-term debt obligations reflect the maturities of certain series of our first mortgage bonds, which we intend to refinance when due. The state revolving fund loan obligation has an amortizing mortgage payment, payable over a 20-year period, and will be refinanced as future securities are issued. Both the long-term debt and the state revolving fund loan have certain provisions, which would result in default and subsequently require the obligation to be repaid, however, there are also specific cure provisions which allow us to avoid default of the obligation. We have not experienced conditions, which would result in our default under these agreements, and we do not anticipate any such occurrence. Payments for unconditional purchase obligations reflect minimum purchase obligations under our interconnection agreements with neighboring utilities.
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| Less than |
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Impact of Recent Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective est imated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that is acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized as they were prior to the adoption of Statement 142. Our adoption of SFAS No.141 and SFAS No. 142 will not have a material impact on our financial statements.
In August 2001, the FASB issued statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Statement No. 143 requires recognition of a liability at fair value and an increase to the carrying value of the related asset for any retirement obligation. This amount would then be amortized over the life of the asset. The liability would be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows. This statement is effective June 2003. Our adoption of this statement will not have a material impact on our financial condition or results of operations.
In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 incorporated the disposal of a business segment into the framework of Statement No. 121. Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement also excludes goodwill that was included in Statement No. 121 scope and provided refinement to cash flow estimations for defining any applicable impairment. This statement is effective January 1, 2002. Our adoption of this statement will not have a material impact on our financial condition or results of operations.
Cautionary Statement
Statements in this Annual Report which express our "belief", "anticipation", "projection" or "expectation," including statements regarding when we will commence operations in Pennsylvania, our goals, priorities and growth and expansion plans, our obligations and investment plans in 2002, and our plans regarding a debt and/or equity offering and our expected profitability, as well as other statements which are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties that could cause actual results to differ materially from those projected, including material changes in demand from larger customers, changes in weather, availability of labor, changes in government policies, levels of rate relief granted and changes in economic conditions and the other risks set forth in our Annual Report on Form 10-K under the caption "Risk Factors. " All of the forward-looking statements made in this Annual Report are based on our current beliefs and we undertake no obligation to update any of these cautionary statements.
Item 8.-Financial Statements and Supplementary Data.
CONSOLIDATED BALANCE SHEET | |||||
(In thousands) |
| For the year ended | |||
ASSETS |
| 2001 |
| 2000 | |
Utility plant, at original cost less accumulated depreciation | $ | 152,356 | $ | 134,038 | |
Current assets |
|
|
|
| |
Cash and cash equivalents |
| 1,053 |
| 392 | |
Accounts receivable, net |
| 2,610 |
| 1,967 | |
Unbilled operating revenues |
| 2,159 |
| 2,102 | |
Materials and supplies-at cost on FIFO basis |
| 616 |
| 730 | |
Prepaid property taxes |
| 589 |
| 591 | |
Prepaid expenses and other |
| 448 |
| 620 | |
|
| 7,475 |
| 6,402 | |
Other assets |
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|
| |
Non-utility property (less accumulated depreciation 2001-$82; 2000-$166) |
| 297 |
| 268 | |
Other deferred assets |
| 1,178 |
| 1,335 | |
|
| 1,475 |
| 1,603 | |
Regulatory assets, net |
| 2,228 |
| 2,364 | |
| $ | 163,534 | $ | 144,407 | |
====== | ====== | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
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| |
Stockholders' equity |
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|
|
| |
Common stock | $ | 2,040 | $ | 2,013 | |
Additional paid-in-capital |
| 25,107 |
| 24,474 | |
Retained earnings |
| 7,026 |
| 6,070 | |
Preferred stock |
| 272 |
| 272 | |
Total stockholders' equity |
| 34,445 |
| 32,829 | |
Preferred stock-mandatorily redeemable, net of current portion |
| 200 |
| 300 | |
Long-term debt, net of current portion |
| 49,370 |
| 50,717 | |
|
| 84,015 |
| 83,846 | |
Current liabilities |
|
|
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| |
Notes payable |
| 16,118 |
| 2,000 | |
Current portion of long-term debt |
| 1,328 |
| 1,119 | |
Current portion of mandatorily redeemable preferred stock |
| 100 |
| 100 | |
Accounts payable |
| 4,745 |
| 3,168 | |
Overdraft payable |
| 983 |
| 1,224 | |
Income taxes payable |
| 38 |
| -- | |
Deferred income taxes |
| 229 |
| -- | |
Interest accrued |
| 555 |
| 530 | |
Customer deposits |
| 414 |
| 419 | |
Other |
| 988 |
| 938 | |
|
| 25,498 |
| 9,498 | |
Deferred credits and other liabilities |
|
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|
| |
Net advances for construction |
| 18,754 |
| 18,780 | |
Postretirement benefit obligation |
| 1,360 |
| 1,455 | |
Deferred investment tax credits |
| 904 |
| 934 | |
Deferred income taxes |
| 5,660 |
| 4,231 | |
Commitments and contingencies (Note 11) |
|
|
|
| |
|
| 26,678 |
| 25,400 | |
Net contributions in aid of construction |
| 27,343 |
| 25,663 | |
$ | 163,534 | $ | 144,407 | ||
====== | ====== | ||||
The notes and schedules are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS | ||||||
(In thousands, except per share amount) | ||||||
| For the Year Ended December 31, | |||||
|
| 2001 |
| 2000 |
| 1999 |
Operating revenues |
|
|
|
|
|
|
Water sales | $ | 31,362 | $ | 27,090 | $ | 26,310 |
Other utility operating revenue |
| 509 |
| 418 |
| 427 |
Non-utility operating revenue (Note 7) |
| 116 |
| 43 |
| 40 |
|
| 31,987 |
| 27,551 |
| 26,777 |
Operating expenses |
|
|
|
|
|
|
Utility operating expenses |
| 17,368 |
| 15,181 |
| 14,426 |
Non-utility operating expenses (Note 7) |
| 73 |
| 39 |
| 37 |
Related party expenses (Note 8) |
| 178 |
| 179 |
| 227 |
Depreciation and amortization |
| 3,001 |
| 2,706 |
| 2,417 |
Taxes |
|
|
|
|
|
|
State and federal income |
|
|
|
|
|
|
Currently payable (Note 3) |
| 470 |
| 223 |
| 921 |
Deferred (Note 3) |
| 1,714 |
| 1,396 |
| 1,039 |
Property and other |
| 1,782 |
| 1,616 |
| 1,620 |
|
| 24,586 |
| 21,340 |
| 20,687 |
Operating income |
| 7,401 |
| 6,211 |
| 6,090 |
|
|
|
|
|
|
|
Other income (expense), net |
|
|
|
|
|
|
Allowance for funds used during construction |
| 375 |
| 253 |
| 133 |
Miscellaneous |
| 82 |
| 42 |
| 55 |
|
| 457 |
| 295 |
| 188 |
Income before interest charges |
| 7,858 |
| 6,506 |
| 6,278 |
|
|
|
|
|
|
|
Interest charges |
| 4,537 |
| 4,055 |
| 3,298 |
|
|
|
|
|
|
|
Net income |
| 3,321 |
| 2,451 |
| 2,980 |
Dividends on preferred stock |
| 51 |
| 61 |
| 71 |
Net income applicable to common stock | $ | 3,270 | $ | 2,390 | $ | 2,909 |
|
|
|
|
|
|
|
Income per common share: |
|
|
|
|
|
|
Basic | $ | 1.61 | $ | 1.19 | $ | 1.48 |
Diluted | $ | 1.58 | $ | 1.17 | $ | 1.46 |
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
Basic |
| 2,026 |
| 2,007 |
| 1,961 |
Diluted |
| 2,072 |
| 2,044 |
| 1,996 |
|
|
|
|
|
|
|
Cash dividends per share of common stock | $ | 1.11 | $ | 1.10 | $ | 1.06 |
The notes and schedules are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS | ||||||
(In thousands) | ||||||
For the Year Ended December 31, | ||||||
2001 | 2000 | 1999 | ||||
Cash flows from operating activities | ||||||
Net income | $ | 3,321 | $ | 2,451 | $ | 2,980 |
Adjustments to reconcile net cash provided by operating activities | ||||||
Depreciation and amortization | 2,848 | 2,537 | 2,285 | |||
Deferred income taxes, net | 1,628 | 1,425 | 1,085 | |||
Allowance for funds used during construction | (375) | (253) | (133) | |||
Changes in assets and liabilities | ||||||
Accounts receivable, net | (643) | 368 | (367) | |||
Unbilled operating revenues | (57) | (95) | (26) | |||
Materials and supplies | 114 | (20) | (93) | |||
Prepaid property taxes | 2 | (43) | 4 | |||
Prepaid expenses and other | 172 | (314) | 21 | |||
Other deferred assets | 157 | (214) | (21) | |||
Regulatory assets | 136 | 244 | 78 | |||
Accounts payable | 1,577 | (790) | 810 | |||
State and federal income taxes | 38 | (665) | 665 | |||
Interest accrued | 25 | (125) | (285) | |||
Customer deposits and other, net | 45 | (472) | 536 | |||
Postretirement benefit obligation | (95) | (83) | (89) | |||
Net cash provided by operating activities | 8,893 | 3,951 | 7,450 | |||
Cash flows used in investing activities | ||||||
Capital expenditures (net of AFUDC) | (21,345) | (14,366) | (15,349) | |||
Proceeds from sale of assets | 11 | 24 | 6 | |||
Investments in unconsolidated affiliates | --- | (29) | --- | |||
Net cash used in investing activities | (21,334) | (14,371) | (15,343) | |||
Cash flows from financing activities | ||||||
Net (repayments) borrowings under line of credit agreements | 9,811 | (1,310) | (87) | |||
Overdraft payable | (241) | 643 | (54) | |||
Net advances and contributions in aid of construction | 2,169 | 1,569 | 3,129 | |||
Proceeds from issuance of long-term debt | 4,307 | 20,000 | --- | |||
Proceeds from issuance of common stock | 590 | 280 | 7,960 | |||
Dividends | (2,296) | (2,257) | (2,173) | |||
Principal payments under capital lease obligations | (26) | (23) | (47) | |||
Principal payments under long-term debt obligations | (1,112) | (8,112) | (727) | |||
Redemption of preferred stock | (100) | (100) | (100) | |||
Net cash provided by financing activities | 13,102 | 10,690 | 7,901 | |||
Net increase in cash and cash equivalents | 661 | 270 | 8 | |||
Cash and cash equivalents at beginning of year | 392 | 122 | 114 | |||
Cash and cash equivalents at end of year | $ | 1,053 | $ | 392 | $ | 122 |
Supplemental Disclosures of Cash Flow Information | ||||||
Interest paid | $ | 4,426 | $ | 4,045 | $ | 3,513 |
Income taxes paid | $ | 432 | $ | 750 | $ | 256 |
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During 1999, 24,165 shares of Class A stock and 126,353 shares of Class B stock were reacquired in exchange for a note in the amount of $4,450,000 that is discussed under Note 6.
