UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from June 30, 1996 To September 30, 1996
Commission file number 0-18516
Artesian Resources Corporation
(Exact name of registrant as specified in its charter)
Delaware 51-0002090
State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization
664 Churchmans Road, Newark, Delaware 19702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 453-6900
Former name, former address, and former fiscal year,
if changed since last report No change
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.
Yes X No
As of October 18 , 1996, 1,242,192 shares and 502,668 shares of Class
A Non-Voting Common stock and Class B Voting Common stock, respectively,
were outstanding.
Page 1 of 12
ARTESIAN RESOURCES CORPORATION
INDEX TO FORM 10-Q
Part I - Financial Information:Page(s)
Item 1 - Financial Statements
Consolidated Balance Sheet -
September 30, 1996 and December 31, 1995 3
Consolidated Statement of Income for
the quarters ended September 30, 1996 and 1995 4
Consolidated Statement of Income for
the nine months ended September 30, 1996 and 1995 5
Consolidated Statement of Retained Earnings for
the nine months ended September 30, 1996 and 1995 5
Consolidated Statement of Cash Flows for the
nine months ended September 30, 1996 and 1995 6
Notes to the Consolidated Financial Statements 7-9
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition 10-11
Part II - Other Information:
Item 6 - Exhibits and Reports on Form 8-K 12
Exhibit 11 - Computation of Earnings per Common Share 12
Signatures 12
Part I - Financial Information
Item I - Financial Statements
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET
Unaudited September 30, December 31,
1996 1995
ASSETS
Utility plant, at orig. cost less
accumulated depreciation $86,020,168 $83,160,422
CURRENT ASSETS
Cash and cash equivalents 288,500 149,704
Accounts receivable 1,990,076 2,133,217
Unbilled operating revenue 1,625,000 1,332,000
Materials and supplies - FIFO 690,878 606,674
Prepaid property taxes 735,420 462,451
Prepaid expenses and other 308,800 236,860
5,638,674 4,920,906
OTHER ASSETS
Non-utility property (less accumulated
depreciation 1996-$1,425,067;
1995-$2,108,835) 943,950 2,952,676
Deferred income taxes 1,651,212 1,764,231
Other deferred assets 1,170,289 1,328,218
3,765,451 6,045,125
REGULATORY ASSETS 2,612,500 2,714,713
$98,036,792 $96,841,166
LIABILITIES AND CAPITAL
CAPITALIZATION
Common stock $ 1,744,812 $1,037,494
Additional paid-in capital 17,117,343 8,041,183
Retained earnings 6,693,886 6,317,222
Total common stockholders' equity 25,556,041 15,395,899
Preferred stock-mandatorily
redeemable 825,000 972,500
Preferred stock 271,700 271,700
Total preferred stock 1,096,700 1,244,200
Long-term debt, net of current
portion 17,292,553 17,558,300
43,945,294 34,198,399
CURRENT LIABILITIES
Notes payable 2,842,000 9,225,000
Current portion of long-term debt 5,343,286 7,345,154
Dividends payable 25,206
Accounts payable 1,396,167 2,735,119
Overdraft payable 904,089 669,023
State and federal income taxes 542,655 139,702
Deferred income taxes 165,946 166,241
Interest accrued 726,054 667,157
Customer deposits 358,684 321,811
Other 889,247 577,298
13,193,334 21,846,505
DEFERRED CREDITS AND OTHER LIABILITIES
Net advances for construction 21,190,553 21,492,568
Postretirement benefit obligation 1,758,337 1,772,960
Deferred investment tax credits 1,032,705 1,060,636
23,981,595 24,326,164
NET CONTRIBUTIONS IN AID OF CONSTRUCTION 16,916,569 16,470,098
$98,036,792 $96,841,166
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
For the Quarter
Ended September 30,
1996 1995
OPERATING REVENUES
Water sales $5,218,727 $5,562,422
Other utility operating revenue 75,230 44,423
Non-utility operating revenue (Note 3) 513,025
5,293,957 6,119,870
OPERATING EXPENSES
Utility operating expenses 2,987,421 2,931,150
Non-utility operating expenses (Note 3) 11,640 416,930
Related party expenses (Note 4) 61,360 61,021
Depreciation 541,617 584,803
Income taxes 316,202 161,407
Taxes other than income 366,748 357,275
Write down of rental building 790,225
4,284,988 5,302,811
OPERATING INCOME 1,008,969 817,059
ALLOWANCE FOR FUNDS USED
DURING CONSTRUCTION 46,455 97,756
OTHER EXPENSE (12,601) (18,182)
INCOME BEFORE INTEREST CHARGES 1,042,823 896,633
INTEREST CHARGES
