UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-18516
ARTESIAN RESOURCES CORPORATION
(exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or organization: DELAWARE
I.R.S. Employer Identification Number: 51-0002090
Address of principal executive officers: 664 CHURCHMANS ROAD
NEWARK, DELAWARE 19702
Registrant's telephone number, including area code: (302) 453 - 6900
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 whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Exchange Act.
[X] Yes [ ] No
As of April 19, 2004, 3,332,245 shares of Class A Non-Voting Common Stock and
587,680 shares of Class B Common Stock were outstanding.
ARTESIAN RESOURCES CORPORATION
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS Page(s)
Consolidated Balance Sheet
March 31, 2004 and December 31, 2003 3
Consolidated Statement of Income
for the three months ended March 31, 2004 and 2003 4
Consolidated Statement of Retained Earnings
for the three months ended March 31, 2004 and 2003 5
Consolidated Statement of Cash Flows
for the three months ended March 31, 2004 and 2003 5 - 6
Notes to the Consolidated Financial Statements 7 - 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 - 15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
ITEM 4 - CONTROLS AND PROCEDURES 15
PART II - OTHER INFORMATION: 15
ITEM 1 - LEGAL PROCEEDINGS 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
INDEX TO EXHIBITS 18
2
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
-----------
March 31, 2004 December 31, 2003
-------------- -----------------
ASSETS
Utility plant, at original cost less accumulated depreciation $ 196,010 $ 187,893
Current assets
Cash and cash equivalents 1,580 1,128
Accounts receivable, net 2,489 2,408
Income tax receivable 404 841
Unbilled operating revenues 2,365 2,745
Materials and supplies-at cost on FIFO basis 768 801
Prepaid property taxes 355 711
Prepaid expenses and other 617 577
--------- ---------
8,578 9,211
--------- ---------
Other assets
Non-utility property (less accumulated depreciation 2004-$79; 2003-$78) 351 334
Restricted cash 10,729 14,219
Other deferred assets 2,772 2,544
--------- ---------
13,852 17,097
Regulatory assets, net 2,066 2,123
--------- ---------
$ 220,506 $ 216,324
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock $ 3,918 $ 3,901
Additional paid-in capital 41,410 41,160
Retained earnings 7,553 7,630
--------- ---------
Total stockholders' equity 52,881 52,691
--------- ---------
Long-term debt, net of current portion 81,328 80,558
--------- ---------
134,209 133,249
--------- ---------
Current liabilities
Notes payable 11,711 12,499
Current portion of long-term debt 266 188
Current portion of mandatorily redeemable preferred stock --- 100
Accounts payable 4,588 3,951
Overdraft payable 2,445 1,337
Deferred income taxes 141 213
Interest accrued 400 267
Customer deposits 435 422
Other 1,020 697
--------- ---------
21,006 19,674
--------- ---------
Deferred credits and other liabilities
Net advances for construction 19,859 19,175
Postretirement benefit obligation 1,217 1,232
Deferred investment tax credits 836 843
Deferred income taxes 12,476 11,775
--------- ---------
34,388 33,025
Commitments and contingencies
Net contributions in aid of construction 30,903 30,376
--------- ---------
$ 220,506 $ 216,324
========= =========
See notes to the consolidated financial statements.
3
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
(In thousands, except per share amounts)
For the Quarter
Ended March 31,
---------------
2004 2003
---- ----
OPERATING REVENUES
Water sales $ 8,466 $ 8,258
Other utility operating revenue 199 177
Non-utility revenue 122 103
-------- --------
8,787 8,538
OPERATING EXPENSES
Utility operating expenses 4,983 4,739
Related party expenses --- 43
Non-utility operating expenses 74 48
Depreciation and amortization 924 847
State and federal income taxes 471 499
Property and other taxes 529 497
-------- --------
6,981 6,673
-------- --------
OPERATING INCOME 1,806 1,865
Allowance for funds used during construction 92 33
Other income, net 277 29
-------- --------
INCOME BEFORE INTEREST CHARGES 2,175 1,927
INTEREST CHARGES 1,457 1,155
-------- --------
NET INCOME 718 772
PREFERRED DIVIDEND REQUIREMENT AND REDEMPTION
PREMIUM 3 64
-------- --------
NET INCOME APPLICABLE TO COMMON STOCK $ 715 $ 708
======== ========
INCOME PER COMMON SHARE:
Basic $ 0.18 $ 0.18
======== ========
Diluted $ 0.18 $ 0.18
======== ========
CASH DIVIDEND PER COMMON SHARE $ 0.2025 $ 0.1983
======== ========
AVERAGE COMMON SHARES OUTSTANDING:
Basic 3,917 3,866
======== ========
Diluted 4,053 3,953
======== ========
See notes to the consolidated financial statements.