The notes and schedules are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY | |||
(In thousands, except share amounts) | |||
|
| Common Shares |
|
| Preferred Shares | Outstanding | Common Shares |
| Outstanding 7% | Class A | Outstanding |
| Prior Preferred | Non-Voting | Class B |
Balance as of December 31, 1998 | 10,868 | 1,291,121 | 512,726 |
Net income |
|
|
|
Cash dividends declared |
|
|
|
Common stock |
|
|
|
Preferred stock |
|
|
|
Stock repurchase |
| (24,165) | (126,353) |
Issuance of common stock |
|
|
|
Issuance of common stock (3) |
| 325,000 |
|
Dividend reinvestment plan |
| 7,109 | 5,451 |
Employee stock options |
| 5,366 |
|
Employee Retirement Plan (4) |
| 1,764 |
|
Balance as of December 31, 1999 | 10,868 | 1,606,195 | 391,824 |
Net income |
|
|
|
Cash dividends declared |
|
|
|
Common stock |
|
|
|
Preferred stock |
|
|
|
Stock repurchase |
|
|
|
Issuance of common stock |
|
|
|
Officer bonus |
| 2,100 |
|
Dividend reinvestment plan |
| 9,727 |
|
Employee stock options |
| 3,500 |
|
Employee Retirement Plan (4) |
| (188) |
|
Balance as of December 31, 2000 | 10,868 | 1,621,334 | 391,824 |
Net income |
|
|
|
Cash dividends declared |
|
|
|
Common stock |
|
|
|
Preferred stock |
|
|
|
Stock repurchase |
|
|
|
Issuance of common stock |
|
|
|
Officer bonus |
| 6,000 |
|
Dividend reinvestment plan |
| 9,906 |
|
Employee stock options |
| 5,462 |
|
Employee Retirement Plan (4) |
| 5,452 |
|
Balance as of December 31, 2001 | 10,868 | 1,648,154 | 391,824 |
|
|
|
|
(1) | At December 31, 2001, 2000, 1999 and 1998, Class A Non-Voting Common Stock had 3,500,000 shares authorized. |
(2) | At December 31, 2001, 2000, 1999 and 1998, Class B Common Stock had 1,040,000 shares authorized. |
(3) | Artesian Resources Corporation issued 325,000 shares of Class A Non-Voting Common Stock on April 13, 1999. |
(4) | Artesian Resources registered 200,000 shares of Class A Non-Voting Common Stock available |
The notes and schedules are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY | |||
(In thousands, except share amounts) | |||
| $25 Par Value |
|
|
Balance as of December 31, 1998 | $ 272 | $ 1,291 | $ 512 |
Net income |
|
|
|
Cash dividends declared |
|
|
|
Common stock |
|
|
|
Preferred stock |
|
|
|
Stock repurchase |
| (24) | (126) |
Issuance of common stock |
| 325 |
|
Dividend reinvestment plan |
| 7 | 6 |
Employee stock options |
| 5 |
|
Employee Retirement Plan (4) |
| 2 |
|
Balance as of December 31, 1999 | $ 272 | $ 1,606 | $ 392 |
Net income |
|
|
|
Cash dividends declared |
|
|
|
Common stock |
|
|
|
Preferred stock |
|
|
|
Stock repurchase |
|
|
|
Issuance of common stock |
|
|
|
Officer bonus |
| 2 |
|
Dividend reinvestment plan |
| 10 |
|
Employee stock options |
| 3 |
|
Employee Retirement Plan (4) |
|
|
|
Balance as of December 31, 2000 | $ 272 | $ 1,621 | $ 392 |
Net income |
|
|
|
Cash dividends declared |
|
|
|
Common stock |
|
|
|
Preferred stock |
|
|
|
Stock repurchase |
|
|
|
Issuance of common stock |
|
|
|
Officer bonus |
| 6 |
|
Dividend reinvestment plan | 10 | ||
Employee stock options |
| 6 |
|
Employee Retirement Plan (4) |
| 5 |
|
Balance as of December 31, 2001 | $ 272 | $ 1,648 | $ 392 |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY | |||
(In thousands, except share amounts) | |||
| Additional |
|
|
Balance as of December 31, 1998 | $ 18,073 | $ 7,785 | $ 27,933 |
Net income |
| 2,980 | 2,980 |
Cash dividends declared |
|
|
|
Common stock |
| (2,102) | (2,102) |
Preferred stock |
| (71) | (71) |
Stock repurchase | (1,535) | (2,659) | (4,344) |
Issuance of common stock |
|
|
|
Issuance of common stock (3) | 7,215 |
| 7,540 |
Dividend reinvestment plan | 270 |
| 283 |
Employee stock options | 83 |
| 88 |
Employee Retirement Plan (4) | 47 |
| 49 |
Balance as of December 31, 1999 | $ 24,153 | $ 5,933 | $ 32,356 |
Net income |
| 2,451 | 2,451 |
Cash dividends declared |
|
|
|
Common stock |
| (2,196) | (2,196) |
Preferred stock |
| (61) | (61) |
Stock repurchase |
| (57) | (57) |
Issuance of common stock |
|
|
|
Officer bonus | 45 |
| 47 |
Dividend reinvestment plan | 223 |
| 233 |
Employee stock options | 66 |
| 69 |
Employee Retirement Plan (4) | (13) |
| (13) |
Balance as of December 31, 2000 | $ 24,474 | $ 6,070 | $ 32,829 |
Net income |
| 3,321 | 3,321 |
Cash dividends declared |
| (2,245) | (2,245) |
Common stock |
| (51) | (51) |
Preferred stock |
| (69) | (69) |
Stock repurchase |
|
|
|
Issuance of common stock |
|
|
|
Officer bonus | 151 |
| 157 |
Dividend reinvestment plan | 249 |
| 259 |
Employee stock options | 97 |
| 103 |
Employee Retirement Plan (4) | 136 |
| 141 |
Balance as of December 31, 2001 | $ 25,107 | $ 7,026 | $ 34,445 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation-- The consolidated financial statements include the accounts of Artesian Resources Corporation and its wholly-owned subsidiaries ("Artesian Resources" or the "Company"), including its principal operating company, Artesian Water Company, Inc. ("Artesian Water"). Appropriate elimination's have been made for all material inter-company transactions and account balances.
Utility Subsidiary Accounting-- The accounting records of Artesian Water are maintained in accordance with the uniform system of accounts as prescribed by the Delaware Public Service Commission ("PSC"). Artesian Water follows the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," which provides guidance for companies in regulated industries.
Utility Plant and Capitalized Leases-- All additions to plant are recorded at cost. Cost includes direct labor, materials, and indirect charges for such items as transportation, supervision, pension, and other fringe benefits related to employees engaged in construction activities. When depreciable units of utility plant are retired, the cost of retired property, together with any cost associated with retirement and less any salvage value or proceeds received, is charged to accumulated depreciation. Maintenance, repairs, and replacement of minor items of plant are charged to expense as incurred.
In accordance with a rate order issued by the PSC, Artesian Water accrues an Allowance for Funds Used During Construction ("AFUDC"). AFUDC, which represents the cost of funds devoted to construction projects through the date the project is placed in service, is capitalized as part of construction work in progress. The rate used for the AFUDC calculation is based on Artesian Water's weighted average cost of debt and the rate of return on equity authorized by the PSC. The rate used to capitalize AFUDC in 2001, 2000 and 1999 was 8.5%, 9.3%, and 9.4%, respectively.
Utility plant comprises:
| Estimated |
| |||
| Useful |
| December 31, | ||
| Life |
| 2001 |
| 2000 |
| In Years | (in thousands) | |||
Utility plant, at original cost |
|
|
|
|
|
Utility plant in service |
|
|
|
|
|
Intangible plant | --- | $ | 103 | $ | 103 |
Source of supply plant | 45-85 |
| 10,049 |
| 8,035 |
Pumping and water treatment plant | 35-62 |
| 21,459 |
| 17,049 |
Transmission and distribution plant |
|
|
|
|
|
Mains | 81 |
| 90,785 |
| 82,278 |
Services | 39 |
| 16,269 |
| 14,526 |
Storage tanks | 79 |
| 10,276 |
| 9,974 |
Meters | 26 |
| 8,065 |
| 7,741 |
Hydrants | 60 |
| 4,941 |
| 4,583 |
General plant | 5-31 |
| 13,505 |
| 11,994 |
Property held for future use | --- |
| 3,132 |
| 2,581 |
Construction work in progress | --- |
| 5,291 |
| 4,296 |
|
|
| 183,875 |
| 163,160 |
Less accumulated depreciation |
|
| 31,519 |
| 29,122 |
|
| $ | 152,356 | $ | 134,038 |
Depreciation and Amortization-- For financial reporting purposes, depreciation is provided using the straight-line method at rates based on estimated economic useful lives, which range from 5 to 85 years. Composite depreciation rates for utility plant were 2.15%, 2.14% and 2.15%, for the years ended December 31, 2001, 2000, and 1999, respectively. In a rate order issued by the PSC, the Company was directed effective January 1, 1998 to begin using revised depreciation rates for utility plant. In rate orders issued by the PSC, Artesian Water was directed effective May 28, 1991 and August 25, 1992 to offset depreciation on utility property funded by Contributions in Aid of Construction ("CIAC") and Advances for Construction ("Advances"), respectively, against CIAC and Advances. Other deferred assets are amortized using the straight-line method over applicable lives, which range from 2 to 20 years.
Regulatory Assets-- Certain expenses are recoverable through rates, without a return on investment, and are deferred and amortized during future periods using various methods as permitted by the PSC. Expenses related to rate proceedings are amortized on a straight-line basis over a period of 2 years. The postretirement benefit obligation, which is being amortized over 20 years, is adjusted for the difference between the net periodic postretirement benefit costs and the cash payments. The deferred income taxes will be amortized over future years as the tax effects of temporary differences previously flowed through to the customers reverse.
Regulatory assets at December 31, net of amortization, comprise:
|
| 2001 |
| 2000 |
|
| (in thousands) | ||
Postretirement benefit obligation | $ | 1,360 | $ | 1,455 |
Deferred income taxes recoverable in future rates |
| 657 |
| 665 |
Expense of rate proceedings |
| 211 |
| 244 |
| $ | 2,228 | $ | 2,364 |
Other Deferred Assets-- Certain expenses are deferred and amortized using the straight-line method over various time periods ranging from 2 to 25 years. In 1992, Artesian Water entered a ten-year agreement for a water service interconnection with the Chester (Pennsylvania) Water Authority ("Chester"). The interconnection was placed in service during October 1992 at a total cost of $1.5 million and is being amortized over a 10-year period as approved by the PSC.
Other deferred assets at December 31, net of amortization, comprise:
|
| 2001 |
| 2000 |
|
| (in thousands) | ||
Chester interconnection | $ | 149 | $ | 298 |
Debt issuance expense |
| 560 |
| 587 |
Other |
| 469 |
| 450 |
| $ | 1,178 | $ | 1,335 |
Advances for Construction-- Water mains, services and hydrants, or cash advances to reimburse Artesian Water its costs to construct water mains, services and hydrants, are contributed to Artesian Water by customers, real estate developers and builders in order to extend water service to their properties. The value of these contributions is recorded as Advances for Construction. Artesian Water makes refunds on these advances over a specific period of time based on operating revenues generated by the specific plant or as new customers are connected to the mains. After all refunds are made, any remaining balance is transferred to CIAC.
Contributions in Aid of Construction-- CIAC includes the non-refundable portion of advances for construction and direct contributions of water mains, services and hydrants, or cash to reimburse Artesian Water its costs to construct water mains, services and hydrants by customers, real estate developers and builders in order to extend water service to their properties.
Income Taxes-- Deferred income taxes are provided in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" on all differences between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements based on the enacted tax rates to be in effect when such temporary differences are expected to reverse.
The Tax Reform Act of 1986 mandated that Advances and CIAC received subsequent to December 31, 1986, generally are taxable income to Artesian Water. For Advances, Artesian Water was directed by the PSC to pay the related taxes and collect amounts equal to the taxes paid from the developer. For CIAC, Artesian Water was directed to pay the taxes instead of the developer contributing the taxes. The 1996 Tax Act provided an exclusion from taxable income for CIAC and Advances received after June 12, 1996 by Artesian Water that are not included in the rate base for rate-making purposes.
