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, 2005
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 000-18516
ARTESIAN RESOURCES CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0002090
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
664 CHURCHMANS ROAD, NEWARK, DELAWARE 19702
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(Address of principal executive offices) (Zip Code)
(302) 453 - 6900
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report.)
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 30, 2005, 3,384,586 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, 2005 (unaudited) and December 31, 2004 3
Consolidated Statement of Income
for the quarter ended March 31, 2005 and 2004 (unaudited) 4
Consolidated Statement of Retained Earnings
for the quarter ended March 31, 2005 and 2004 (unaudited) 5
Consolidated Statement of Cash Flows
for the quarter ended March 31, 2005 and 2004 (unaudited) 5 - 6
Notes to the Consolidated Financial Statements 7 - 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 - 15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
ITEM 4 - CONTROLS AND PROCEDURES 15 - 16
PART II - OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS 17
ITEM 6 - EXHIBITS 17
SIGNATURES 18
INDEX TO EXHIBITS 19
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
March 31, 2005 December 31, 2004
-------------- -----------------
ASSETS
Utility plant, at original cost less accumulated depreciation $ 215,847 $ 212,152
Current assets
Cash and cash equivalents 1,685 1,217
Accounts receivable, net 3,215 3,806
Unbilled operating revenues 1,957 2,372
Materials and supplies-at cost on FIFO basis 911 932
Prepaid property taxes 383 765
Prepaid expenses and other 566 565
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8,717 9,658
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Other assets
Non-utility property (less accumulated depreciation 2005-$113; 2004-$108) 332 337
Restricted cash -- 503
Other deferred assets 2,846 2,626
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3,178 3,466
Regulatory assets, net 2,087 2,104
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$ 229,829 $ 227,380
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock $ 3,971 $ 3,956
Additional paid-in capital 42,610 42,222
Retained earnings 8,876 8,765
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Total stockholders' equity 55,457 54,943
Long-term debt, net of current portion 82,495 82,356
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137,952 137,299
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Current liabilities
Notes payable 10,624 9,213
Current portion of long-term debt 342 1,082
Accounts payable 1,232 2,173
Accrued expenses 1,600 1,989
Overdraft payable 1,756 1,812
Deferred income taxes 53 150
Interest accrued 491 354
Customer deposits 472 470
Other 1,877 1,197
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18,447 18,440
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Deferred credits and other liabilities
Net advances for construction 22,151 21,456
Postretirement benefit obligation 1,151 1,169
Deferred investment tax credits 809 816
Deferred income taxes 15,513 14,774
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Commitments and contingencies
39,624 38,215
Net contributions in aid of construction 33,806 33,426
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$ 229,829 $ 227,380
============ ==============
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,
----------------------------
2005 2004
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OPERATING REVENUES
Water sales $ 9,295 $ 8,466
Other utility operating revenue 225 199
Non-utility revenue 382 122
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9,902 8,787
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OPERATING EXPENSES
Utility operating expenses 5,377 4,983
Non-utility operating expenses 255 74
Depreciation and amortization 1,042 924
State and federal income taxes 640 471
Property and other taxes 581 529
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7,895 6,981
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OPERATING INCOME 2,007 1,806
OTHER INCOME, NET
Allowance for funds used during construction 51 92
Other income, net 377 277
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INCOME BEFORE INTEREST CHARGES 2,435 2,175
INTEREST CHARGES 1,481 1,457
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NET INCOME 954 718
PREFERRED DIVIDEND REQUIREMENT -- 3
------- -------
NET INCOME APPLICABLE TO COMMON STOCK $ 954 $ 715
======= =======
INCOME PER COMMON SHARE:
Basic $ 0.24 $ 0.18
======= =======
Diluted $ 0.23 $ 0.18
======= =======
CASH DIVIDEND PER COMMON SHARE $0.2125 $0.2025
======= =======
AVERAGE COMMON SHARES OUTSTANDING
Basic 3,967 3,917
======= =======
Diluted 4,094 4,053
======= =======
See notes to the consolidated financial statements.