4
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Unaudited
(In thousands)
For the Quarter
Ended March 31,
---------------
2004 2003
---- ----
Balance, beginning of period $ 7,630 $ 6,973
Net income 718 772
------- -------
8,348 7,745
Less: Dividends 795 833
Common stock-Repurchase --- 8
------- -------
Balance, end of period $ 7,553 $ 6,904
======= =======
See notes to the consolidated financial statements.
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
(In thousands)
For the Quarter
Ended March 31,
---------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 718 $ 772
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 923 845
Deferred income taxes, net 623 353
Allowance for funds used during construction (92) (33)
Changes in assets and liabilities:
Accounts receivable (81) (907)
Income tax receivable 437 --
Unbilled operating revenue 380 529
Materials and supplies 33 (64)
Accrued state and federal income taxes -- (3)
Prepaid property taxes 356 323
Prepaid expenses and other (40) (146)
Other deferred assets (227) (133)
Regulatory assets 56 27
Postretirement benefit obligation (15) (16)
Accounts payable 637 (140)
Interest accrued 133 (398)
Customer deposits and other, net 335 287
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,176 1,296
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (net of AFUDC) (9,111) (4,280)
Proceeds from sale of assets 9 --
------- -------
NET CASH USED IN INVESTING ACTIVITIES (9,102) (4,280)
------- -------
5
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit agreement (788) 11,948
Proceeds from issuance of long-term debt 770 14,945
Proceeds from issuance of tax-free bonds 3,490 --
Overdraft payable 1,108 712
Net advances and contributions in aid of construction 1,348 603
Net proceeds (repayments) under promissory notes and SRF Loans 78 (275)
Net proceeds from stock transactions 267 79
Dividends (795) (833)
Repayment of long-term debt -- (292)
Retirement of preferred stock (100) (100)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,378 2,891
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 452 (93)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 1,128 874
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,580 $ 781
======= =======
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 1,304 $ 1,541
======= =======
Income taxes paid $ -- $ 150
======= =======
See notes to the consolidated financial statements.
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
Artesian Resources Corporation ("Artesian Resources" or the "Company") operates
as a holding company, whose income is derived from the earnings of our four
wholly owned subsidiary companies and our one-third interest in AquaStructure
Delaware, L.L.C., 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, and have contract operation agreements with fourteen private and
municipal water providers.
Our other water utility subsidiary, Artesian Water Pennsylvania, Inc., began
operations in 2002, providing water service to a residential community,
consisting of 41 homes, in Chester County, Pennsylvania. Our other two
subsidiaries, neither of which is regulated, are Artesian Wastewater Management,
Inc. ("Artesian Wastewater"), which provides wastewater services in Delaware,
and Artesian Development Corporation, whose sole activity is the ownership of an
eleven-acre parcel of land zoned for office buildings located immediately
adjacent to our corporate headquarters. On October 14, 2003, we filed an
application with the Pennsylvania Public Utilities Commission to increase our
service area in Pennsylvania. The application concerns four specific housing
developments that are expected to add 350 customers over 10 years to the extent
our application is approved.
The terms "we", "our" and the "Company" as used herein refer to Artesian
Resources and its subsidiaries.