Long-term debt 509,888 561,499
Short-term debt 38,150 135,673
Amortization of debt expense 5,630 6,607
Other 10,757 4,534
564,425 708,313
NET INCOME 478,398 188,320
DIVIDENDS ON PREFERRED STOCK 25,206 28,879
NET INCOME APPLICABLE
TO COMMON STOCK $ 453,192 $ 159,441
PER SHARE OF COMMON STOCK:
Net income $ 0.26 $ 0.15
Cash dividends $ 0.23 $ 0.15
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
For the Nine Months
Ended September 30,
1996 1995
OPERATING REVENUES
Water sales $15,364,103 $15,421,608
Other utility operating revenue 184,328 136,213
Non-utility operating revenue 79,948 1,454,914
15,628,379 17,012,735
OPERATING EXPENSES
Utility operating expenses 8,626,658 8,677,061
Non-utility operating expenses (Note 3) 63,261 1,184,455
Related party expenses (Note 4) 184,080 183,063
Depreciation 1,605,495 1,706,574
Income taxes 892,000 586,715
Taxes other than income 1,005,195 1,017,664
Write down of rental building 790,225
12,376,689 14,145,757
OPERATING INCOME 3,251,690 2,866,978
ALLOWANCE FOR FUNDS USED
DURING CONSTRUCTION 118,675 159,872
OTHER EXPENSE (71,923) (170,446)
INCOME BEFORE INTEREST CHARGES 3,298,442 2,856,404
INTEREST CHARGES
Long-term debt 1,570,012 1,689,432
Short-term debt 348,283 289,972
Amortization of debt expense 19,767 19,821
Other 22,929 12,921
1,960,991 2,012,146
NET INCOME 1,337,451 844,258
DIVIDENDS ON PREFERRED STOCK 79,292 90,310
NET INCOME APPLICABLE
TO COMMON STOCK $ 1,258,159 $ 753,948
PER SHARE OF COMMON STOCK:
Net income $ 0.90 $ 0.73
Cash dividends $ 0.67 $ 0.45
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Unaudited
For the Nine Months
Ended September 30,
1996 1995
BALANCE, beginning of period $6,317,222 $5,877,661
NET INCOME 1,337,451 844,258
7,654,673 6,721,919
DIVIDENDS 960,787 552,695
BALANCE, end of period $6,693,886 $6,169,224
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
For the Nine Months
Ended September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 1,337,451 $ 844,258
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,493,832 1,678,638
Allowance for funds used during
construction (118,675) (159,872)
Write-down on rental office building 790,225
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable 143,141 (339,847)
Unbilled operating revenue (293,000) (333,000)
Materials and supplies (84,204) (129,182)
State and federal income taxes payable 402,953 (150,542)
Prepaid property taxes (272,969) (261,123)
Deferred income taxes, net 84,793 476,875
Deferred debits 157,930 170,255
Prepaid expenses and other (71,940) (253,760)
Regulatory assets 102,213 (72,261)
Postretirement benefit obligation (14,623) (35,548)
Accounts payable (1,338,952) (1,124,451)
Interest accrued 58,897 (249,248)
Other and customer deposits, net 343,959 28,857
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,930,806 880,274
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (4,648,147) (8,994,852)
Proceeds from sale of assets 2,102,644 1,640
NET CASH USED IN INVESTING ACTIVITIES (2,545,503) (8,993,212)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under
line of credit agreement (6,383,000) 6,818,000
Net advances and contributions
in aid of construction 468,647 1,079,614
Proceeds from long-term debt 146,206
Repayment on term note (2,005,540)
Proceeds from issuance of common stock 9,365,932
Proceeds from common stock dividends reinvested
and stock options exercised 417,545 186,675
Dividends (935,580) (552,695)
Overdraft payable 235,066 769,926
Principal payments under capital
lease obligations (250,964) (215,080)
Principal payments under long-term
debt obligations (11,113) (55,002)
Retirement of preferred stock (147,500) (147,500)
NET CASH PROVIDED
BY FINANCING ACTIVITIES 753,493 8,030,144
NET INCREASE (DECREASE)IN CASH
AND CASH EQUIVALENTS 138,796 (82,794)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 149,704 229,673
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 288,500 $ 146,879
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 1,882,327 $ 2,241,573
Income taxes paid $ 418,037 $ 310,000
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General
The unaudited financial statements of Artesian Resources Corporation and
it wholly-owned subsidiaries ("the Company" or "Artesian Resources"),
including its principal operating company, Artesian Water Company, Inc.