Investment tax credits were deferred through 1986 and are recognized as a reduction of deferred income tax expense over the estimated economic useful lives of the related assets.
Revenue Recognition and Unbilled Revenues-- Water service revenue for financial statement purposes includes amounts billed to customers on a cycle basis and unbilled amounts based upon estimated usage from the date of the last meter reading to the end of the accounting period.
Cash and Cash Equivalents-- For purposes of the Consolidated Statement of Cash Flows, Artesian Resources considers all temporary cash investments with a maturity of three months or less to be cash equivalents. Artesian Water utilizes its bank's controlled disbursement service to reduce the use of its line of credit by funding checks as they are presented to the bank for payment rather than at issuance. If the checks currently outstanding but not yet funded exceed the cash balance on Artesian Water's books, the net liability is recorded as a current liability on the balance sheet in the Overdraft Payable account.
Use of Estimates in the Preparation of Consolidated Financial Statements-- The consolidated financial statements were prepared in conformity with generally accepted accounting principles, which require management to make estimates concerning unbilled revenues and regulatory asset recovery that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's estimate.
NOTE 2
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
Current Assets and Liabilities-- For those current assets and liabilities that are considered financial instruments, the carrying amounts approximate fair value because of the short maturity of those instruments.
Long-term Financial Liabilities-- The fair value of Artesian Resources' long-term debt and mandatorily redeemable preferred stock as of December 31, 2001 and 2000, determined by discounting their future cash flows using current market interest rates on similar instruments with comparable maturities, are approximately as shown below.
Fair value of financial instruments at December 31, comprised:
| 2001 | 2000 | |||||||
| Carrying | Estimated | Carrying | Estimated | |||||
| (in thousands) | ||||||||
|
|
|
|
|
|
|
|
| |
Long-term debt | $ | 49,370 | $ | 50,685 | $ | 50,717 | $ | 50,232 | |
Mandatorily redeemable preferred stock | $ | 200 | $ | 184 | $ | 300 | $ | 275 | |
The fair value of Advances cannot be reasonably estimated due to the inability to accurately estimate future refunds expected to be paid over the life of the contracts. Refund payments are based on the water sales to new customers in the particular development constructed. Future refunds expected to be paid would have to be estimated on a per contract basis using the past history of refund payments. The fair value of Advances would be less than the carrying amount because these financial instruments are non-interest bearing.
NOTE 3
INCOME TAXES
Deferred income taxes reflect temporary differences between the valuation of assets and liabilities for financial and tax reporting.
At December 31, 2001, for state income tax purposes, Artesian Resources had recorded a deferred tax asset of $775,000 to reflect separate company net operating loss carry forwards aggregating approximately $10,000,000. These net operating loss carry forwards will expire if unused between 2002 and 2021. Artesian Resources has recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to the expiration of the state net operating loss carry forwards. The valuation allowance decreased from $685,000 in 2000 to $590,000 in 2001 as a result of utilizing a portion of the net operating losses, which were expected to expire unutilized.
At December 31, 2001, for federal income tax purposes, there were minimum tax credit carry forwards aggregating approximately $2,464,000 resulting from the payment of alternative minimum tax in current and prior years. These minimum tax credit carry forwards may be carried forward indefinitely to offset future regular federal income taxes. Artesian Resources has not recorded a valuation allowance for these federal tax carry forwards, because the Company believes it is more likely than not those benefits will be realized.
Components of income tax expense: | ||||||
(in thousands) | ||||||
| For the Year ended December 31, | |||||
State income taxes |
| 2001 |
| 2000 |
| 1999 |
Current | $ | (62) | $ | 51 | $ | 232 |
Deferred-current |
|
|
|
|
|
|
Property taxes |
| --- |
| 4 |
| --- |
Allowance for bad debts |
| --- |
| --- |
| (1) |
Deferred-non-current |
|
|
|
|
|
|
Accelerated depreciation |
| 754 |
| 267 |
| 281 |
Rate case expenses |
| --- |
| (13) |
| 2 |
State net operating loss |
| (185) |
| --- |
| --- |
Tax credit carry forwards |
| --- |
| (1) |
| --- |
Valuation allowance |
| (95) |
| --- |
| --- |
Other |
| (47) |
| 63 |
| (79) |
Total state income tax expense | $ | 365 | $ | 371 | $ | 435 |
|
| |||||
| For the Year ended December 31, | |||||
|
| 2001 |
| 2000 |
| 1999 |
Federal income taxes | $ | 532 | $ | 172 | $ | 689 |
Current |
|
|
|
|
|
|
Deferred-current |
|
|
|
|
|
|
Property taxes |
| --- |
| 14 |
| (1) |
Allowance for bad debts |
| --- |
| (1) |
| (5) |
Deferred-non-current |
|
|
|
|
|
|
Accelerated depreciation |
| 2,690 |
| 952 |
| 1,004 |
Rate case expenses |
| (13) |
| (45) |
| 8 |
Federal tax credit carry forwards |
| --- |
| 4 |
| 3 |
Amortization of investment tax credits |
| (31) |
| --- |
| --- |
Alternative minimum tax |
| (1,556) |
| (83) |
| 128 |
Amortization of regulatory asset for deferred taxes |
| 10 |
| (15) |
| --- |
Other |
| 187 |
| 250 |
| (301) |
Total federal income tax expense | $ | 1,819 | $ | 1,248 | $ | 1,525 |
| |||||||||
RECONCILIATION OF EFFECTIVE TAX RATE | |||||||||
| For the Year Ended December 31, | ||||||||
|
| 2001 |
|
| 2000 |
|
| 1999 |
|
|
| Amount | % |
| Amount | % |
| Amount | % |
|
|
|
|
|
|
|
|
|
|
Reconciliation of effective tax rate |
|
|
|
|
|
|
|
|
|
Amount computed at statutory rate |
| 1,872 | 34.0 |
| 1,379 | 34.0 |
| 1,675 | 34.0 |
Reconciling items |
|
|
|
|
|
|
|
|
|
State income tax-net of federal |
|
|
|
|
|
|
|
|
|
Other |
| 71 | 1.3 |
| (7) | (0.2) |
| (2) | --- |
|
|
|
|
|
|
|
|
|
|
Total income tax expense and effective rate | $ | 2,184 | 39.7 | $ | 1,619 | 39.8 | $ | 1,960 | 39.8 |
Deferred income taxes at December 31, 2001 and 2000 were comprised of the following:
In thousands | For the Year Ended December 31, | |||||
Deferred tax assets related to: |
| 2001 |
| 2000 |
| 1999 |
|
| Amount |
| Amount |
| Amount |
|
|
|
|
|
|
|
Federal minimum tax credit carry forwards | $ | 2,464 | $ | 908 | $ | 825 |
Federal and state operating loss carry forwards |
| 775 |
| 685 |
| 671 |
Bad debt allowance |
| 38 |
| 35 |
| 34 |
Valuation allowance |
| (590) |
| (685) |
| (671) |
Total deferred tax assets |
| 2,687 |
| 943 |
| 859 |
|
|
|
|
|
|
|
Deferred tax liabilities related to: |
|
|
|
|
|
|
Property plant and equipment basis differences |
| (7,993) |
| (4808) |
| (3,601) |
Expenses of rate proceedings |
| (84) |
| (97) |
| (155) |
Property taxes |
| (234) |
| (235) |
| (217) |
Other |
| (204) |
| 60 |
| 399 |
|
|
|
|
|
|
|
Total deferred tax liabilities |
| (8,515) |
| (5,080) |
| (3,574) |
|
|
|
|
|
|
|
Net deferred tax liability | $ | (5,828) | $ | (4,137) | $ | (2,715) |
Deferred taxes, which are classified into a net current and non-current balance, are presented in the balance sheet as follows:
|
| For the Year Ended December 31, | ||||
Deferred tax assets related to: |
| 2001 |
| 2000 |
| 1999 |
|
| Amount |
| Amount |
| Amount |
|
|
|
|
|
|
|
Current deferred tax (liability) asset | $ | (229) | $ | 94 | $ | 61 |
Non-current deferred tax liability |
| (5,660) |
| (4,231) |
| (2,776) |
Deferred tax asset in other assets |
| 61 |
| --- |
| --- |
Net deferred tax liability | $ | (5,828) | $ | (4,137) | $ | (2,715) |
NOTE 4
PREFERRED STOCK
Artesian Resources has two classes of preferred stock outstanding. The 7% Prior Preferred stock (on which dividends are cumulative) is redeemable at Artesian Resources' option at $30.00 per share plus accrued dividends. The 9.96% Series Cumulative Prior Preferred stock has annual mandatory redemption requirements and is redeemable at Artesian Resources' option at $25.38 per share through January 31, 2002 and to $25.00 per share on February 1, 2003 and thereafter. The Company chose not to exercise the option to redeem on January 31, 2002. Under mandatory sinking fund provisions, redemptions will aggregate $100,000 (4,000 shares) annually in 2002 through 2004. The Company also has 100,000 shares of $1.00 par value Series Preferred stock authorized but unissued. See the Consolidated Statements of Stockholders' Equity.
There are 40,000 authorized shares of the 9.96% Series Cumulative Prior Preferred stock with a par value of $25 per share, of which 12,000 and 16,000 shares were outstanding as of December 31, 2001 and 2000, respectively. Cash dividends paid in 2001 and 2000 were $32,000 and $42,000, respectively.
NOTE 5
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
The Class A Non-Voting Common Stock ("Class A Stock") of Artesian Resources trades on the Nasdaq National Market under the symbol ARTNA. The Class B Common Stock of Artesian Resources trades on the Nasdaq Bulletin Board under the symbol ARTNB.
In 1999, Artesian Resources issued 325,000 shares of Class A Stock at $25.00 per share. Net proceeds from the offering were used to reduce debt incurred to finance investment in utility plant.
Under Artesian Resources' dividend reinvestment plan, stockholders were issued 9,906, 9,727 and 12,560 shares at fair market value for the reinvestment of $259,000, $233,000 and $283,000 of their cash dividends for the years 2001, 2000 and 1999, respectively.
NOTE 6
DEBT
Artesian Water has available unsecured lines of credit, with no financial covenant restrictions, totaling $35.0 million at December 31, 2001, which are renewable annually at the banks' discretion. Borrowings under the lines of credit bear interest based on the London Interbank Offering Rate ("LIBOR") plus 1.0% for 30, 60, 90, or 180 days or the banks' Federal Funds Rate plus 1.0%, at the option of Artesian Water.
At December 31, 2001, 2000, and 1999, Artesian Water had $16.1 million, $6.3 million and $7.6 million outstanding under these lines at weighted average interest rates of 2.6%, 7.5% and 6.3%, respectively. The maximum amount outstanding was $16.7 million, $18.8 million and $11.6 million in 2001, 2000, and 1999, respectively. The twelve month average amount outstanding was approximately $14.2 million, $12.8 million and $7.1 million, at weighted average annual interest rates of 4.8%, 7.2% and 6.0% in 2001, 2000, and 1999, respectively.
On December 29, 2000, Artesian Water issued a $20.0 million, 8.17%, twenty year Series O First Mortgage Bond to redeem the Series K $7.0 million First Mortgage Bond and to pay down the lines of credit. On December 29, 2020 the Series O First Mortgage Bond matures.
