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 June 30, 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
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0002090
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
664 CHURCHMANS ROAD, NEWARK, DELAWARE 19702
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(302) 453 - 6900
-----------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------
(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 August 5, 2005, 3,401,017 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
June 30, 2005 (unaudited) and December 31, 2004 3
Consolidated Statement of Income
for the quarter ended June 30, 2005 and 2004 (unaudited) 4
Consolidated Statement of Income
for the six months ended June 30, 2005 and 2004 (unaudited) 5
Consolidated Statement of Retained Earnings
for the six months ended June 30, 2005 and 2004 (unaudited) 6
Consolidated Statement of Cash Flows
for the six months ended June 30, 2005 and 2004 (unaudited) 6 - 7
Notes to the Consolidated Financial Statements 8 - 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 - 19
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19 - 20
ITEM 4 - CONTROLS AND PROCEDURES 20
PART II - OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS 20
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 - 21
ITEM 6 - EXHIBITS 22
SIGNATURES 23
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
June 30, 2005 December 31, 2004
------------- -----------------
ASSETS
Utility plant, at original cost less accumulated depreciation $220,079 $212,152
Current assets
Cash and cash equivalents 1,517 1,217
Accounts receivable, net 3,584 3,806
Unbilled operating revenues 2,737 2,372
Materials and supplies-at cost on FIFO basis 902 932
Prepaid property taxes -- 765
Prepaid expenses and other 532 565
-------- --------
9,272 9,658
-------- --------
Other assets
Non-utility property (less accumulated depreciation 2005-$118; 2004-$108) 327 337
Restricted cash -- 503
Other deferred assets 2,796 2,626
-------- --------
3,123 3,466
Regulatory assets, net 2,097 2,104
-------- --------
$234,571 $227,380
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock $ 3,986 $ 3,956
Additional paid-in capital 42,823 42,222
Retained earnings 9,216 8,765
-------- --------
Total stockholders' equity 56,025 54,943
Long-term debt, net of current portion 91,630 82,356
-------- --------
147,655 137,299
-------- --------
Current liabilities
Notes payable 1,124 9,213
Current portion of long-term debt 342 1,082
Accounts payable 1,770 2,173
Accrued expenses 2,075 2,028
Overdraft payable 2,189 1,812
Deferred income taxes -- 150
Interest accrued 356 354
Customer deposits 474 470
Reserved water sales revenues 743 217
Other 1,339 941
-------- --------
10,412 18,440
-------- --------
Deferred credits and other liabilities
Net advances for construction 22,867 21,456
Postretirement benefit obligation 1,133 1,169
Deferred investment tax credits 802 816
Deferred income taxes 16,375 14,774
-------- --------
Commitments and contingencies
41,177 38,215
-------- --------
Net contributions in aid of construction 35,327 33,426
-------- --------
$234,571 $227,380
======== ========
See notes to the consolidated financial statements.
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share amounts)
For the Quarter
Ended June 30,
--------------------
2005 2004
-------- --------
OPERATING REVENUES
Water sales $ 10,402 $ 9,568
Other utility operating revenue 234 204
Non-utility revenue 866 212
-------- --------
11,502 9,984
-------- --------
OPERATING EXPENSES
Utility operating expenses 5,431 5,196
Non-utility operating expenses 888 132
Depreciation and amortization 1,080 1,093
State and federal income taxes 805 648
Property and other taxes 591 553
-------- --------
8,795 7,622
-------- --------
OPERATING INCOME 2,707 2,362
OTHER INCOME, NET
Allowance for funds used during construction 72 162
Miscellaneous income (expense) (31) (85)
-------- --------
INCOME BEFORE INTEREST CHARGES 2,748 2,439
INTEREST CHARGES 1,544 1,480
-------- --------
NET INCOME APPLICABLE TO COMMON STOCK $ 1,204 $ 959
======== ========
INCOME PER COMMON SHARE:
Basic $ 0.30 $ 0.24
======== ========
Diluted $ 0.29 $ 0.24
======== ========
CASH DIVIDEND PER COMMON SHARE $ 0.2175 $ 0.2075
======== ========
AVERAGE COMMON SHARES OUTSTANDING
Basic 3,975 3,930
======== ========
Diluted 4,107 4,064
======== ========
See notes to the consolidated financial statements.