Stock Compensation Plans
- ------------------------
At March 31, 2004, the Company had three stock-based compensation plans. 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 three plans was $1,200 and
$1,100 for the three months ended March 31, 2004 and 2003, respectively. Had
compensation cost for the Company's three 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:
For the Quarter
Ended March 31,
---------------
2004 2003
---- ----
In thousands, except per share data
NET INCOME APPLICABLE TO COMMON STOCK
As reported $ 715 $ 708
Add: compensation expense included
in net income (net of tax) -- --
Deduct: compensation expense using
fair value based method (net of tax) (1) (24)
----- -----
Pro-forma $ 714 $ 684
BASIC NET INCOME PER COMMON SHARE
As reported $ .18 $ .18
Pro-forma $ .18 $ .18
DILUTED NET INCOME PER COMMON SHARE
As reported $ .18 $ .18
Pro-forma $ .18 $ .17
7
NOTE 2 - REGULATORY ASSETS
Certain expenses are recoverable through rates charged to our customers, without
a return on investment, and are deferred and amortized during future periods
using various methods as permitted by the Delaware Public Service Commission
("Delaware PSC"). Expenses related to applications to increase rates are
amortized on a straight-line basis over a period of two 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 net of amortization, are
comprised of the following:
March 31, 2004 December 31, 2003
-------------- -----------------
(in thousands)
Postretirement benefit obligation $ 1,217 $ 1,232
Deferred income taxes recoverable in future rates 623 627
Expense of rate proceedings 112 220
Other 114 44
------- -------
$ 2,066 $ 2,123
======= =======
Expenses related to the Net Periodic Pension Cost for the postretirement benefit
obligation are as follows:
FOR THE QUARTER ENDED MARCH 31, 2004 2003
---- ----
NET PERIODIC PENSION COST
Interest Cost $ 14 $ 16
Amortization of Net (Gain) or Loss (9) (14)
Amortization of Transition Obligation/(Asset) 2 2
---- -----
Total FAS 106 Net Periodic Benefit Cost 7 4
---- -----
Total Net Periodic Benefit Cost $ 7 $ 4
==== =====
CONTRIBUTIONS
Artesian Water contributed $22,000 to its postretirement benefit plan in the
first quarter of 2004 and expects to contribute another $66,000 for the
remainder of the year.
NOTE 3 - RELATED PARTY TRANSACTIONS
The office building and shop complex utilized by Artesian Water were previously
leased at an average annual rental of $173,000 from the former limited partners
of White Clay Realty, who owned the property jointly as tenants in common. Dian
C. Taylor, Chair and Chief Executive Officer of Artesian Resources, was a tenant
in common and John R. Eisenbrey, Jr., a director of Artesian Resources, was a
beneficiary of a tenant in common. The rental of $173,000 was below market
rates. In December 2002, Artesian Water filed a condemnation action in the
Delaware Superior Court, seeking to acquire title to the office and shop complex
leased by Artesian Water, known as 664 Churchmans Road, Newark, Delaware (the
"Property"). Artesian Water filed this action under its statutory power of
eminent domain against the owner of the Property, White Clay Realty, a Delaware
Limited Partnership, and each of the limited partners. The Superior Court ruled
that since White Clay Realty had no general partner, the partnership was
dissolved and all of the former partners owned the Property jointly as tenants
in common. A special committee of the Board of Directors of Artesian Water,
composed entirely of outside directors who had no ownership interest in the
Property, made the determination to purchase the Property through the
condemnation procedures. Under this procedure, if the acquisition of the
Property were to be approved by the court, the fair market value of the Property
would be determined by a panel of commissioners after an evidentiary hearing.
8
Artesian Water's independent appraiser valued the Property to be worth
$3,800,000. In December 2002, Artesian Water issued a payment to the
Prothonotary for the State of Delaware for $3,800,000. As the court delayed
payment until the matter was decided, the amount was refunded to Artesian Water
in June 2003. Until a final determination of the condemnation, the parties
agreed that Artesian Water could continue to occupy the Property under the terms
of the lease with a quarterly rental payment of $43,361. Pursuant to a deadline
set by the Superior Court, the owners of the Property submitted an independent
appraisal that valued the Property to be worth $4,800,000. The condemnation case
was scheduled for trial on October 20, 2003, wherein the fair market value of
the Property would have been determined by a panel of three Commissioners after
an evidentiary hearing. Prior to the commencement of the trial on October 20,
2003, all parties agreed to settle the case for a purchase price of $4,500,000
paid by Artesian Water. The decision to settle on the part of Artesian Water was
made by the Special Committee of independent directors and with the
recommendation of special counsel to the Special Committee. The settlement was
approved by order of the Superior Court on October 20, 2003. The Court also
approved applications of two of the tenants in common (neither of whom is an
officer or director of Artesian) for their expenses, totaling $50,000, to be
paid by Artesian Water, to which applications Artesian Water did not object.