On June 17, 1997, Artesian Water issued a $10.0 million, 7.84%, ten year Series M First Mortgage Bond and borrowed $2.5 million against a $5.0 million, ten year Series N First Mortgage Bond to repay the outstanding balance on the lines of credit. On September 18, 1997, Artesian Water borrowed the remaining $2.5 million on the Series N First Mortgage Bond. The $5.0 million, ten year Series N First Mortgage Bond has a fixed interest rate of 7.56%. On February 1, 2003, the Series L First Mortgage Bond matures. No other repayments or sinking fund deposits on first mortgage bonds are required over the next five years. As of December 31, 2001 and 2000, substantially all of Artesian Water's utility plant was pledged as security for the First Mortgage Bonds. In addition, the trust indentures contain covenants which limit long-term debt, including the current portion thereof, to 66 2/3% of total capitalization including the current portion of the long-ter m debt, and which, in certain circumstances, could restrict the payment of cash dividends. As of December 31, 2001, however, no dividend restrictions were imposed under these covenants.
On May 4, 1999, Artesian repurchased 126,353 shares of Class B Common Stock and 24,165 shares of Class A Non-Voting Common Stock from Helena C. Taylor and Ellis D. Taylor in exchange for a promissory note (the "Note") in the principal amount of $4,450,000 representing the purchase price of the stock, with a discounted present value of $4,307,000. The Note is payable quarterly, on a calendar basis, over a four-year period and in sixteen equal principal installments of $278,125 commencing on June 30, 1999. The outstanding balance on the Note bears interest in an amount computed based on the quarterly dividend the Taylor's would have received on the Stock transferred to Artesian but not yet paid for by Artesian. In addition, the principal installment is adjusted on a quarterly basis to reflect changes in the book value per common share of the Company as reported in its most recent quarterly financial statement distributed to stockholders prior to th e quarterly payment. Such amounts, if any, represent contingent purchase price of the stock and will be charged to retained earnings. At December 31, 2001, Artesian had $1,391,000 outstanding under this promissory note.
On January 31, 2001, Artesian Water Company, Inc. entered into a financing agreement with the Delaware Department of Health and Social Services to borrow funds totaling not more than $4,307,144 from the State's Revolving Loan Fund under an unsecured General Obligation Note. The note bears interest of 4.48% and is payable ratably over twenty years. The effective rate of the loan, including expenses related to the closing, is 4.53%. The funds of $4,307,144 were received in August 2001. The Company used the proceeds of this revolving loan to repay outstanding short-term debt. As such, in December 2000, the Company reclassified $4,307,144 from notes payable to long-term debt on the balance sheet.
Long-term debt consists of:
| December 31, | ||||||
| 2001 | 2000 | |||||
| (in thousands) | ||||||
First mortgage bonds |
|
|
|
| |||
|
|
|
|
| |||
Series L, 8.03%, due February 1, 2003 | $ | 10,000 | $ | 10,000 | |||
Series M, 7.84%, due December 31, 2007 |
| 10,000 |
| 10,000 | |||
Series N, 7.56%, due December 31, 2007 |
| 5,000 |
| 5,000 | |||
Series O, 8.17%, due December 29, 2020 |
| 20,000 |
| 20,000 | |||
|
| 45,000 |
| 45,000 | |||
Note Payable to Ellis & Helena Taylor |
| 1,391 |
| 2,503 | |||
State revolving fund loan |
| 4,307 |
|
| |||
Note Payable |
|
|
| 4,307 | |||
Capitalized lease obligations |
|
|
| 26 | |||
|
| 50,698 |
| 51,836 | |||
Less current maturities |
| 1,328 |
| 1,119 | |||
| $ | 49,370 | $ | 50,717 | |||
Payments due by period: |
| |||||||||
In thousands |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
Long-term debt | $ | --- | $ | 10,000 | $ | --- | $ | --- | $ | --- |
State revolving fund loan | $ | 137 | $ | 143 | $ | 150 | $ | 156 | $ | 163 |
Note payable to Ellis & |
|
|
|
|
|
|
|
|
|
|
Total payments | $ | 1,250 | $ | 10,421 | $ | 150 | $ | 156 | $ | 163 |
NOTE 7
NON-UTILITY OPERATING REVENUE AND EXPENSES
Artesian Wastewater Management, Inc. (Artesian Wastewater) is a non-regulated subsidiary of Artesian Resources, which provides wastewater treatment services in Delaware. On March 12, 1997 Artesian Wastewater became a one-third owner in AquaStructure Delaware, L.L.C. which markets proposals to design and construct wastewater treatment facilities.
Non-utility operating revenue consists of $116,000, $43,000 and $40,000 in income received by Artesian Wastewater Management, Inc. in 2001, 2000 and 1999.
Non-utility operating expenses are as follows:
| 2001 | 2000 | 1999 | |||
| (in thousands) | |||||
Artesian Wastewater | $ | 66 | $ | 33 | $ | 25 |
Artesian Resources |
| 2 |
| 6 |
| 12 |
Artesian Development |
| --- |
| --- |
| --- |
Total | $ | 73 | $ | 39 | $ | 37 |
NOTE 8
RELATED PARTY TRANSACTIONS
The office building and shop complex utilized by Artesian Water are leased at an average annual rental of $180,000 from a partnership, White Clay Realty, in which certain of Artesian Resources' officers and directors are partners. The lease expires in 2002, with provisions for renewals for two 5-year periods thereafter. Management believes that the payments made to White Clay Realty for the lease of its office building and shop complex and maintenance costs, taxes and other ownership type costs paid are comparable to what Artesian Water would have to pay to unaffiliated parties for similar facilities (See Note 11).
Artesian Water leased certain parcels of land for water production wells from Glendale Enterprises Limited, a company wholly-owned by Ellis D. Taylor, at an annual rental of $44,000. Renewal of the lease was automatic from year to year unless 60 day's written notice was given by either party before the end of the year's lease. During 2000, Artesian was notified by Glendale Enterprises Limited that it desired to discontinue the lease for the well sites. In its attempt to acquire the property from the lessor, Artesian received a claim from an unrelated third party with regard to lease payments made since 1986. In January 2001, the parties agreed to settle the ownership dispute, the third party withdrew its claim, and Artesian acquired the property.
Rental expense associated with related party transactions are as follows:
| 2001 | 2000 | 1999 | |||
| (in thousands) | |||||
White Clay Realty | $ | 178 | $ | 179 | $ | 182 |
Glendale Enterprises |
| --- |
| --- |
| 45 |
Total | $ | 178 | $ | 179 | $ | 227 |
NOTE 9
STOCK COMPENSATION PLANS
At December 31, 2001, the Company had two stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for compensation expense under its plans. Accordingly, the aggregate compensation cost that has been charged against income for the two plans was $38,000, $41,000 and $42,000 for 2001, 2000, and 1999, respectively. Had compensation cost for the Company's two plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", the Company's net income and net income per common share would have been reduced to the pro-forma amounts indicated below:
| 2001 | 2000 | 1999 | |||
| (in thousands, except per share data) | |||||
Net income applicable to common stock |
|
|
|
|
|
|
As reported | $ | 3,270 | $ | 2,390 | $ | 2,909 |
Pro-forma | $ | 3,140 | $ | 2,299 | $ | 2,782 |
|
|
|
|
|
|
|
Basic net income per common share |
|
|
|
|
|
|
As reported | $ | 1.61 | $ | 1.19 | $ | 1.48 |
Pro-forma | $ | 1.55 | $ | 1.15 | $ | 1.42 |
|
|
|
|
|
|
|
Diluted net income per common share |
|
|
|
|
|
|
As reported | $ | 1.58 | $ | 1.17 | $ | 1.46 |
Pro-forma | $ | 1.52 | $ | 1.12 | $ | 1.39 |
In 1992, the Company instituted the 1992 Non-Qualified Stock Option Plan (the "1992 Plan"), which was subsequently amended in 1998. Under the 1992 Plan, options to purchase shares of Class A Stock may be granted to employees at prices not less than 85% of the fair market value on the date of grant. Employees who participate and who are not executive officers or directors of the Company may receive options to purchase up to 1,000 shares. Each director or officer who participates in any year may request an option to purchase 3,000 shares of stock. The option price for directors and officers of the Company is 90% of the fair market value on the date of grant. Options granted under this plan to employees who are not executive officers or directors extend for a period of one year. Options granted to officers and directors extend to a period of ten years. All options are exercisable after six months of service from the date of initial grant, and are adjusted for stock dividends and splits. Employees, officers and directors become eligible to exercise options under the 1992 plan, after one year of service to the Company.
In 1996, the Company instituted the Incentive Stock Option Plan (the "ISO Plan"), under which the Company may grant options to its key employees and officers for up to 100,000 shares of Class A Stock. Options are granted at the fair market value on the date of grant. The option exercise period shall not exceed ten years from the date of grant and will be determined by the Company for each stock option granted. Options granted will vest in accordance with the terms and conditions determined by the Company and are adjusted for stock dividends and splits.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2001, 2000 and 1999, respectively: dividend yield of 4.2%, 4.6% and 4.2%; expected volatility of 0.34%, 0.34% and 0.31%; risk free interest rates of 3.16%, 6.17% and 5.08% for the employee options under the 1992 Plan, 4.93%, 6.44% and 5.58% for the director and officer options under the 1992 Plan and 4.93%, 6.69% and 5.58% for the 2001, 2000 and 1999 ISO Plan options respectively; and expected lives of one year for the employee options and five years for the director and officer options under the 1992 Plan for all years, five years in the 2001, and eight years for the 2000 and 1999 ISO Plan options. Shares of common stock have been reserved for future issuance under all of the foregoing options.
The following summary reflects changes in the Class A shares under option:
| 2001 | 2000 | 1999 | |||
|
| Weighted |
| Weighted |
| Weighted |
Plan options |
|
|
|
|
|
|
Outstanding at beginning of year | 149,016 | $18.14 | 127,640 | $17.35 | 84,057 | $15.21 |
Granted | 40,361 | $23.78 | 31,756 | $21.91 | 49,411 | $20.69 |
Exercised | (5,462) | $14.95 | (3,500) | $16.24 | (5,359) | $23.27 |
Canceled | (11,312) | $19.44 | (6,880) | $21.83 | (469) | $17.30 |
Outstanding at end of year | 172,603 | $19.47 | 149,016 | $18.14 | 127,640 | $17.35 |
|
|
|
|
|
|
|
Options exercisable at year end | 121,207 | $17.78 | 110,395 | $17.02 | 87,999 | $16.08 |
|
|
|
|
|
|
|
Weighted average fair value of |
|
|
|
|
|
|
options granted during the year |
| $24.42 |
| $23.17 |
| $21.21 |
The following tables summarize information about employee stock options outstanding at December 31, 2001:
Options Outstanding |
|
|
|
Range of | Shares Outstanding | Weighted Average | Weighted Average |
$12.71-$19.13 | 80,696 | 5.65 Years | $15.88 |
$20.60-$26.84 | 91,907 | 7.89 Years | $22.63 |
|
|
|
|
Options Exercisable |
|
|
|
Range of | Shares Exercisable | Weighted Average |
|
$12.71-$17.13 | 68,696 | $15.31 |
|
$19.13-$23.13 | 52,511 | $21.02 |
|
NOTE 10
EMPLOYEE BENEFIT PLANS
401(k) Plan--Artesian Resources has a defined contribution 401(k )Salary Reduction Plan (the "Plan") which covers substantially all employees. Under the terms of the Plan, Artesian Resources contributes 2% of eligible salaries and wages and matches employee contributions up to 6% of gross pay at a rate of 50%. Artesian Resources may, at its option, make additional contributions of up to 3% of eligible salaries and wages. No such additional contributions were made in 2001, 2000 and 1999. Plan expenses, which include Company contributions and administrative fees, for the years 2001, 2000 and 1999, were approximately $310,000, $323,000 and $188,000, respectively.