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share amounts)
For the Six Months
Ended June 30,
2005 2004
------- -------
OPERATING REVENUES
Water sales $19,697 $18,033
Other utility operating revenue 459 404
Non-utility revenue 1,248 334
------- -------
21,404 18,771
------- -------
OPERATING EXPENSES
Utility operating expenses 10,808 10,180
Non-utility operating expenses 1,144 206
Depreciation and amortization 2,122 2,016
State and federal income taxes 1,445 1,119
Property and other taxes 1,172 1,082
------- -------
16,691 14,603
------- -------
OPERATING INCOME 4,713 4,168
OTHER INCOME, NET
Allowance for funds used during construction 123 254
Miscellaneous income 347 192
------- -------
INCOME BEFORE INTEREST CHARGES 5,183 4,614
INTEREST CHARGES 3,025 2,937
------- -------
NET INCOME 2,158 1,677
PREFERRED DIVIDEND REQUIREMENT -- 2
------- -------
NET INCOME APPLICABLE TO COMMON STOCK $ 2,158 $ 1,675
======= =======
INCOME PER COMMON SHARE:
Basic $ 0.54 $ 0.43
======= =======
Diluted $ 0.53 $ 0.41
======= =======
CASH DIVIDEND PER COMMON SHARE $0.4300 $0.4100
======= =======
AVERAGE COMMON SHARES OUTSTANDING:
Basic 3,973 3,924
======= =======
Diluted 4,107 4,057
======= =======
See notes to the consolidated financial statements
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Unaudited
(In thousands)
For the Six Months
Ended June 30,
2005 2004
------- -------
Balance, beginning of period $ 8,765 $ 7,630
Net income 2,158 1,677
------- -------
10,923 9,307
Less: Dividends 1,707 1,616
------- -------
Balance, end of period $ 9,216 $ 7,691
======= =======
See notes to the consolidated financial statements.
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
(In thousands)
For the Six Months
Ended June 30,
2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 2,158 $ 1,677
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,121 2,010
Deferred income taxes, net 1,437 1,269
Allowance for funds used during construction (123) (254)
Changes in assets and liabilities:
Accounts receivable, net 222 180
Income tax receivable -- 437
Unbilled operating revenues (365) (381)
Materials and supplies 30 (73)
Prepaid property taxes 765 711
Prepaid expenses and other 34 (573)
Other deferred assets (192) (99)
Regulatory assets 7 103
Postretirement benefit obligation (36) (29)
Accounts payable (402) (434)
Accrued expenses 47 871
Interest accrued 2 789
Customer deposits and other, net 928 594
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,633 6,798
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (net of AFUDC) (10,244) (20,409)
Investment in AquaStructure -- (4)
Proceeds from sale of assets 4 11
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (10,240) (20,402)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit agreements 1,046 (1,130)
Proceeds from issuance of long-term debt 251 2,819
Restricted funds from issuance of tax-free bonds 503 9,244
Overdraft payable 377 634
Net advances and contributions in aid of construction 3,636 3,070
Net proceeds from issuance of common stock 631 575
Dividends (1,707) (1,616)
Principal repayments of long-term debt (852) --
Deferred debt issuance costs 22 (27)
Redemption of preferred stock -- (100)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,907 13,469
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 300 (135)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 1,217 1,128
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,517 $ 993
======== ========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 2,953 $ 2,107
======== ========
Income taxes paid $ -- $ --
======== ========
See notes to the consolidated financial statements.
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 eighteen 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. Artesian Wastewater began providing service to
a community in Sussex County in July 2005. The Delaware Public Service
Commission, the PSC, approved the tariff to serve this community on July 15,
2005. 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.
Certain prior year amounts have been reclassed to conform with current year
presentation.
Stock Compensation Plans
On May 25, 2005, the Company's shareholders approved a new Equity Compensation
Plan, the Plan, which authorizes up to 500,000 shares of Class A Non-Voting
Common Stock for issuance. There have been no grants issued under this plan
through June 30, 2005. Since May 25, 2005, no additional grants were made
under the Company's three stock-based compensation plans previously available.
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
$49,500 for the six months ended June 30, 2004 and $44,900 for the quarter ended
June 30, 2004. No expense was incurred for the six months or the quarter ended
June 30, 2005 under any of the plans. Had compensation cost for the Company's
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 For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ------------ ----------- -----------
In thousands, except per share data
NET INCOME APPLICABLE TO COMMON STOCK
As reported $ 1,204 $ 959 $ 2,158 $ 1,675
Add: compensation expense included
in net income (net of tax) -- 27 -- 29
Deduct: compensation expense using
fair value based method (net of tax) (2) (59) (6) (83)
---------- ------------ ----------- -----------
Pro-forma $ 1,202 $ 927 $ 2,152 $ 1,621
BASIC NET INCOME PER COMMON SHARE
As reported $ .30 $ .24 $ .54 $ .43
Pro-forma $ .30 $ .24 $ .54 $ .41
DILUTED NET INCOME PER COMMON SHARE
As reported $ .29 $ .24 $ .53 $ .41
Pro-forma $ .29 $ .23 $ .52 $ .40
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 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:
June 30, 2005 December 31, 2004
------------- -----------------
(in thousands)
Postretirement benefit obligation $1,133 $1,169
Deferred income taxes recoverable in future rates 605 612
Expense of rate proceedings 330 289
Other 29 34
------ ------
$2,097 $2,104
====== ======
Expenses related to the Net Periodic Pension Cost for the postretirement benefit
obligation are as follows:
FOR THE SIX MONTHS ENDED JUNE 30, 2005 2004
-------- --------
NET PERIODIC PENSION COST
Interest cost $ 27 $ 29
Amortization of net gain (17) (18)
Amortization of transition obligation 4 4
-------- --------
Total net periodic benefit cost $ 14 $ 15
======== ========
CONTRIBUTIONS
Artesian Water contributed $50,000 to its postretirement benefit plan in the
first six months of 2005 and expects to contribute another $50,000 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.