Expenses associated with related party transactions were as follows:
For the Quarter
Ended March 31,
---------------
2004 2003
---- ----
(in thousands)
White Clay Realty $ --- $ 43
===== =====
NOTE 4 - 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 the potentially dilutive effect
of employee stock options. The following table summarizes the shares used in
computing basic and diluted net income per share:
For the Quarter
Ended March 31,
---------------
2004 2003
---- ----
(in thousands)
Average common shares outstanding during
the period for Basic computation 3,917 3,866
Dilutive effect of employee stock options 136 87
----- -----
Average common shares outstanding during
the period for Diluted computation 4,053 3,953
===== =====
Equity per common share was $13.50 and $13.24 at March 31, 2004 and 2003,
respectively. These amounts were computed by dividing common stockholders'
equity, excluding preferred stock, by the number of shares of common stock
outstanding on March 31, 2004 and 2003, respectively.
NOTE 5 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued revised Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits-an amendment of
FASB Statements No. 87, 88, and 106." This statement requires additional
disclosures to those in the original Statement No. 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined pension plans
and other defined benefit postretirement plans. Disclosures for earlier periods
presented for comparative purposes are restated. This statement is effective for
financial statements with fiscal years ending after December 15, 2003. The
additional disclosures required for our postretirement benefit obligation are
presented in Note 2.
9
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The statement is effective for financial instruments entered into or
modified after May 31, 2003 and effective for other instruments beginning at the
first interim period beginning after June 15, 2003. The adoption of this
statement did not have a material impact on the financial condition or results
of operation of Artesian Resources.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting related to derivatives and hedging
activities under FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement is effective for contracts entered into
or modified, and hedging relationships designated, after June 30, 2003. The
adoption of this statement did not have a material impact on the financial
condition or results of operation of Artesian Resources.
NOTE 6 - RATE PROCEEDINGS
On February 5, 2004, Artesian Water filed a petition with the Delaware Public
Service Commission (the "Delaware PSC") to implement new rates to meet a
requested increase in revenue of 24%, or approximately $8.8 million on an
annualized basis. The Delaware PSC, on March 16, 2004, suspended the
implementation of the proposed new rates pending further investigation and
public evidentiary hearings. Pending these hearings and a final ruling by the
Delaware PSC, the Company, as permitted by law, placed a portion of the proposed
rates into effect under bond on April 6, 2004. These temporary rates were
designed to generate an increase in annual operating revenue of approximately
6.98%, or $2.5 million on an annualized basis.
On April 2, 2002, Artesian Water filed a petition with the Delaware PSC seeking
to raise rates for water service by 23.12% or $7.5 million. Artesian Water, as
permitted by law, placed 7.71% of the proposed rates into effect under bond
beginning June 1, 2002. Beginning December 3, 2002, Artesian Water, as permitted
by law, placed an additional 3.69% of the proposed rates into effect. On April
15, 2003, the Delaware PSC issued PSC Order No. 6147 approving an increase in
Artesian Water's revenue requirement of 9.68% effective May 1, 2003. These rates
represented an increase in water consumption charges, customer charges, and fire
hydrant ready-to-serve charges necessary to generate an increase in annual
operating revenues of approximately $3.3 million. Since the temporary rates that
we had placed into effect beginning December 3, 2002, were in excess of the
final approved rate increase, in June 2003 we refunded approximately $201,000,
plus interest, to our customers. Since Artesian Water had reserved revenue
related to the second temporary increase of $234,000, an additional $33,000 was
recorded to revenue in the second quarter of 2003.
Delaware statute permits 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 that normally recognize changes in a water utility's overall
financial position. The DSIC process significantly reduces expenses when
compared to those typically associated with general rate increase requests. We
requested on November 30, 2003, and subsequently implemented, a 1.13% DSIC
surcharge for bills rendered subsequent to January 1, 2004. This surcharge was
designed to generate approximately $204,000 in revenues between January and June
of 2004. However, as we placed temporary rates into effect on April 6, 2004, the
surcharge was reset to zero as required by law. We billed $100,000 in revenues
through March 31, 2004.