Postretirement Benefit Plan--Artesian Resources has a Postretirement Benefit Plan (the "Benefit Plan"), which provides medical and life insurance benefits to certain retired employees. Prior to the amendment of the Benefit Plan, substantially all employees could become eligible for these benefits if they reached retirement age while still working for Artesian Resources.
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), requires Artesian Resources to accrue the expected cost of providing postretirement health care and life insurance benefits as employees render the services necessary to earn the benefits. Artesian Resources elected to defer recognition and amortize its transition obligation over twenty years.
Artesian Resources recognized an offsetting regulatory asset with respect to the SFAS 106 liability. This asset is recorded based on the PSC order which permits Artesian Water to continue recovery of postretirement health care and life insurance expense on a pay-as-you-go basis for the remaining eligible employees. Artesian Water anticipates liquidating its SFAS 106 obligation and substantially recovering the expenses in rates over a period of approximately 20 years (based on the age and life expectancy of the remaining eligible participants). Further, expense recovery as a percentage of rates is expected to remain constant over the initial years, and then decline until the obligation is liquidated. Amounts charged to expense were $95,000, $83,000 and $89,000 for 2001, 2000 and 1999, respectively.
The following table sets forth the amount recognized in Artesian Resources' Consolidated Balance Sheet for the Benefit Plan as of December 31:
| 2001 | 2000 | |||
| (in thousands) | ||||
CHANGE IN BENEFIT OBLIGATION |
|
|
|
| |
Benefit obligation at beginning of year | $ | 950 | $ | 1,067 | |
Interest cost |
| 70 |
| 79 | |
Plan participant contributions |
| 3 |
| 3 | |
Actuarial (gain)/loss |
| 71 |
| (109) | |
Benefits paid |
| (86) |
| (90) | |
Benefit obligation at end of year | $ | 1,008 | $ | 950 | |
|
|
|
|
| |
CHANGE IN PLAN ASSETS |
|
|
|
| |
Fair value of plan assets at beginning of year | $ | 0 | $ | 0 | |
Employer contributions |
| 83 |
| 87 | |
Plan participant contributions |
| 3 |
| 3 | |
Benefits paid |
| (86) |
| (90) | |
Fair value of plan assets at end of year | $ | 0 | $ | 0 | |
|
|
|
|
| |
ACCRUED EXPENSE |
|
|
|
| |
Funded status | $ | (1,008) | $ | (950) | |
Unrecognized net gain |
| (460) |
| (618) | |
Unrecognized transition obligation |
| 102 |
| 110 | |
Accrued postretirement benefit cost | $ | (1,366) | $ | (1,458) | |
For measurement purposes, a 12.0% annual rate of increase in per capita cost of covered health care benefits was assumed for 2001; the rate was assumed to decrease gradually to 5% through the year 2009 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amount of the obligation and periodic cost reported. An increase in the assumed health care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 2001 by $65,000 and the interest cost component of net periodic postretirement benefit cost for the year then ended by $5,000.
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.00% and 7.75% for the years ended December 31, 2001 and 2000.
Supplemental Pension Plan-Effective October 1, 1994, Artesian Water established a Supplemental Pension Plan (the "Supplemental Plan") to provide additional retirement benefits to full-time employees hired prior to April 26, 1994. The purpose of the Supplemental Plan is to help employees save for future retiree medical costs, which will be paid by employees. The Supplemental Plan accomplishes this objective by providing additional cash resources to employees upon a termination of employment or retirement, to meet the cost of future medical expenses. Artesian Water has established a contribution based upon each employee's years of service ranging from 2% to 6% of eligible salaries and wages. Artesian Water also provides additional benefits to individuals who were over age 50 as of January 1, 1994. These individuals are referred to as the "Transition Group." Effective November 1, 1994, individuals eligible for the Transition Group had the opportunit y to defer compensation to the Supplemental Plan, and to receive a transition matching contribution for 5 years. Each one-dollar of eligible salaries and wages deferred by the Transition Group was matched with three, four, or five dollars by Artesian Water based on the employee's years of service subject to certain limitations under the federal tax rules. Plan expenses, which include Company contributions and administrative fees, for the years 2001, 2000, and 1999 were approximately $220,000, $177,000 and $267,000, respectively.
NOTE 11
COMMITMENTS
The office building and shop complex are leased at an average annual rental of $180,000 from a partnership, White Clay Realty (See Note 8). The lease renewal commenced January 1, 1998, and is being accounted for as an operating lease. The lease expires in 2002, with provisions for renewals for two 5-year periods thereafter.
In 1995, Artesian Water entered into four 5-year leases for computer equipment and in 1997 Artesian Water entered a 10-year lease for a land easement. Both have been recorded as capital leases. Also in 1997, Artesian Water entered into a 33 year operating lease for a parcel of land with improvements located in South Bethany, a municipality in Sussex County, Delaware.
During 1996, Artesian Water entered into a 10-year lease commitment for office space. Rent expense for 2001, 2000 and 1999 for the office space was $69,000, $67,000 and $66,000, respectively.
Future minimum annual rental payments under these lease obligations for the five years subsequent to 2001 are as follows:
| (in thousands) | |
2002 | $ | 246 |
2003 |
| 72 |
2004 |
| 74 |
2005 |
| 76 |
2006 |
| 13 |
| $ | 481 |
Artesian Water has two water service interconnection agreements with two neighboring utilities, which require minimum annual purchases. Rates charged under all agreements are subject to change. Effective August 1, 1997, Artesian Water renegotiated the contract with Chester Water Authority to, among other things, reduce the minimum purchase requirements from 1,459 million gallons to 1,095 million gallons annually and to extend the contract through the year 2021. The minimum annual purchase commitments for all interconnection agreements for 2002 through 2006 and the aggregate total for the years 2007 through 2021, at current rates, are as follows:
| (in thousands) | |
2002 | $ | 2,670 |
2003 |
| 2,670 |
2004 |
| 2,677 |
2005 |
| 2,670 |
2006 |
| 2,670 |
2007 through 2021 |
| 35,997 |
| $ | 49,354 |
Expenses for purchased water were $2,752,000, $2,551,000 and $2,440,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
In 2001, Artesian Water entered into a 5-year agreement with Allied Painting, Inc. to paint all tanks that are scheduled to be painted in the next 5 years, including those scheduled for 2001. The expenditures committed to in the agreement for the years 2002-2005 are as follows:
| (in thousands) | |
2002 | $ | 249 |
2003 |
| 249 |
2004 |
| 249 |
2005 |
| 249 |
| $ | 996 |
Budgeted mandatory utility plant expenditures, due to planned governmental highway projects which require the relocation of Artesian Water's water service mains, expected to be incurred in 2002 through 2006 are as follows:
| (in thousands) | |
2002 | $ | 1,405 |
2003 |
| 1,700 |
2004 |
| 500 |
2005 |
| 1,200 |
2006 |
| 900 |
| $ | 5,705 |
The exact timing and extent of these relocation projects is controlled primarily by the Delaware Department of Transportation.
NOTE 12
GEOGRAPHIC CONCENTRATION OF CUSTOMERS
Artesian Water provides water utility service to customers within its established service territory in portions of Delaware, pursuant to rates filed with and approved by the PSC. As of December 31, 2001, Artesian Water was serving 66,173 customers.
NOTE 13
RATE PROCEEDINGS
On December 5, 2000, Artesian Water filed a petition with the PSC to implement new rates seeking increased revenues of approximately 22.57% or $6.4 million on an annualized basis. Effective February 3, 2001, Artesian Water was permitted, through temporary rates approved by the PSC, to collect an increase of $2.5 million on an annualized basis, subject to refund, until permanent rates were approved by the PSC.
On June 19, 2001, the PSC approved a settlement that Artesian Water entered into with Staff of the Delaware Public Service Commission ("Staff") and the Division of the Public Advocate ("DPA") on June 6, 2001. The parties' stipulated agreement provided for an increase in rates designed to provide the Company an additional $3.7 million in annualized revenues. The settlement, as approved, also allowed the Company a return on equity of 10.5%. The new rates approved by the PSC became effective July 1, 2001.
NOTE 14
NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE
Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share is based on the weighted average number of common shares outstanding and potentially dilutive effect of employee stock options.
The following table summarizes the shares used in computing basic and diluted net income per share:
| Years Ended December 31, | ||
| 2001 | 2000 | 1999 |
| (in thousands) | ||
Average common shares outstanding during the |
|
|
|
period for Basic computation | 2,026 | 2,007 | 1,961 |
Dilutive effect of employee stock options | 46 | 37 | 35 |
Average common shares outstanding during the |
|
|
|
period for Diluted computation | 2,072 | 2,044 | 1,996 |
Equity per common share was $16.87, $16.22 and $16.36 at December 31, 2001, 2000, and 1999, respectively. These amounts were computed by dividing stockholders' equity excluding preferred stock by the number of basic weighted average shares of common stock outstanding at the end of each year.
NOTE 15
Selected Consolidated Quarterly Financial Data (Unaudited)
The following table presents certain historical consolidated statements of operations data for each quarter for the fiscal years ended December 31, 2001 and 2000.
In thousands (except | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||
per share data) | 2001 | 2000 | 2001 | 2000 | 2001 | 2000 | 2001 | 2000 |
Operating revenues | $6,960 | $6,348 | $7,974 | $7,239 | $8,947 | $7,022 | $8,106 | $6,942 |
Operating income | $1,270 | $1,073 | $1,889 | $1,883 | $2,549 | $1,644 | $1,693 | $1,611 |
Net income applicable to common stock |
|
|
|
|
|
|
|
|
Income per common share | ||||||||
Basic | $ 0.13 | $ 0.12 | $ 0.44 | $ 0.49 | $ 0.71 | $ 0.31 | $ 0.34 | $ 0.27 |
Diluted | $ 0.12 | $ 0.11 | $ 0.43 | $ 0.48 | $ 0.70 | $ 0.30 | $ 0.33 | $ 0.26 |
NOTE 16
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Because the Company is regulated, goodwill that is recovered through ratemaking will continue to be amortized. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that is acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized as they were prior to the adoption of Statement 142. Our adoption of this statement will not have a material impact on our financial condition or results of operations.
In August 2001, the FASB issued statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Statement No. 143 requires recognition of a liability at fair value and an increase to the carrying value of the related asset for any retirement obligation. This amount would then be amortized over the life of the asset. The liability would be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows. This statement is effective June 2003. Our adoption of this statement will not have a material impact on our financial condition or results of operations.
In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 incorporated the disposal of a business segment into the framework of Statement No. 121. Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement also excludes goodwill that was included in Statement No. 121 scope and provided refinement to cash flow estimations for defining any applicable impairment. This Statement is effective January 1, 2002. Our adoption of this statement will not have a material impact on our financial condition or results of operations.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Artesian Resources Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Artesian Resources Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in Item 14 (a) of this Form 10-K. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above presents fairly, in all material respects, the financial position of Artesian Resources Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
February 8, 2002
Item 9. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.
None.
PART III
Item 10. - Directors and Executive Officers.