("Artesian Water"), presented herein have been prepared in accordance with
the instructions to Form 10-Q and do not include all of the information and
note disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the financial statements and
notes thereto for the year ended December 31, 1995 included in the Company's
Annual Report on Form 10-K. The accompanying financial statements have not
been examined by independent accountants in accordance with generally accepted
auditing standards, but in the opinion of management such financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to fairly summarize the Company's financial position and results of
operations. The results of operations for the quarter and for the nine months
ended September 30, 1996 may not be indicative of the results that may be
expected for the year ending December 31, 1996.
Note 2 - Regulatory Assets
Certain expenses, which are recoverable through rates as permitted by the
State of Delaware Public Service Commission ("PSC"), are deferred and amortized
during future periods using various methods. Expenses related to rate
proceedings are amortized on a straight-line basis over three years. The post
retirement benefit obligation, which is being amortized over twenty years is
adjusted for the difference between the net periodic post retirement 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 customer reverse. Regulatory assets, net of amortization,
comprise:
eptember 30, 1996 December 31, 1995
Postretirement benefit obligation $1,758,337 $1,772,960
Deferred income taxes recoverable
in future rates 728,945 740,267
Expense of rate proceedings 125,218 201,486
$2,612,500 $2,714,713
Note 3 - Non-utility Operating Revenue and Expenses
Non-utility operating revenue consists of environmental testing
revenue received by Artesian Laboratories, Inc. (Artesian Laboratories or ALI)
and rental income received by Artesian Development, Corporation (Artesian
Development or ADC), and Artesian Resources Corporation (ARC) as follows:
For the Quarter Ended For the Nine Months
September 30, Ended September 30,
1996 1995 1996 1995
ALI $ 0 $439,204 $ 0 $1,235,332
ADC 73,821 79,948 219,582
Total $ 0 $513,025 $79,948 $1,454,914
Non-utility operating expenses are as follows:
ALI $ 0 $345,651 $ 0 $1,008,034
ADC 11,640 71,259 63,261 170,027
ARC 0 20 0 6,394
Total $11,640 $416,930 $63,261 $1,184,455
As described in notes 5 and 6, Artesian Development's rental office building
was sold and the Board of Directors of Artesian Resources authorized the
disposal of substantially all of the net assets of Artesian Laboratories.
Note 4 - Related Party Transactions
The office building and shop complex utilized by Artesian Water are
leased at an aggregate annual rental of $204,052 from a partnership, White
Clay Realty, in which certain of the Company's officers and directors are
partners. The lease expires in 1997, with provisions for renewals for three
five year periods thereafter. Management believes that the payments made to
White Clay Realty for the lease of its office building are generally comparable
to what Artesian Water would have to pay to unaffiliated parties for similar
facilities.
Artesian Water leases certain parcels of land for water production wells from
Glendale Enterprises Limited, a company wholly owned by Ellis D. Taylor,
Director and Chairman Emeritus of Artesian Resources, at an annual rental of
approximately $40,000. The initial term of the lease was for the ten years
ended September 30, 1995, and thereafter, renewal was automatic from year to
year unless 60 days written notice is given by either party before the end of
the year's lease. The annual rental is adjusted each year by the consumer
price index as of June 30 of the preceding year. Artesian Water has the right
to terminate this lease by giving 60 days written notice should the water
supply be exhausted or other conditions beyond the control of Artesian Water
materially and adversely affect its interest in the lease.