10
NOTE 7 - STOCK SPLIT
On June 30, 2003, the Company completed a three for two stock split on its Class
A Non-Voting Common Stock and Class B Common Stock, which was effected in the
form of a 50% stock dividend. Shareholders of record on May 30, 2003 received
one additional share of common stock for each two shares held. All share and per
share data for all prior periods have been restated to give effect to this stock
split.
Weighted Average Shares For the Quarter
Outstanding Ended March 31,
---------------
2004 2003
---- ----
Basic 3,917,034 3,866,072
Diluted 4,053,117 3,952,821
11
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2004
Overview
- --------
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. In the event that temperatures during the typically warmer
months are cooler than expected, or rainfall is greater than typical, the demand
for water may decrease and our revenues may be adversely affected. We believe
the effects of weather are short term and do not materially affect the execution
of our strategic initiatives.
While customer growth in our utility subsidiaries has been a major focus in the
first quarter of 2004, we are aggressively seeking opportunities that produce
revenue streams that are not as directly affected by weather. These
opportunities include wastewater treatment services by Artesian Wastewater
Management, Inc., a non-regulated subsidiary. Artesian Wastewater is actively
pursuing design, build and operations contracts with residential developers in
Sussex County, Delaware. Artesian Wastewater has a permit pending to construct a
90,300 gallon per day facility to service a residential development in Sussex
County. The development is planned to add 750 customers over the next 10 years.
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.
Ensuring our customers have a dependable supply of safe, high-quality water has
been, and will continue to be, a high priority. We have invested $2.8 million
through March 31, 2004, and expect to make $5.4 million in investments in the
remaining nine months of 2004, that will increase our sources of water 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.
REGULATORY MATTERS AND INFLATION
As of March 31, 2004, we had approximately 70,000 metered customers and serviced
a population of approximately 230,000, representing approximately 29% of
Delaware's total population. The Delaware PSC regulates Artesian Water's rates
charged for water service, the sale and issuance of 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. In Delaware, utilities are
permitted by law to place rates into effect, under bond, on a temporary basis
pending completion of a rate increase proceeding. The first temporary increase
may be up to the lesser of $2.5 million on an annual basis or 15% of annual
gross water sales. Should the rate case not be completed within seven months, by
law, the utility may put the entire requested rate relief in effect, under bond,
until a final resolution is ordered and placed into effect. If such rates are
found to be in excess of rates the Delaware PSC finds to be appropriate, the
utility must refund the portion found in excess to customers with interest. The
timing of our rate increase requests are therefore dependent upon the estimated
cost of the administrative process in relation to the investments and expenses
that we hope to recover through the rate increase. We can provide no assurances
that rate increase requests will be approved by applicable regulatory agencies;
and, if approved, we cannot guarantee that these rate increases will be granted
in a timely or sufficient manner to cover the investments and expenses for which
we initially sought the rate increase.
12
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.
Delaware statute permits 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 that normally recognize changes in a water utility's overall
financial position. The DSIC process significantly reduces expenses when
compared to those typically associated with general rate increase requests. We
requested on November 30, 2003 and subsequently implemented a 1.13% DSIC
surcharge for bills rendered subsequent to January 1, 2004. This surcharge was
designed to generate approximately $204,000 in revenues between January and June
of 2004. However, as we placed temporary rates into effect on April 6, 2004, the
surcharge was reset to zero as required by law. We billed $100,000 in revenues
under this surcharge through March 31, 2004.
Operating Revenues
- ------------------
Revenues totaled $8.8 million for the quarter ended March 31, 2004, $0.3
million, or 2.9% above revenues for the quarter ended March 31, 2003 of $8.5
million. Water sales revenues increased 2.5% for the quarter ended March 31,
2004 over the corresponding period in 2003 due to customer growth. The remaining
increase in operating revenues for the three months ended March 31, 2004 is
primarily due to additional revenues generated by wastewater and contract
operations services. We realized 96.4% of our total revenue for the three months
ended March 31, 2004, from the sale of water.