Name | Age | Position |
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Dian C. Taylor | 56 | Director; Chair of the Board since July 1993, and Chief Executive Officer and President of Artesian Resources Corporation and its Subsidiaries since September 1992. Ms. Taylor has been employed by the Company since August 1991. She was formerly a consultant to the Small Business Development Center at the University of Delaware from February 1991 to August 1991 and Owner and President of Achievement Resources Inc. from 1977 to 1991. Achievement Resources, Inc. specialized in strategic planning, marketing, entrepreneurial and human resources development consulting. Ms. Taylor was a marketing director for SMI, Inc. from 1982 to 1985. Ms. Taylor is the sister of Norman H. Taylor, Jr. and the aunt of John R. Eisenbrey, Jr. She serves on the Executive and Budget Committees. |
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Kenneth R. Biederman | 58 | Director; Professor of Finance at the College of Business and Economics of the University of Delaware since May 1996. Interim Dean of the College of Business and Economics of the University of Delaware from February 1999 to June 2000. Dean of the College of Business and Economics of the University of Delaware from 1990 to 1996. Director of Chase Manhattan Bank USA from 1993 to 1996. Formerly a financial and banking consultant from 1989 to 1990 and President of Gibraltar Bank from 1987 to 1989. Previously Chief Executive Officer and Chairman of the Board of West Chester Savings Bank; Economist and former Treasurer of the State of New Jersey and Staff Economist for the United States Senate Budget Committee. He serves on the Executive; Audit; Personnel, Compensation and Benefits; Budget; and Stock Option Committees. |
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John R. Eisenbrey, Jr. | 46 | Director; owner and President of Bear Industries, Inc., a privately held mechanical contracting firm specializing in fire protection, for more than fifteen years. Mr. Eisenbrey is the nephew of Dian C. Taylor and Norman H. Taylor, Jr. He serves on the Audit; Personnel, Compensation, and Benefits; and Stock Option Committees. |
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Norman H. Taylor | 62 | Director; Manager of Facilities and Vehicle Maintenance of Artesian Water Company, Inc. since July 1997. Mr. Taylor has been employed by Artesian Water Company, Inc. since 1965 and has held various operational and supervisory positions within the Company. Mr. Taylor is the brother of Dian C. Taylor and the uncle of John R. Eisenbrey, Jr. He serves on the Budget Committee. |
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William C. Wyer | 55 | Director; Managing Director of Wilmington Renaissance Corporation (formerly Wilmington 2000) since January 1998. Wilmington Renaissance Corporation is a private organization seeking to revitalize the City of Wilmington, Delaware. Mr. Wyer has served as a Director of GMAC Bank since August 2001. President of All Nation Life Insurance and Senior Vice President of Blue Cross/Blue Shield of Delaware from September 1995 to January 1998. Managing Director of Wilmington 2000 from May 1993 to September 1995. Formerly President of Wyer Group, Inc. from 1991 to 1993 and Commerce Enterprise Group from 1989 to 1991, both of which are management-consulting firms specializing in operations reviews designed to increase productivity, cut overhead and increase competitiveness, and President of the Delaware State Chamber of Commerce from 1978 to 1989. He serves on the Executive; Audit; Budget; Stock Option, and Personnel, Compensation and Benefits Committees. |
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Joseph A. DiNunzio | 39 | Senior Vice President and Corporate Secretary of Artesian Resources Corporation and its Subsidiaries since March 2000. Mr. DiNunzio previously served as Vice President and Secretary of Artesian Resources Corporation and its Subsidiaries since January 1995. Mr. DiNunzio has been employed by the Company since 1990 and has held various executive and management level positions within the Company. Prior to joining Artesian, Mr. DiNunzio was employed by Price Waterhouse Coopers LLP from 1984 to 1989. |
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Susan A. Frank | 40 | Vice President of Customer and Community Relations of Artesian Water Company, Inc. since November 2000. Ms. Frank served as Director of The Delaware State Housing Authority from 1993 to 2000. Ms. Frank was employed by U. S. Representative Thomas R. Carper from 1985 to 1992. |
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Bruce P. Kraeuter | 52 | Vice President of Engineering and Planning of Artesian Water Company, Inc., Mr. Kraeuter has served as an officer since March 1995. Mr. Kraeuter has been employed by the Company since July 1989 and has held various executive and operational positions within the Company. Mr. Kraeuter served as Senior Engineer with the Water Resources Agency for New Castle County, Delaware from 1974 to 1989. |
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John J. Schreppler, II | 45 | Vice President, Assistant Secretary and General Counsel of Artesian Resources Corporation and Artesian Water Company, Inc. since July 2000. He previously practiced law in Wilmington, Delaware as John J. Schreppler, II P.A. from February 1999; and before that as a partner in The Bayard Firm from 1988 to 1999. |
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David B. Spacht | 42 | Vice President, Chief Financial Officer and Treasurer of Artesian Resources Corporation and Subsidiaries since January 1995. The Company has employed Mr. Spacht since 1981and he has held various executive and management level positions within the Company. |
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John M. Thaeder | 43 | Vice President of Planning and Distribution of Artesian Water Company, Inc. since February 1998. Prior to joining the Company, Mr. Thaeder was employed by Hydro Group, Inc. from 1996 to 1998 as Southeastern District Manager of Sales and Operations from Maryland to Florida. During 1995 and 1996, Mr. Thaeder was Hydro Group's Sales Manager of the Northeast Division with sales responsibilities from Maine to Florida. From 1988 to 1995, he served as District Manager of the Layne Well and Pump Division of Hydro Group. |
In accordance with the provisions of the Company's By-laws, the Board is divided into three classes. Members of each class serve for three years and one class is elected each year to serve a term until his or her successor shall have been elected and qualified or until earlier resignation or removal.
The executive officers are elected or approved by our Board or our appropriate subsidiary to serve until his or her successor is appointed or shall have been qualified or until earlier death, resignation or removal.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, directors, officers and certain beneficial owners of the Company's equity securities are required to file reports of their transactions in the Company's equity securities with the Securities and Exchange Commission on specified due dates. In 2001, reports of transactions by all directors, officers and such beneficial holders were timely filed, with the exception of a late filed Form 4 for Kenneth Biederman, reporting the sale of 800 shares of the Company's Class A Common Stock. In making this statement, the Company has relied on the written representations of its directors, officers and five percent stockholders and copies of the reports that they filed with the Securities and Exchange Commission.
Item 11. - Executive Compensation.
The following table sets forth a summary of the compensation for the three most recent fiscal years awarded or paid to or earned by the Chief Executive Officer and the next five highest paid executive officers whose annual salaries and bonuses exceeded $100,000:
Summary Compensation Table | ||||||||||||
Annual | Long Term Compensation | |||||||||||
Compensation | ||||||||||||
Number of |
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Other | ||||||||||||
Name and Principal | Annual | |||||||||||
Position | Year | Salary | Bonus | Compensation | ||||||||
Dian C. Taylor | 2001 | $ | 204,615 | $ | 75,6651 | $ | 29,5543 | 8,000 | $ | 16,6874 |
Director, Chair, | 2000 | $ | 193,270 | $ | 45,9472 | $ | 18,5403 | 3,000 | $ | 17,4924 |
CEO & President | 1999 | $ | 175,000 | $ | 2,758 | $ | 14,2623 | 8,000 | $ | 15,6394 |
Joseph A. DiNunzio | 2001 | $ | 142,692 | $ | 49,1151 | $ | 1,313 | 5,000 | $ | 13,2114 |
Senior Vice President & | 2000 | $ | 133,270 | $ | 20,6282 | $ | 671 | 3,000 | $ | 12,0034 |
Corporate Secretary | 1999 | $ | 115,000 | $ | 3,505 | $ | 570 | 2,500 | $ | 10,3584 |
David B. Spacht | 2001 | $ | 131,250 | $ | 35,2361 | $ | 959 | 3,000 | $ | 10,1344 |
Vice President, | 2000 | $ | 125,962 | $ | 18,0462 | $ | 1,071 | 3,000 | $ | 8,8274 |
Chief Financial Officer | 1999 | $ | 115,000 | $ | 2,725 | $ | 1,668 | 2,500 | $ | 8,0604 |
& Treasurer | ||||||||||
Bruce P. Kraeuter | 2001 | $ | 116,106 | $ | 35,4241 | $ | 1,980 | 3,000 | $ | 12,3934 |
Vice President of | 2000 | $ | 112,808 | $ | 10,2722 | $ | 1,507 | 3,000 | $ | 10,4694 |
Engineering & Planning | 1999 | $ | 94,000 | $ | 2,785 | $ | 1,220 | 2,500 | $ | 8,5524 |
John M. Thaeder | 2001 | $ | 116,106 | $ | 33,7351 | $ | 1,807 | 3,000 | $ | 6,7384 |
Vice President of | 2000 | $ | 106,538 | $ | 9,8392 | $ | 2,193 | 3,000 | $ | 5,6253 |
Planning & Distribution | 1999 | $ | 91,385 | $ | 2,662 | $ | 1,421 | 2,500 | 2,4023 | |
John J. Schreppler, II | 2001 | $ | 121,154 | $ | 32,1131 | 3,000 | ||||
Vice President, Assistant | 2000 | $ | 53,232 | $ | 155 | |||||
Secretary & General | ||||||||||
Counsel |
(1) | Includes the realized value of the stock awards and cash bonuses approved by the Personnel, Compensation and Benefits Committee on October 1, 2001 under the Company's Cash and Stock Bonus Compensation Plan to Ms. Taylor and Messrs. DiNunzio, Spacht, Kraeuter, Thaeder and Schreppler on October 1, 2001. Ms. Taylor received 1,200 shares of Class A Stock and $18,580 in cash. Mr. DiNunzio received 750 shares of Class A Stock and $14,005 in cash. Mr. Spacht received 500 shares of Class A Stock and $8,829 in cash. Mr. Kraeuter received 500 shares of Class A Stock and $9,004 in cash. Mr. Thaeder received 500 shares of Class A Stock and $9,004 in cash. Mr. Schreppler received 500 shares of Class A Stock and $8,566 in cash. The cash portion of the bonus was issued to cover the individual tax liability associated with the stock bonus issued. The fair market value of the Class A Stock issued (and included in the table above) was $26.25 per share based on the closing price on the Nasdaq National Market on the date of the award. |
(2) | Includes the realized value of the stock awards and cash bonuses approved by the Personnel, Compensation and Benefits Committee on October 1, 2001 under the Company's Cash and Stock Bonus Compensation Plan to Ms. Taylor and Messrs. DiNunzio, Spacht, Kraeuter, and Thaeder on October 1, 2001. Ms. Taylor received 1,000 shares of Class A Stock and $20,855 in cash. Mr. DiNunzio received 500 shares of Class A Stock and $9,424 in cash. Mr. Spacht received 200 shares of Class A Stock and $2,159 in cash. Mr. Kraeuter received 200 shares of Class A Stock and $2,859 in cash. Mr. Thaeder received 200 shares of Class A Stock and $2,438 in cash. The cash portion of the bonus was issued to cover the individual tax liability associated with the stock bonus issued. The fair market value of the Class A Stock issued (and included in the table above) was $22.125 per share based on the closing price on the Nasdaq National Market on the date of the award. |
(3) | Includes $19,300 in 2001, $11,200 in 2000 and $12,650 in 1999 received as compensation for attendance at meetings of the Board and its committees. In 2001 and 2000, Ms. Taylor received $8,958 and $5,764, respectively, in medical expense reimbursements from the Company's Officer's Medical Reimbursement Plan. |