Expenses associated with related party transactions are as follows:
For the Quarter Ended For the Nine Months
September 31, Ended September 30,
1996 1995 1996 1995
White Clay Realty $51,013 $51,013 $153,039 $153,039
Glendale Enterprises 10,347 10,008 31,041 30,024
$61,360 $61,021 $184,080 $183,063
Note 5 - Disposal of Non-Utility Assets
In March 1996, the Company completed the sale to an unrelated third party, of
Artesian Development's rental office building and 4.27 acres of land resulting
in a loss of $790,000. The loss, which was recognized in the third quarter of
1995, reflects the difference between the net book value and the selling price,
and also includes $176,000 in expenses associated with completing the sale.
The proceeds from the sale were used to repay the mortgage on the property and
related closing costs.
Note 6 - Disposal of Non-Utility Business
In December 1995, the Board of Directors of Artesian Resources authorized the
disposal of substantially all of the net assets of Artesian Laboratories,
resulting in an estimated pre-tax loss of $128,000 recorded as an operating
expense in 1995. The loss reflects the difference between the projected sales
price and the net book value of substantially all the assets and liabilities
of the business, and also includes estimated operating losses of $137,000
through the anticipated disposal date and estimated additional expenses
associated with completing the sale. The sale of the net assets of Artesian
Laboratories is expected to be completed during the fourth quarter of 1996.
Note 7 - Issuance of Class A Non-Voting Common Stock
On May 24, 1996, Artesian Resources Corporation issued 675,000 shares of Class
A Non-Voting Common Stock at $15.00 per share. The net proceeds from the
issuance of approximately $9,400,000 were used to reduce short-term debt
incurred to finance investment in utility plant.
ITEM 2 ARTESIAN RESOURCES CORPORATION MANAGEMENT'S
DISCUSSION AND ANALYSIS FOR THE QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1996
Results of Operation
For the quarter ended September 30, 1996, Artesian Resources recorded net
income of $478,398 which represents a $290,078 increase over earnings of
$188,320 for the quarter ended September 30, 1995. For the nine months ended
September 30, 1996, Artesian Resources recorded net income of $1,337,451 which
represents a $493,193 increase over earnings of $844,258 for the nine months
ended September 30, 1995.The year-to-date increase is primarily due to the
prior year fixed asset write-down on Artesian Development Corporation's rental
office building of $790,225 before taxes and $521,549 after taxes, which was a
decrease to prior year earnings per share of $0.51. Artesian Water's water
sales revenues have decreased $58,000 as compared to 1995 water revenues due to
decreased customer consumption for the nine months ended September 30, 1996.
The decrease in consumption, primarily attributable to the wet weather
experienced in 1996 as compared to the dry conditions in 1995, more than offset
the revenue increases caused by an increase in the number of customers served
and increased rates. Earnings per share of $0.26 and $0.90 for the quarter and
nine months ended September 30, 1996, respectively, are affected by the
increase in the weighted average shares outstanding due to the issuance of
675,000 shares of Class A Non-Voting Common Stock (Class A Stock) on
May 24, 1996.
Utility operating expenses decreased $50,403 for the nine months ended
September 30, 1996 primarily due to the reduction in purchased water expense
of approximately $306,000. A portion of the decrease in purchased water
expense is a matter of timing due to contractual obligations to purchase water.
Off-setting this decrease is an increase to payroll expense of $207,000 due to
the addition of several new employees as well as pay increases. Utility
operating expenses increased $56,271 for the quarter ended September 30, 1996
due primarily to a 20% price increase on purchased water from a supplier with
which Artesian Water has contractual obligations to purchase water.
Non-utility revenues decreased by approximately $522,000 and $1,384,000 and
non-utility expenses decreased by $414,000 and $1,127,000, respectively, for
the quarter and nine months ended September 30, 1996 due to the write-off in
1995 of the net assets of Artesian Laboratories Inc. ("Artesian Laboratories")
and the sale of Artesian Development's rental office building at the end of the
first quarter. The write-off for Artesian Laboratories in 1995 included a
reserve approximating net operating losses expected through the disposal date.