On February 5, 2004, Artesian Water filed a petition with the Delaware PSC to
implement new rates to meet a requested increase in revenue of 24%, or
approximately $8.8 million on an annualized basis. The Delaware PSC, on March
16, 2004, suspended the implementation of the proposed new rates pending further
investigation and public evidentiary hearings. Pending these hearings and a
final ruling by the Delaware PSC, the Company, as permitted by law, placed a
portion of the proposed rates into effect under bond on April 6, 2004. These
temporary rates were designed to generate an increase in annual operating
revenue of approximately 6.98%, or $2.5 million on an annualized basis.
On April 2, 2002, Artesian Water filed a petition with the Delaware PSC seeking
to raise rates for water service. Artesian Water, as permitted by law, placed
7.71% of the proposed rates into effect under bond beginning June 1, 2002.
Beginning December 3, 2002, Artesian Water placed an additional 3.69% of the
proposed rates into effect. On April 15, 2003, the Delaware PSC approved an
increase in Artesian Water's revenue requirement of 9.68%, effective May 1,
2003. See Note 6 of our financial statements included in this report for
additional discussion.
Operating Expenses
- ------------------
Operating expenses, excluding depreciation and taxes, increased $227,000, or
4.7%, to $5.6 million for the quarter ended March 31, 2004, compared to $4.8
million for the same period in 2003. The components of the increase in operating
expenses included an increase in repair and maintenance expense of $71,000, or
26.2%, due to the replacement of the filter media used in a new water treatment
process at one of our facilities. We expect to replace this media annually and
have requested recovery of this on-going expense in rate charges to customers.
Employee benefits expense also increased $62,000, or 13%, due to an increase in
medical insurance premiums effective August 2003. Administration expenses
increased approximately $88,000 for the quarter ended March 31, 2004, or 12.3%,
due primarily to the reimbursement of consulting expenses incurred by the PSC in
connection with the review of supply conditions during 2002. The investigation
confirmed that our supply was adequate to meet uninterrupted demand during this
drought period. Additional expense of $27,000 was incurred in the first quarter
of 2004 as a result of costs associated with our Pennsylvania subsidiary's
request for new service territory described in Note 1 to the financial
statements included in this report. These increases were partially offset by a
reduction of $43,000 in related party expense due to our purchase of the office
and shop complex in October 2003 which we had previously leased from White Clay
Realty. Purchased water expense decreased approximately $85,000, or 11.1%, due
to a later start in storing water in our aquifer storage and recovery well in
the current year. The ratio of operating expense, excluding depreciation and
taxes, to total revenue was 57.5% for the three months ended March 31, 2004,
compared to 56.6% for the three months ended March 31, 2003.
13
Depreciation and amortization expense increased $77,000, or 9.1%, over the
quarter ended March 31, 2003 to $924,000 due to increases in our utility plant
in service providing supply, treatment, storage and distribution of water.
Income tax expense decreased $28,000 due to reduced profitability for the
quarter ended March 31, 2004 compared to the quarter ended March 31, 2003.
Other Income
- ------------
Other Income increased $248,000 primarily due to increased patronage income from
CoBank. This increase in patronage income is related to the Company's issuance
of an additional $25 million in First Mortgage Bonds in January 2003 to CoBank,
which is a cooperative bank that distributes equity and cash income to its
customer-owners.
Interest Charges
- ----------------
Interest charges increased $302,000, or 26.2%, over the quarter ended March 31,
2003, primarily due to interest related to the $25 million Series P First
Mortgage Bond issued on January 31, 2003 and the $15.4 million Series Q First
Mortgage Bond issued on December 1, 2003. The Series P Bond issuance replaced
the Series L 8.03% $10 million bond and paid down our line of credit.