(4) | The Company contributes two percent of an eligible employee's gross earnings to the 401(k) Deferred Compensation Retirement Plan (401(k) Plan). In addition, the Company matches fifty percent of the first six percent of the employee's gross earnings, that the employee contributes to the 401(k). The amounts disclosed in this column include our contributions under the 401(k) Plan for the fiscal year 2001-Ms. Taylor, $8,793, Mr. DiNunzio, $6,325, Mr. Spacht $2,533, Mr. Kraeuter $6,788, Mr. Thaeder $6,738, for the fiscal year 2000-Ms. Taylor $9,755, Mr. DiNunzio $6,670, Mr. Spacht $2,522, Mr. Kraeuter $5, 951, Mr. Thaeder $5,625; and for the fiscal year 1999-Ms. Taylor $8,634, Mr. DiNunzio $5,753, Mr. Spacht, $2,303, Mr. Kraeuter $4,786 and Mr. Thaeder $2,402. In addition, effective October 1, 1994, the Company established a Supplemental 401(k) Retirement Plan (the "Supplemental Plan"). All employees hired before April 26, 1994 and under the age of sixty at that date are eligible for the Supplemen tal Plan. Employees over the age of sixty waived participation in the plan in order to receive Company paid medical, dental and life insurance benefits upon retirement. The Company will not provide such benefits to any other current or future employees. The amounts disclosed in this column also include our contributions under the Supplemental Plan for the fiscal year 2001-Ms. Taylor $7,894, Mr. DiNunzio $6,886, Mr. Spacht $7,600, Mr. Kraeuter $5,605; for the fiscal year 2000-Ms. Taylor $7,736, Mr. DiNunzio $5,336, Mr. Spacht $6,305, Mr. Kraeuter $4,518; and for the fiscal year 1999-Ms. Taylor $7,006, Mr. DiNunzio $4,606, Mr. Spacht $5,757 and Mr. Kraeuter $3,766. |
Option Grants in Last Fiscal Year | |||||||
Potential Realizable Value at | |||||||
Assumed Annual Rates of | |||||||
Stock Price Appreciation for | |||||||
Individual Grants | Option Term(1) | ||||||
Name/Number of | % of Total | Market | Exercise | Expiration | 0% ($) | 5% ($) | 10% ($) |
Securities | Options | or | Date | ||||
Options | Employees | Date of | Price per | ||||
Granted | in Fiscal Year | Grant | Share | ||||
Dian C. Taylor | |||||||
3,0002 | 10.6% | $24.40 | $21.96 | 5/30/11 | $ 7,320 | $53,355 | $123,982 |
5,0003 | 17.6% | 24.40 | 26.84 | 5/30/06 | (12,200) | 21,506 | 62,282 |
Joseph A. DiNunzio | |||||||
5,0003 | 17.6% | $24.40 | $24.40 | 5/30/11 | $76,725 | $194,437 | |
David B. Spacht | |||||||
3,0003 | 10.6% | $24.40 | $24.40 | 5/30/12 | $46,035 | $116,662 | |
Bruce P. Kraeuter | |||||||
3,0003 | 10.6% | $24.40 | $24.40 | 5/30/11 | $46,035 | $116,662 | |
John M. Thaeder | |||||||
3,0003 | 10.6% | $24.40 | $24.40 | 5/30/11 | $46,035 | $116,662 | |
John J. Schreppler | |||||||
3,0003 | 10.6% | $24.40 | $24.40 | 5/30/11 | $46,035 | $116,662 | |
(1) | Amounts represent the hypothetical gains that could be achieved from the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of zero percent (0%), five percent (5%) and ten percent (10%) compounded annually from the date the respective options were granted to their expiration date based upon the grant price. |
(2) | Option granted for Class A Stock under the 1992 Non-Qualified Stock Option Plan. These grants vest in six months following the date of grant. |
(3) | Option granted for Class A Stock under the Incentive Stock Option Plan. These grants vest annually in five equal installments from the date of grant. |
The following table provides certain information concerning option exercises during 2001 by the Executive Officers named in the Summary Compensation Table and year-end option values:
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values | ||||
Number of Securities | Value of Unexercised | |||
Underlying Unexercised | In-the Money | |||
Shares |
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Name | Exercise (#) | Realized | Exercisable1/Unexercisable(1) | Exercisable/Unexercisable(2) |
Dian C. Taylor | --- | --- | 22,000/8,000 | $280,034/$44,020 |
Joseph A. DiNunzio | --- | --- | 12,600/8,900 | $190,630/$66,366 |
David B. Spacht | 2,602 | $30,980 | 8,352/6,900 | $116,005/$53,286 |
Bruce P. Kraeuter | --- | --- | 9,100/6,900 | $127,533/$53,286 |
John M. Thaeder | --- | --- | 3,600/6,900 | $ 42,253/$53,286 |
John J. Schreppler | --- | --- | 0/3,000 | $ 0/$19,620 |
(1) | All securities represent options to purchase shares of the Class A Stock. |
(2) | The value of unexercised in-the-money options is calculated based on the closing price of the Class A Stock on the Nasdaq National Market on the date of grant of the option. |
Outside directors receive an annual retainer fee of $5,000 paid in advance. Each director receives $900 for each Board meeting attended, $400 for each committee meeting attended on the day of a regular board meeting and $800 for each committee meeting attended on any other day. The chair of each committee, who is also an outside director, receives an annual retainer of $500.
The Company has an Officer's Medical Reimbursement Plan that reimburses officers for certain medical expenses not covered under the Company's medical insurance plan.
The Company has a Cash and Stock Bonus Compensation Plan for officers. The purpose of this plan is to compensate the officers of the Company and Artesian Water, as appointed by the Board of Directors, for their contributions to the long-term growth and prosperity of the Company in the form of cash or shares of the Class A Stock of the Company. Compensation in the form of a bonus of the Class A Stock of the Company paid to such officers also serves to increase such officers' proprietary interest in the Company.
Item 12. - Security Ownership of Directors, Executive Officers and Certain Other Beneficial Owners.
The following table sets forth the beneficial ownership of the equity securities of the Company for each director and nominee for director, each executive officer named in the Summary Compensation Table and each beneficial owner of more than five percent (5%) of the outstanding shares of any class of the Company's voting securities and all directors and executive officers, based in each case on information furnished to the Company.
Beneficial Ownership(1) | |||||||
| Class A Non-Voting | Class B Common | 7% Cumulative Prior Preferred Stock | ||||
| shares | percent(2) | shares | percent(2) | shares | percent(2) | |
Dian C. Taylor (3) |
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Kenneth R. Biederman(3) | 25,500 | 1.5% | --- | --- | --- | --- | |
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John R. Eisenbrey, Jr.(3)(4) |
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Norman H. Taylor, Jr.(3) (5) |
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William C. Wyer | 24,000 | 1.5% | --- | --- | --- | --- | |
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Joseph A. DiNunzio(3) (6) | 15,621 | --- | 46 | --- | --- | --- | |
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Bruce P. Kraeuter(3) | 13,984 | --- | --- | --- | --- | --- | |
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David B. Spacht(3) | 9,294 | --- | 84 | --- | 31 | --- | |
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John J. Schreppler, II | 500 | --- | --- | --- | --- | --- | |
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John M. Thaeder(3) | 6,334 | --- | 606 | --- | --- | --- | |
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Hilda Taylor |
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Louisa Taylor Welcher (7) |
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Directors and Executive Officers as a Group (11 Individuals)(8) |
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(1) | The nature of ownership consists of sole voting and investment power unless otherwise indicated. The amount also includes all shares issuable to such person or group upon the exercise of options held by such person or group to the extent such options are exercisable within 60 days after March 1, 2002. |
(2) | The percentage of the total number of shares of the class outstanding is shown where that percentage is one percent or greater. Percentages for each person are based on the aggregate number of shares of the applicable class outstanding as of March 1, 2002, and all shares issuable to such person upon the exercise of options held by such person, to the extent such options are exercisable within 60 days of that date. |
(3) | Includes options to purchase shares of the Class A Stock as follows: Ms. Taylor (22,000 shares); Mr. Biederman (18,000 shares); Mr. Eisenbrey (4,729 shares); Mr. Taylor (3,600 shares); Mr. Wyer (18,000 shares); Mr. DiNunzio (12,600 shares); Mr. Kraeuter (9,100 shares); Mr. Spacht (8,352 shares); and Mr. Thaeder (3,600 shares). |
(4) | Includes 347 shares of the Class B Stock owned by a trust, of which Mr. Eisenbrey, Jr. is a trustee and has a beneficial ownership interest, and 196 shares of the Class B Stock held in custodial accounts for Mr. Eisenbrey, Jr.'s daughters. |
(5) | Includes 718 shares of the Class B Stock and 173 shares of the Class A Stock owned by Mr. Taylor's wife for which Mr. Taylor disclaims beneficial ownership. |
(6) | Includes 12 shares of the Class A Stock held in custodial accounts for Mr. DiNunzio's sons. |
(7) | Includes 64 shares of the Class B Stock held jointly by Ms. Welcher's husband and son, 730 shares of the Class B Stock held by Ms. Welcher's sons, 26 shares of the Company's 7%, Prior Preferred Stock, per share, held by Ms. Welcher's sons, 137 shares of the Class A Stock held by Ms. Welcher's husband and 690 shares of the Class A Stock held by Ms. Welcher's sons, for which Ms. Welcher disclaims beneficial ownership. |
(8) | Includes options to purchase 99,981 shares of the Class A Stock. |
Item 13. - Transactions with Management and Affiliated Interests
The Company's office building and shop complex are leased by Artesian Water Company, Inc. (Artesian Water), the Company's regulated water utility subsidiary, at an annual average rental of approximately$180,000 from White Clay Realty, a partnership which includes, among others, Dian C. Taylor, Louisa Welcher (sister of Dian C. Taylor and Norman H. Taylor, Jr.), the estate of Ellis D. Taylor (uncle of Dian C. Taylor and Norman H. Taylor, Jr.) and a trust in which John R. Eisenbrey, Jr. is one of the trustees and in which he has a beneficial interest. The initial term of the lease expired in 1997. Artesian Water exercised its option for the first of three five-year renewal periods under the lease, extending the term through 2002. The lease may be terminated at any time by Artesian Water through the purchase of the leased facilities for (1) an amount equal to the sum of any mortgage on such fa cilities and any accrued rental to date or (2) fair market value of the facilities, whichever is higher.
In 2001, Artesian Water purchased for $875,000, certain parcels of land for water production wells from Glendale Enterprises Limited, a company wholly-owned by the estate of Ellis D. Taylor.
On April 29, 1999, the Company entered into an agreement with Ellis D. Taylor, who has since passed away, and his spouse, Helena C. Taylor (the "Taylor's"), to repurchase 126,353 shares of Class B Stock and 24,165 shares of Class A Stock (the "Taylor Stock") owned by the Taylor's. On May 4, 1999, the Company executed a promissory note (the "Note") in the principal amount of $4,450,000 representing the purchase price of the Taylor Stock. Commencing on June 30, 1999, the Note is payable quarterly, on a calendar basis, over a four-year period. The outstanding balance on the Note bears interest in an amount based on the quarterly dividend the Taylor's would have received on the Stock transferred to the Company but not yet paid for by the Company. In addition, the principal installment is adjusted on a quarterly basis to reflect changes in the book value per common share of the Company as reported in its most recent quarterly financial statement distr ibuted to stockholders prior to the quarterly payment. For the year ended December 31, 2001, principal payments (including book value adjustments) totaled $1,182,000 and interest payments totaled $78,000. At December 31, 2001, the Company had $1,391,000 outstanding under the notes.
Item 14. - Exhibits, Financial Statements Schedules, and Reports on Form 8-K.