4
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Unaudited
(In thousands)
For the Quarter
Ended March 31,
-------------------------
2005 2004
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Balance, beginning of period $ 8,765 $ 7,630
Net income 954 718
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9,719 8,348
Less: Dividends 843 795
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Balance, end of period $ 8,876 $ 7,553
======= =======
See notes to the consolidated financial statements.
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
(In thousands)
For the Quarter
Ended March 31,
-------------------------
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 954 $ 718
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,041 923
Deferred income taxes, net 636 623
Allowance for funds used during construction (51) (92)
Changes in assets and liabilities:
Accounts receivable, net 591 (81)
Income tax receivable -- 437
Unbilled operating revenues 415 380
Materials and supplies 21 33
Prepaid property taxes 382 356
Prepaid expenses and other (1) (40)
Other deferred assets (234) (227)
Regulatory assets 17 56
Postretirement benefit obligation (18) (15)
Accounts payable (941) (959)
Accrued expenses (389) 1,596
Interest accrued 137 133
Customer deposits and other, net 682 335
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NET CASH PROVIDED BY OPERATING ACTIVITIES 3,242 4,176
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (net of AFUDC) (4,852) (9,111)
Proceeds from sale of assets 4 9
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NET CASH USED IN INVESTING ACTIVITIES (4,848) (9,102)
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5
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Unaudited
(In thousands)
For the Quarter
Ended March 31,
--------------------------
2005 2004
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CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings under line of credit agreements 1,411 (788)
Proceeds from issuance of long-term debt 252 770
Restricted funds from issuance of tax-free bonds 503 3,490
Overdraft payable (56) 1,108
Net advances and contributions in aid of construction 1,242 1,348
Principal repayments of long-term debt (853) 78
Net proceeds from issuance of common stock 403 267
Dividends (843) (795)
Deferred debt issuance costs 15 --
Redemption of preferred stock -- (100)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 2,074 5,378
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NET INCREASE IN CASH AND CASH EQUIVALENTS 468 452
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 1,217 1,128
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,685 $1,580
====== ======
Supplemental Disclosures of Cash Flow Information:
Interest paid $1,324 $1,304
====== ======
Income taxes paid $ -- $ --
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See notes to the consolidated financial statements.
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
Artesian Resources Corporation, Artesian Resources, operates as a holding
company, whose income is derived from the earnings of our 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. The terms "we", "our" and the "Company" as used herein
refer to Artesian Resources and its subsidiaries.
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. Artesian Water distributes
and sells water to residential, commercial, industrial, governmental, municipal
and utility customers throughout Delaware. In addition, Artesian Water provides
services to other water utilities, including operations and billing functions,
and has contract operation agreements with seventeen private and municipal water
providers.
Our other water utility subsidiary, Artesian Water Pennsylvania, Inc., Artesian
Water Pennsylvania, began operations in 2002, providing water service to a
residential community, consisting of 39 customers, in Chester County. On October
14, 2003, Artesian Water Pennsylvania filed an application with the Pennsylvania
Public Utilities Commission to increase our service area in Pennsylvania. This
application, which concerns four specific developments that are expected to add
350 customers over 10 years, was approved and an order entered on February 4,
2005.
One other subsidiary, Artesian Wastewater Management, Inc., Artesian Wastewater,
is a regulated entity that will own wastewater infrastructure and provide
wastewater services in Delaware. Our other subsidiaries, neither of which is
regulated, are Artesian Utility Development, Inc., Artesian Utility, which
designs and builds wastewater infrastructure and provides contract 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 September 30, 2004, we changed the name of our non-regulated subsidiary,
Artesian Wastewater Management, Inc., which operates municipal wastewater
facilities under operating agreements, to Artesian Utility Development, Inc.