The sale of the net assets of Artesian Laboratories is expected to be completed
during the fourth quarter of 1996.
Other income from the Allowance for Funds Used During Construction (AFUDC)
decreased $41,000 for the nine months ended September 30, 1996 due to a lower
level of company financed utility plant additions in the current year. Other
expense decreased $99,000 for the nine months ended September 30, 1996 as
compared to the same periods in 1995 due primarily to Artesian Water's
settlement of litigation in 1995 with a former employee and officer.
For the quarter ended September 30, 1996, interest expense on short-term
debt decreased $98,000 due to Artesian Water's decreased use of its $15
million available lines of credit as compared with the same period in 1995
as a result of the application of the proceeds from the public offering to
repay this debt. For the nine months ended September 30, 1996, interest
expense on short-term debt increased $58,000 due to Artesian Water's increased
usage, prior to completion of the public offering, of its lines of credit to
finance utility plant additions. Interest expense on long-term debt decreased
$52,000 and $119,000 for the quarter and nine months ended September 30, 1996
due to the repayment of Artesian Development's building mortgage in March 1996.
Liquidity and Capital Resources
The primary source of liquidity for the nine months ended September 30,
1996 is $9,366,000 from the issuance of common stock. On May 24, 1996
Artesian Resources issued 675,000 shares of Class A Stock at $15.00 per share.
The net proceeds from the issuance were contributed entirely to Artesian Water.
Artesian Water used the entire net proceeds to reduce the outstanding balances
on lines of credit. As of October 15, 1996, $2,700,000 is drawn on the $15
million available lines of credit. Artesian Development Corporation also
received $1,888,000, net of closing costs of $162,000, for the sale of the
rental office building on March 13, 1996. These funds were used to repay the
outstanding mortgage associated with the building. At September 30, 1996,
Artesian Resources had a working capital deficit of $7,555,000 attributable to
the reclassification of the $5 million Series J First Mortgage Bonds which are
due December 1996 and to the borrowings on the lines of credit of Artesian
Water, noted above. Artesian Water anticipates it will utilize existing lines
of credit to repay the Series J Bonds. Long term refinancing arrangements will
be completed in the first quarter of 1997.
Capital expenditures for the nine months ended September 30, 1996, were
approximately $4,600,000, of which $168,000 was for mandatory main relocation
projects. The largest single main relocation project originally budgeted for
1996 at a cost of $1,500,000 has been substantially postponed by the State of
Delaware until 1997. This project is planned to incur $300,000 in expenditures
for the remainder of 1996 and $1,200,000 for 1997. Budgeted mandatory utility
plant expenditures expected to be incurred for the remainder of 1996 through
2000, due to planned state highway projects which require the relocation of
Artesian Water's service mains are as follows:
Three months ending December 31, 1996 $ 462,000
Year ending December 31, 1997 2,865,000
Year ending December 31, 1998 250,000
Year ending December 31, 1999 1,500,000
Year ending December 31, 2000 2,000,000
$7,077,000
The exact timing and extent of these relocation projects is controlled by the
Delaware Department of Transportation.
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed for the quarter ended
September 30, 1996.
Exhibit 11 - Computation of Earnings per Common Share
For the Nine Months Ended
September 30,
1996 1995
Earnings
Income applicable to Common Stock $1,258,158 $753,948
Shares
Weighted average number of Common Stock
Shares outstanding 1,390,847 1,055,848
Primary earnings per share $0.90 $0.71
SIGNATURES
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 thereunto duly authorized.
ARTESIAN RESOURCES CORPORATION
Date November 5, 1996 /s/ Dian C. Taylor
Dian C. Taylor
President, CEO, and Chair of the Board
Artesian Resources Corporation
and Subsidiaries
Date November 5, 1996 /s/ David B. Spacht
David B. Spacht
Vice President, Chief Financial Officer,
and Treasurer
Artesian Resources Corporation
and Subsidiaries