Net Income
- ----------
Our net income decreased $54,000 for the quarter ended March 31, 2004, compared
to the same period a year ago. The decrease in net income for the quarter was
due to increased operating expenses discussed above and interest charges
associated with the issuance of debt to finance additions to utility plant. Our
net income applicable to common stock increased by $7,000 as redemption premium
costs of $54,000 associated with the buy-back of all 10,868 shares of our 7%
Prior Preferred Stock on February 21, 2003 were reflected in the quarter ended
March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity for the three months ended March 31, 2004 were
$4.2 million provided by cash flow from operating activities and $5.4 million
from financing activities, which includes $1.3 million in contributions and
advances. Cash flow from operating activities is primarily provided by our
utility operations, and is impacted by the timeliness and adequacy of rate
increases and changes in water consumption as a result of year-to-year
variations in weather conditions particularly during the summer. A significant
part of our ability to maintain and meet our financial objectives is to assure
our investments in utility plant and equipment are recovered in the rates
charged to customers. As such, from time to time we file rate increase requests
to recover increases in operating expenses and investments in utility plant and
equipment. On February 5, 2004, Artesian Water filed a petition with the
Delaware PSC seeking to raise rates for water service and on April 6, 2004, the
Delaware PSC approved a temporary increase in Artesian Water's revenue
requirement of 6.98% as permitted by law. These rates represent an increase in
water consumption charges, customer charges and fire hydrant ready-to-serve
charges necessary to generate an increase in annual operating revenues of
approximately $2.5 million.
At March 31, 2004, 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 March 31,
2004, we had $23.3 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, at our discretion, the bank's federal funds rate plus 1.0%.
At March 31, 2004 the rate on these lines was 2.04%. All the facilities are
reviewed annually by each bank for renewal. We expect that our available cash
balances, our projected cash generated from operations and available bank credit
lines will be sufficient to meet our financial obligations for the next twelve
months.
14
CAUTIONARY STATEMENT
Statements in this Quarterly Report on Form 10-Q which express our "belief,"
"anticipation" or "expectation," as well as other statements which are not
historical fact including statements regarding our customer growth, contract
operations opportunities, investment plans in 2004, revenues from temporary rate
increases, plans to increase our wastewater treatment operations and other
revenue streams less affected by weather, the acquisition of a dependable supply
of safe, high-quality water and our ability to obtain final approval on pending
rate increase requests or approval to service additional service territories are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve risks and uncertainties that could
cause actual results to differ materially from those projected. Certain factors,
such as changes in weather, changes in our contractual obligations, changes in
government policies, changes in economic conditions, and other matters could
cause results to differ materially from those in the forward-looking statements.
The Company does not undertake to update any of the forward-looking statements
included in the Quarterly Report on Form 10-Q except as required by law.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to the risk of fluctuating interest rates in the normal course of
business. Our policy is to manage interest rates through the use of fixed rate,
long-term debt and, to a lesser extent, short-term debt. The Company's interest
rate risk related to existing fixed rate, long-term debt is not material due to
the term of our First Mortgage Bonds, which have maturity dates ranging from
2007 to 2043.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures as of the end of the period covered by this report have been designed
and are functioning effectively to provide reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. The Company
believes that a controls system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
The Company adopted a code of conduct applicable to its employees which is
available upon request.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material legal proceedings pending at this date.
15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation of the Company effective
April 28, 2004.
3.3 Artesian Resources Corporation By-laws
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Forms 8-K
A current report on Form 8-K dated February 5, 2004 was
filed with the Securities and Exchange Commission on
February 6, 2004 reporting a filing of a petition with
the Delaware PSC to increase rates for service.
16
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: April 28, 2004 By: /s/ David B. Spacht
-----------------------
David B. Spacht, Vice President, Chief
Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
Principal Executive Officer:
/s/ Dian C. Taylor April 28, 2004
- ------------------------------
Dian C. Taylor President, Chief Executive Officer and Director
Principal Financial and Accounting Officer:
/s/ David B. Spacht April 28, 2004
- ------------------------------
David B. Spacht Vice President, Chief Financial Officer
and Treasurer
Directors:
/s/ Norman H. Taylor, Jr. April 28, 2004
- ------------------------------
Norman H. Taylor, Jr. Director
/s/ Kenneth R. Biederman April 28, 2004
- ------------------------------
Kenneth R. Biederman Director
/s/ William C. Wyer April 28, 2004
- ------------------------------
William C. Wyer Director
/s/ John R. Eisenbrey, Jr. April 28, 2004
- ------------------------------
John R. Eisenbrey, Jr. Director
17
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation of the Company
effective April 28, 2004.
3.3 Artesian Resources Corporation By-laws
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
18