Concurrent with this name change, we formed a new subsidiary, Artesian
Wastewater Management, Inc., which will provide wastewater services to customers
in Delaware as a regulated public wastewater service company.
Stock Compensation Plans
- ------------------------
At March 31, 2005, 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 insignificant
for the three months ended March 31, 2004. No expense was incurred for the three
months ended March 31, 2005. 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:
7
For the Quarter
---------------
Ended March 31,
---------------------------
2005 2004
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In thousands, except per share data
NET INCOME APPLICABLE TO COMMON STOCK
As reported $ 953 $ 715
Add: compensation expense included
in net income (net of tax) -- --
Deduct: compensation expense using
fair value based method (net of tax) (3) (1)
---------- -----------
Pro-forma $ 950 $ 714
BASIC NET INCOME PER COMMON SHARE
As reported $ 0.24 $ 0.18
Pro-forma $ 0.24 $ 0.18
DILUTED NET INCOME PER COMMON SHARE
As reported $ 0.23 $ 0.18
Pro-forma $ 0.23 $ 0.18
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,
the 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, 2005 December 31, 2004
-------------- -----------------
(in thousands)
Postretirement benefit obligation $ 1,151 $ 1,169
Deferred income taxes recoverable in future rates 608 612
Expense of rate proceedings 297 289
Other 31 34
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$ 2,087 $ 2,104
========== ==========
Expenses related to the Net Periodic Pension Cost for the postretirement benefit
obligation are as follows:
FOR THE QUARTER ENDED MARCH 31, 2005 2004
-------- --------
NET PERIODIC PENSION COST
Interest Cost $ 14 $ 14
Amortization of Net Gain (9) (9)
Amortization of Transition Obligation 2 2
-------- --------
Total Net Periodic Benefit Cost $ 7 $ 7
======== ========
CONTRIBUTIONS
Artesian Water contributed $25,000 to its postretirement benefit plan in the
first quarter of 2005 and expects to contribute another $75,000 for the
remainder of the year. These contributions consist of insurance premium payments
for medical, dental and life insurance benefits made on behalf of the Company's
eligible retired employees.
8
NOTE 3 - 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,
2005 2004
----- ------
(in thousands)
Average common shares outstanding during
the period for Basic computation 3,967 3,917
Dilutive effect of employee stock options 127 136
----- ------
Average common shares outstanding during
the period for Diluted computation 4,094 4,053
===== ======
Equity per common share was $13.96 and $13.50 at March 31, 2005 and 2004,
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, 2005 and 2004, respectively.
NOTE 4 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement No. 123 (revised 2004), Statement
No. 123R, "Share-Based Payment". This Statement is a revision of FASB Statement
No. 123, "Accounting for Stock-Based Compensation". This Statement supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and its related
implementation guidance. This Statement establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services. According to the FASB, this Statement is effective as of the
beginning of the first interim or annual reporting period that begins after June
15, 2005. However, during the first quarter of 2005, the Securities and Exchange
Commission approved a new rule that delays the adoption of this standard to the
beginning of the next fiscal year, instead of the next reporting period that
begins after June 15, 2005. The rule does not change the accounting required by
Statement No. 123R; it only changes the dates for compliance. We have not yet
determined whether the adoption of this statement will have a material impact on
our financial condition or results of operation. The Company expects to adopt
Statement No. 123R effective January 1, 2006.
NOTE 5 - RATE PROCEEDINGS
On February 5, 2004, Artesian Water filed a petition with the PSC to implement
new rates to meet a requested increase in revenue of 24%, or approximately $8.8
million, on an annualized basis. The 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
PSC, Artesian Water, as is permitted by law, placed a portion of the proposed
rates into effect under surety, in lieu of 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.