Page(s)* | ||
The following documents are filed as part of this report: | ||
(1) Financial Statements: | ||
Consolidated Balance Sheets at December 31, 2001 and 2000 | 18 | |
Consolidated Statements of Operations for the three years ended December 31, 2001 | 19 | |
Consolidated Statements of Cash Flows for the three years ended December 31, 2001 | 20 | |
Consolidated Statements of Changes in Stockholders' Equity for the three years | ||
ended December 31, 2001 | 21-23 | |
Notes to Consolidated Financial Statements | 24-38 | |
Report of Independent Accountants | 39 | |
(2) Exhibits: The Exhibits listed in the accompanying Index to Exhibits are | ||
filed as part of, or incorporated by reference into, this Form 10-K Annual Report. | 50-54 | |
(3) Financial Statement Schedule: | ||
Schedule II: Valuation and Qualifying Accounts | 54 | |
* Page number shown refers to page number in this Report on Form 10-K. | ||
All other schedules are omitted because they are not applicable or required. |
SIGNATURES | ||
ARTESIAN RESOURCES CORPORATION | ||
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has | ||
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized . | ||
Date: 3/26/02 | By: David B. Spacht /s/ | |
David B. Spacht, Vice President, Chief | ||
Financial Officer and Treasurer | ||
| ||
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this | ||
report to be signed on its behalf by the undersigned hereunto duly authorized. | ||
Each person in so signing also makes, constitutes and appoints Dian C. Taylor, Chairman, President, and | ||
Chief Executive Officer of Artesian Resources Corporation, and David B. Spacht, Vice President, Chief | ||
Financial Officer and Treasurer of Artesian Resources Corporation, and each of them acting alone, as his | ||
or her true and lawful attorneys-in-fact, in his or her name, place and stead, to execute and cause to be | ||
filed with the Securities and Exchange Commission any or all amendments to this report. | ||
| ||
Signature | Title | Date |
Principal Executive Officer: | ||
Dian C. Taylor /s/ | ||
Dian C. Taylor | President and Chief Executive Officer | 3/26/02 |
Principal Financial and Accounting Officer: | ||
David B. Spacht /s/ | ||
David B. Spacht | Vice President, Chief Financial Officer | 3/26/02 |
and Treasurer | ||
Directors: | ||
Dian C. Taylor /s/ | ||
Dian C. Taylor | Director | 3/26/02 |
Norman H. Taylor, Jr. /s/ | ||
Norman H. Taylor, Jr. | Director | 3/26/02 |
Kenneth R. Biederman /s/ | ||
Kenneth R. Biederman | Director | 3/26/02 |
William C. Wyer /s/ | ||
William C. Wyer | Director | 3/26/02 |
John R. Eisenbrey, Jr. /s/ | ||
John R. Eisenbrey, Jr. | Director | 3/26/02 |
ARTESIAN RESOURCES CORPORATION | |
FORM 10-K ANNUAL REPORT | |
YEAR ENDED DECEMBER 31, 2001 | |
INDEX TO EXHIBITS | |
Exhibit Number | Description |
3.1 | Restated Certificate of Incorporation of the Company effective May 26, 1995 incorporated |
by reference to Exhibit 3 filed with the Company Form 10-Q for the | |
quarter ended June 30, 1995. | |
3.3 | By-Laws of the Company effective April 27, 1993 incorporated by reference filed with |
the Artesian Resources Corporation Form 8-K filed April 27, 1993. | |
4.1 | Thirteenth and Fourteenth Indentures dated as of June 17, 1997 between the Artesian Water |
Company, Inc., subsidiary of the Company , and the Wilmington Trust Company, as Trustee. | |
Incorporated by reference to the exhibits filed with the Company's Form 10-Q for the | |
quarter ended June 30, 1997. | |
4.2 | Twelfth Supplemental Indenture dated as of December 5, 1995 between the Artesian Water |
Company, Inc. subsidiary of the Company and Wilmington Trust Company, as Trustee. | |
Incorporated by reference to the exhibit filed with the Company's Annual Report | |
on Form 10-K for the year ended December 31, 1995. | |
4.3 | Eleventh Supplemental Indenture dated as of February 16, 1993 between Artesian Water |
Company, Inc., subsidiary of the Company and Principal Mutual Life Insurance Company. | |
Incorporated by reference to the exhibit filed with the Company's Annual Report | |
on Form 10-K for the year ended December 31, 1992. | |
4.4 | Tenth Supplemental Indenture dated as of April 1, 1989 between Artesian Water Company, |
Inc., subsidiary of the Company, and Wilmington Trust Company, as Trustee. Incorporated | |
by reference to the exhibit filed with the Company's Registration Statement on Form 10 | |
filed April 30, 1990 and as amended by Form 8 filed on June 19, 1990. | |
10.1 | Amended and Restated Artesian Resources Corporation 1992 Non-Qualified Stock Option |
Plan, as amended.* ** | |
10.2 | Lease dated as of March 1, 1972 between White Clay Realty Company and Artesian Water |
Company, Inc. incorporated by reference to the exhibit filed with the Company's | |
Registration Statement on Form 10 filed April 30, 1990 and as amended by Form 8 | |
filed on June 19, 1990. | |
10.3 | Artesian Resources Corporation Cash and Stock Bonus Compensation Plan for Officers |
incorporated by reference to the exhibit filed with the Company's Form 10-K for | |
the year ended December 31, 1993.** | |
10.4 | Artesian Resources Corporation Incentive Stock Option Plan incorporated by reference to the |
exhibit filed with the Company's Annual Report on Form 10-K for the year ended | |
December 31, 1995.** | |
10.5 | Share Repurchase Agreement dated April 28, 1999 and related Promissory Note dated |
May 4, 1999. | |
10.6 | "Officer's Medical Reimbursement Plan dated May 27, 1992.* ** |
11 | Statement Re: Computation of Net Income per Class A and Class B Common Shares.* |
21 | Subsidiaries of the Company as of December 31, 2001.* |
23.1 | The consent of KPMG LLP.* |
24.1 | Power of Attorney (included on signature page).* |
____________________________ | |
* | Filed herewith. |
** | Compensation plan or arrangement required to be filed or incorporated as an exhibit. |
EXHIBIT 10.6
OFFICER'S MEDICAL REIMBURSEMENT PLAN
May 27, 1992
It is anticipated that the adoption of this accident and medical reimbursement plan (the "Plan") by Artesian Resources Corporation and its subsidiaries (the "Company") will promote the well-being of the Company and its Officers by assisting its Officers in defraying their medical expenses. The Plan is adopted by the Company in consideration of services rendered to it by the Participants, as defined at (1)(c) below; but payments made by the Company under this Plan are not to be taken into account in computing the compensation which Participants shall otherwise be entitled to receive for their services to the Company.
(1) | As used in this Plan, the following words and phrases shall have the following meanings respectively: | |
| (a) | "Medical and Dental Care" means- |
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| (i) the diagnosis, care, mitigation, treatment, or prevention of disease, or procedures performed for the purpose of affecting any structure or function of the body, or |
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| (ii) transportation primarily for and essential to Medical and Dental Care referred to in (i) above, or |
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| (iii) medicine and drugs primarily for aid essential to Medical and Dental Care and as further described in Treasury Regulation, Section 1.213-1(e)(2), this definition to be construed in accordance with Section 213(d)(1) of the Internal Revenue Code. |
| (b) | "Medical Expenses" means and includes any and all expenses incurred during a calendar year by a Participant or Participant's spouse for Medical and Dental Care (including amounts paid for accident and health insurance), regardless of whether the expenses were incurred in connection with the Participant's employment with the Company. |
| (c) | "Participants" shall be all persons appointed as Officers of the Company by the Board of Directors of the Company. |
| (d) | The "Maximum Amount" of reimbursement for each calendar year is ten percent of a Participant's base annual salary for such year provided, however, that the foregoing amount is predicated upon full employment of fifty-two weeks as an Officer with the Company during the calendar year and shall be reduced proportionately for each day the Participant in question is not employed as an Officer of the Company during the calendar year. |
| (e) | "Discretion" means sole, absolute and uncontrolled discretion, not limited by any restrictions of consistency. |
(2) | The Company shall, upon request by a Participant made at any time not later than fifteen days following the close of each calendar year, pay all or part of the Medical Expenses of the Participant incurred during such year, or reimburse the Participant for such Medical Expenses; provided, however, that- | |
| (a) | Such payments may be made directly to a Participant or paid to a Participant indirectly (for example, but not by way of limitation, by paying the bill of a doctor, hospital or insurer so as to discharge, in whole or in part, a liability of the Participant), whichever the Participant shall request. |
| (b) | Such payments in respect of a calendar year to or in respect of a Participant shall be limited in the aggregate to the Maximum Amount. In the event that for any reason (whether termination of employment, mathematical error or otherwise) the aggregate payments made for a calendar year to or for the benefit of a particular Participant exceed the Maximum Amount, such excess shall be a debt owing by the Participant to the Company and may be collected by the Company by set-off, withholding or any other method. |
| (c) | Payments will be made upon proof of the Medical Expenses in question, such proof to be in such form as the Board of Directors shall in its Discretion determine and decide. It is not necessary, however, that the Medical Expenses be paid by the Participant or the Participant's spouse prior to reimbursement under this Plan, but merely that, if not yet paid, there exists an obligation to pay them. |
| (d) | Premiums paid by the Company under any group accident or health insurance policy which may be maintained by the Company covering or for the benefit of all or some of its employees shall not to any extent be regarded as payments made under the Plan, even if such employees include one or more Participants. |
(3) | The Company shall promptly notify all of the Participants of the existence of the Plan and shall exhibit to them, or furnish them with, a copy of the Plan; and their rights under the Plan shall be enforceable against the Company. | |
(4) | This Plan is not intended to be, nor shall be construed as constituting, a contract or other arrangement between the Company and any Participant to the effect that the Participant will be employed for any specific period of time. The Plan may be amended, suspended or terminated at any time by the Company, but such action shall not adversely affect the rights of any Participant with respect to any request already made by him under paragraph 2 above for Medical Expenses previously incurred. | |
(5) | The Board of Directors may construe any ambiguous provisions for the Plan, correct any defect, supply any omission, or reconcile any inconsistency, in such manner and to such extent as the Board in its Discretion may determine; and any such action of the Board shall be binding and conclusive upon all Participants. | |
EXHIBIT 11
ARTESIAN RESOURCES CORPORATION | ||||||
COMPUTATION OF NET INCOME PER COMMON SHARE | ||||||
2001 | 2000 | 1999 | ||||
Earnings | ||||||
Income Applicable to Common Stock Shares, | $ | 3,270,342 | $ | 2,389,731 | $ | 2,908,939 |
to Class A non-voting and Class B Common Stock | ||||||
Weighted average number of shares outstanding | ||||||
Basic | 2,026,276 | 2,007,190 | 1,960,542 | |||
Diluted | 2,071,543 | 2,043,965 | 1,996,141 | |||
Net Income per Common Share, to Class A | ||||||
non-voting and Class B Common Stock | ||||||
Basic | $ | 1.61 | $ | 1.19 | $ | 1.48 |
Diluted | $ | 1.58 | $ | 1.17 | $ | 1.46 |
EXHIBIT 21
ARTESIAN RESOURCES CORPORATION AND SUBSIDIARY COMPANIES
Subsidiaries of Registrant
The following list includes the Registrant and all of its subsidiaries as of December 31, 2001. The voting equity interests of each company shown is owned, to the extent indicated by the percentage, the company immediately above, which is not intended to the same degree. All subsidiaries of the Registrant appearing in the following table are included in the consolidated financial statements of the Registrant and its subsidiaries.
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| Percentage of Voting |
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Artesian Resources Corporation | Delaware | 100 |
Artesian Water Company, Inc. | Delaware | 100 |
Artesian Water Company of Pennsylvania Inc. | Pennsylvania | 100 |
Artesian Development Corporation | Delaware | 100 |
Artesian Wastewater Management, Inc. | Delaware | 100 |
AquaStructure Delaware, LLC | Delaware | 33 1/3 |
ARTESIAN RESOURCES CORPORATION
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
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For the Year Ended December 31, 2001 |
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For the Year Ended December 31, 2000 |
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For the Year Ended December 31, 1999 |
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