Beginning September 7, 2004, Artesian Water placed an additional portion of the
proposed rates into effect. These rates were designed to generate an additional
increase of approximately 8.02%, for a total increase of 15%, or approximately
$5.5 million on an annualized basis, the maximum level of temporary rates
permitted by law. These revised temporary rates will remain in effect until the
PSC issues their final rate order. On April 5, 2005, the PSC approved a rate
increase for Artesian Water, in response to Artesian Water's February 5, 2004
rate request. A final rate order incorporating the results of the PSC's
deliberation and resolution of their affect on the various components of the
Company's request is currently under review by the parties in the case. Pending
review by Artesian Water of the final order by the PSC, determination can be
reached as to the impact of the new rates on customer bills. Artesian Water
currently expects that the rate increase will be approximately $4.4 million on
an annualized basis. Since temporary rates exceeded the final rate increase,
overpayment from customers, with interest, will be applied to current and future
customer bills once the impact of the new rates is determined. As of March 31,
2005, we have reserved $504,000, or approximately 13% of total temporary rate
revenue, in anticipation of such a refund.
9
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 approval process is less costly when compared to the approval process
for 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 September of 2004. However, as required
by law, application of the DSIC surcharge was discontinued after the temporary
rate increase was placed into effect on April 6, 2004. We billed $87,000 in
revenues under this surcharge from January 1, 2004 through March 31, 2004.
10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2005
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 expected, 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 three months of 2005, we are aggressively seeking opportunities that
produce revenue streams that are not as directly affected by weather. These
opportunities include wastewater treatment services, including design, build,
operate and ownership of systems throughout Delaware and surrounding areas. On
September 30, 2004, we changed the name of our non-regulated subsidiary Artesian
Wastewater Management, Inc., Artesian Wastewater, which operates municipal
wastewater facilities under operating agreements, to Artesian Utility
Development, Inc., Artesian Utility. This non-regulated subsidiary will continue
to actively pursue opportunities to design, build and operate wastewater
facilities throughout Delaware and surrounding areas. Concurrent with this
change in name, we formed a new subsidiary, Artesian Wastewater Management,
Inc., Artesian Wastewater, that will provide wastewater services to customers in
Delaware as a regulated public wastewater service company. The opportunities
generated through our wastewater service companies may provide additional
service territory for the regulated water subsidiary or may provide contract
operations services for municipalities or other regulated entities. We will also
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. In 2003, Delaware passed
legislation requiring all water utilities to certify by July 2006 that they have
sufficient sources of self-supply to serve their respective systems. We have
invested $4.9 million through the three months ended March 31, 2005, related to
assuring reliability of our systems and sources of supply in order to serve our
customers. We believe we have made the appropriate investment in infrastructure
and on March 8, 2005, we filed our certification of self-sufficiency of supply
with the PSC. We were informed by the PSC on March 18, 2005, that our filing was
premature and would not be acted upon at this time.
REGULATORY MATTERS AND INFLATION
As of March 31, 2005, we had 71,275 metered water customers and served a
population of approximately 232,000, representing approximately 28% of
Delaware's total population. The PSC regulates Artesian Water's rates charged
for water service, the sale and issuance of securities and other matters. On
July 6, 2004, Delaware enacted legislation authorizing the PSC to regulate
wastewater companies, which includes rates charged for wastewater service,
issuance of securities and other matters. We received recognition of Artesian
Wastewater as a regulated public wastewater utility by the PSC on March 8, 2005.
Artesian Wastewater received a Certificate of Public Convenience and Necessity,
CPCN, in the first quarter of 2005 to serve a planned 750 home residential
community in Sussex County, Delaware. Artesian Wastewater concurrently received
a permit to construct a wastewater treatment and disposal facility to service
this residential development. This facility is currently under construction.
11
Our regulated utilities 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 lesser of the entire requested
rate relief or 15% of annual gross water sales 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 PSC finds to be appropriate, we 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.
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 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 is less costly when compared to the approval process for
general rate increase requests.
Results of Operations - Analysis of First Quarter of 2005 Compared to
- ---------------------------------------------------------------------
First Quarter of 2004
- ---------------------
Operating Revenues
- ------------------
Revenues totaled $9.9 million for the three months ended March 31, 2005, $1.1
million, or 12.7% above revenues for the three months ended March 31, 2004, of
$8.8 million. Water sales revenues increased 9.8% for the three months ended
March 31, 2005, over the corresponding period in 2004. A portion of the increase
in water sales revenue reflects a 1.6% increase in the number of customers
served. The increase was also the result of a temporary rate increase placed
into effect in two steps on April 6, 2004 and September 7, 2004, pursuant to the
Company's 2004 rate application described below. The remaining increase in
operating revenues for the three months ended March 31, 2005, is primarily due
to additional revenues generated by wastewater and contract operations services.
Offsetting these increases, we served three fewer industrial customers during
the first quarter of 2005 than a year ago and the first quarter of 2005
contained one less calendar day than the leap year of 2004, resulting in a
reduction of about 1.3% in system delivery. We realized 93.9% of our total
revenue for the three months ended March 31, 2005, from the sale of water,
compared to 96.4% during the same period last year.
On February 5, 2004, Artesian Water filed a petition with the PSC to implement
new rates to meet a requested increase in revenue of 24%, or approximately $8.8
million, on an annualized basis. The 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
PSC, Artesian Water, as is permitted by law, placed a portion of the proposed
rates into effect under surety, in lieu of 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.
Beginning September 7, 2004, Artesian Water placed an additional portion of the
proposed rates into effect. These rates were designed to generate an additional
increase of approximately 8.02%, for a total increase of 15%, or approximately
$5.5 million on an annualized basis, the maximum level of temporary rates
permitted by law. These revised temporary rates will remain in effect until the
PSC decides the level of permanent rates and issues a final rate order. If this
permitted temporary rate increase is determined to be in excess of rates that
the PSC ultimately deems appropriate, Artesian Water is required to refund the
excess portion plus interest to its customers. On April 5, 2005, the PSC
approved a rate increase for Artesian Water, in response to Artesian Water's
February 5, 2004 rate request. A final rate order incorporating the results of
the PSC's deliberation and resolution of their affect on the various components
of the Company's request is currently under review by the parties in the case.
Pending review by Artesian Water of the final order by the PSC, determination
can be reached as to the impact of the new rates on customer bills. Artesian
Water currently expects that the rate increase will be approximately $4.4
million on an annualized basis. Since temporary rates exceeded the final rate
increase, overpayment from customers, with interest, will be applied to current
and future customer bills once the impact of the new rates is determined. As of
March 31, 2005, we have reserved $504,000 of the total received under temporary
rates in anticipation of a refund.
12
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 required by law, application of the DSIC surcharge was
discontinued after the temporary rate increase was placed into effect on April
6, 2004. We billed $87,000 in revenues under this surcharge from January 1, 2004
through April 6, 2004.
Operating Expenses
- ------------------
Operating expenses, excluding depreciation and income taxes, increased $627,000,
or 11.2%, to $6.2 million for the three months ended March 31, 2005, compared to
$5.6 million for the same period in 2004. The components of the increase in
operating expenses included increases in payroll and employee benefit expense of
$388,000, in non-utility expense of $180,000, in purchased water expense of
$63,000, in repair and maintenance expense of $24,000, and in water treatment
expense of $7,000, offset by a decrease in administrative expenses of $89,000.
Payroll and employee benefit expense increased approximately $388,000 for the
three months ended March 31, 2005, or 15.3%, over the three months ended March
31, 2004, primarily due to an increase in the number of employees, officer
bonuses paid in 2005 that were not paid in 2004, and a 15% increase in medical
insurance premiums effective August 2004. These increases were partially offset
by an increase in the capitalization of payroll and related benefit costs
associated with our internal staff effort to convert our customer information
system computer programs.
Non-utility expense increased approximately $180,000 for the three months ended
March 31, 2005, over the three months ended March 31, 2004, primarily due to
contracted engineering design services for new projects for Artesian Utility.
The engineering fees are charged back to developers under contract and the
associated revenues have been reflected in our operating revenues under
non-utility revenue.
Purchased water expense increased approximately $63,000 for the three months
ended March 31, 2005, over the three months ended March 31, 2004, primarily due
to an increase in purchases from the City of Wilmington. Current year purchases
from the City of Wilmington are being timed to occur steadily throughout the
year compared to 2004 when minimum purchase requirements were met later in the
year.
Administrative expense decreased by $89,000 primarily due to a decrease in rate
case expense reflecting the effect of the accelerated amortization of the 2002
rate case in the first quarter of 2004 and our reimbursement of consulting fees
incurred by the PSC in the first quarter of 2004 in connection with the review
of supply conditions during the 2002 drought. The investigation confirmed that
our supply was adequate to meet uninterrupted demand during the 2002 drought
period. These decreases were partially offset by increases in auditing and tax
service fees of $38,000.
The ratio of operating expense, excluding depreciation and income taxes, to
total revenue was 56.9% for the three months ended March 31, 2005, compared to
57.6% for the three months ended March 31, 2004.
Depreciation and amortization expense increased $118,000, or 12.8%, over the
three months ended March 31, 2004, due to increases in our utility plant in
service providing supply, treatment, storage and distribution of water. Income
tax expense increased $169,000 due to higher profitability for the three months
ended March 31, 2005, compared to the three months ended March 31, 2004.
13
Other Income, Net
- -----------------
Our Allowance for Funds Used During Construction, AFUDC, decreased $41,000 as a
result of lower long-term construction activity subject to AFUDC for the first
three months of 2005 compared to the same period in 2004, as further discussed
under "Liquidity and Capital Resources" below. Miscellaneous Income increased
$100,000 primarily due to recording cash dividends associated with our
investment in CoBank in the first quarter. CoBank is a cooperative bank that
distributes equity and cash income to its customer-owners. Our ownership
interest in CoBank is the result of our issuance of $40 million in First
Mortgage Bonds to CoBank as currently reflected on our Balance Sheet.
Interest Charges
- ----------------
Interest charges increased $24,000, or 1.7%, for the three months ended March
31, 2005, compared to the three months ended March 31, 2004, primarily due to
higher average outstanding balances on the lines of credit, interest rates that
increased 1.62% since March 2004, and additional borrowings from the Delaware
Drinking Water State Revolving Fund, the Fund, of $1.2 million.
Net Income
- ----------
Our net income increased $236,000 for the three months ended March 31, 2005,
compared to the same period a year ago. The increase in net income for the three
months was greater than expected after accounting for growth in customers and
temporary rate increases placed in effect during the period primarily due to an
increased annual dividend received from CoBank, non-recurring expenses recorded
in the prior period related to PSC costs billed to Artesian for their review of
supply adequacy during the 2002 drought, and to the acceleration of the 2002
rate case expenses due to implementation of temporary rates related to the 2004
rate case.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity for the three months ended March 31, 2005, were
$3.2 million provided by cash flow from operating activities and $2.1 million
from financing activities, which includes $1.2 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.
We invested $4.9 million in capital expenditures during the first three months
of 2005 compared to $9.1 million invested during the same period in 2004. During
the first quarter of 2004, we made significant investments to integrate our
water systems in northern and southern New Castle County, Delaware and to
construct a new one million gallon storage tank in southern New Castle County.
We did not have such extensive projects underway in the first quarter of 2005.
On November 7, 2003, Artesian Water Company, Inc. entered into an agreement to
borrow $5,456,495 from the Fund for a term of twenty years at an interest rate
of 3.64%. The loan was used for costs associated with the replacement and
rehabilitation of transmission and distribution mains within several
developments in our northern New Castle County service territory. We drew down
$251,545 on March 16, 2005. Through March 31, 2005, the Company borrowed
$2,111,812. We have notified the state that we will not draw the remaining
funds.
At March 31, 2005, Artesian Water had lines of credit with two separate
financial institutions totaling $40.0 million to meet its temporary cash
requirements. These revolving credit facilities are unsecured. As of March 31,
2005, we had $29.4 million of available funds under these lines. The interest
rate for borrowings under each of these lines is the London Interbank Offering
Rate, LIBOR, plus 1.0%, or, at our discretion, the bank's federal funds rate
plus 1.0%. At March 31, 2005, the rate on these lines was 3.66%. All the
facilities are reviewed annually by each bank for renewal. We expect that our
available projected cash generated from operations and available bank credit
lines will be sufficient to meet our financial obligations for at least the next
twelve months.
14
At March 31, 2005, Artesian Utility and Artesian Wastewater had lines of credit
with a financial institution for $3.5 million and $1.5 million, respectively, to
meet temporary cash requirements. These revolving credit facilities are
unsecured. As of March 31, 2005, we had not borrowed funds under Artesian
Utility and had borrowed $254 under Artesian Wastewater. The interest rate for
borrowings under each of these lines is the LIBOR plus 1.75%. The bank reviews
its facilities annually for renewal.
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 goals, priorities and growth
and expansion plans for our water and wastewater subsidiaries, the adoption of
Statement 123R, our expectations regarding the size of our February 2004 rate
requests, exact amounts that may be collected under temporary rate increases,
the adequacy of our reserve for a potential refund of revenues received under
temporary rates and the potential impact on revenue in 2005, contract operations
opportunities, the safety and dependability of our water supply, water quality
standards, adequacy of our available sources of financing, investment plans in
2005, plans to increase our wastewater treatment operations and other revenue
streams less affected by weather, appropriate investment in infrastructure
regarding the filing of the certification of sufficient sources of self-supply,
expected contributions in 2005 to our postretirement benefit plan, and our
liquidity needs 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, the timing and results of our rate
requests, changes in economic and market conditions generally, and other matters
could cause results to differ materially from those in the forward-looking
statements. While the Company may elect to update forward-looking statements, we
specifically disclaim any obligation to do so and you should not rely on any
forward-looking statement as representation of the Company's views as of any
date subsequent to the date of the filing of this Quarterly Report on Form 10-Q.
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 terms of our First Mortgage Bonds, which have maturity dates ranging from
2007 to 2043.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our
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 our disclosure controls and procedures as of
the end of the period covered by this report are functioning effectively to
provide reasonable assurance that the information required to be disclosed by us
in reports filed under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and (ii) accumulated and communicated to our management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding disclosure. A controls system
cannot provide absolute assurance, however, 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.
15
(c) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
16
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material legal proceedings pending at this date.
ITEM 6 - EXHIBITS
Exhibits
31.1 Certification of Chief Executive Officer of the Registrant
required by Rule 13a - 14 (a) under the Securities Act of 1934.
31.2 Certification of Chief Financial Officer of the Registrant
required by Rule 13a - 14 (a) under the Securities Act of 1934.
32 Certification of Chief Executive Officer and Chief Financial
Officer of the Registrant required by Rule 13a - 14 (b) under the
Securities Act of 1934.
17
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: May 10, 2005 By: /s/ DIAN C. TAYLOR
------------------------------------------
Dian C. Taylor, (Principal Executive Officer)
Date: May 10, 2005 By: /s/ DAVID B. SPACHT
------------------------------------------
David B. Spacht, (Principal Financial and Accounting Officer)
18
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
31.1 Certification of Chief Executive Officer of the
Registrant required by Rule 13a - 14 (a) under the
Securities Act of 1934.
31.2 Certification of Chief Financial Officer of the
Registrant required by Rule 13a - 14 (a) under the
Securities Act of 1934.
32 Certification of Chief Executive Officer and Chief
Financial Officer of the Registrant required by Rule
13a - 14 (b) under the Securities Act of 1934.
19