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 For the Six Months
Ended June 30, Ended June 30,
----------------- ------------------
2005 2004 2005 2004
----- ----- ----- -----
(in thousands) (in thousands)
Average common shares outstanding during
the period for Basic computation 3,975 3,930 3,973 3,924
Dilutive effect of employee stock options 132 134 134 133
----- ----- ----- -----
Average common shares outstanding during
the period for Diluted computation 4,107 4,064 4,107 4,057
===== ===== ===== =====
Equity per common share was $14.05 at June 30, 2005 and $13.55 at June 30, 2004.
These amounts were computed by dividing common stockholders' equity, excluding
preferred stock, by the number of shares of common stock outstanding on June 30,
2005 and 2004, respectively.
NOTE 4 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board, FASB, issued Statement
No. 154, "Accounting Changes and Error Corrections". This statement is a
replacement of APB Opinion No. 20, "Accounting Changes" and FASB Statement No.
3, "Reporting Accounting Changes in Interim Financial Statements - an amendment
of APB Opinion No. 28". This Statement applies to all voluntary changes in
accounting principle and requires retrospective application to prior period
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effects of the change. When a pronouncement includes specific transition
provisions, those provisions should be followed. This Statement is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.
In March 2005, the FASB issued Interpretation No. 47, "An Interpretation of FASB
Statement No. 143". FASB Statement No. 143, "Accounting for Asset Retirement
Obligations", addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. Statement No. 143 requires recognition of a liability at
fair value and an increase to the carrying value of the related asset for any
retirement obligation. This amount would then be amortized over the life of the
asset. The liability would be adjusted at the end of each period to reflect the
passage of time and changes in the estimated future cash flows. This
Interpretation addresses the legal obligation to retire an asset when the timing
and (or) method of settlement are conditional on a future event that may or may
not be within the control of the Company. This Interpretation is effective no
later than the end of fiscal years ending after December 15, 2005 (December 31,
2005 for calendar-year entities). 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 Interpretation
No. 47 effective December 31, 2005.
In December 2004, the FASB issued Statement No. 123 (revised 2004), Statement
No. 123(R), "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, Staff Accounting
Bulletin 107, 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.
123(R), but recognizes that preparers will need to use considerable judgment
when valuing employee stock options under this statement. 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
this Statement 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, the Company, as is permitted by law, placed a portion of the proposed rates
into effect under surety, in lieu of bond, on April 6, 2004. Beginning September
7, 2004, Artesian Water placed an additional portion of the proposed rates into
effect. These temporary rates were designed to generate an increase in operating
revenue of approximately 15%, or $5.5 million on an annualized basis. On June
21, 2005, the PSC ruled on various issues within Artesian's rate application;
however, on July 5, 2005, they remanded two issues related to rate base
valuation to the Hearing Examiner for further consideration. These two issues
comprised approximately $350,000 of our requested increase in annualized
revenue. Based on the PSC decisions to date, Artesian will be required to refund
a portion of the temporary rate increase to its customers, but until a final
decision is reached on all issues, it is uncertain as to the level of the
refund. The refund, plus interest, for the overpayment from customers, will be
applied to current and future customer bills. The Company had reserved revenue
related to the second temporary increase of approximately $743,000, based on the
estimated amount of the customer refund. However, the amount of the refund would
be less if the matters remanded to the Hearing Examiner are found in our favor.
Delaware law 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 May 31, 2005, and
subsequently implemented, a 0.35% DSIC surcharge for bills rendered subsequent
to July 1, 2005. This surcharge was designed to generate approximately $72,000
in revenues between July and December of 2005.
Delaware House Bill No. 78 was enacted by the General Assembly of the State of
Delaware on June 30, 2005, and signed into law by the Governor on July 12, 2005.
This bill increases the millage assessment of public utilities regulated by the
PSC from 0.002 per dollar (2 mills) to 0.003 per dollar (3 mills) of utility
revenue for calendar year 2005. The law further allows affected utilities to
recover this increase without a base rate case through a rate change made
effective as soon as reasonably practicable. Artesian Water intends to apply for
and implement the rate change by September 1, 2005. The requested adjustment
will also be set to recover the expenses associated with the assessment
applicable to revenues received in 2005 prior to enactment of this legislation.
NOTE 6 - ISSUANCE OF LONG-TERM DEBT
On August 1, 2005, Artesian Water issued Series R, 23-year, First Mortgage Bonds
totaling $25 million at an annual interest rate of 5.96%. These bonds were
issued for the Company to CoBank, a cooperative bank, and the proceeds were used
on August 1, 2005, to retire the Series M, 10-year, 7.84%, $10 million bonds and
the Series N, 10-year, 7.56%, $5 million bonds and to satisfy the $865,000
redemption premium required as a result of the early retirement of the Series M
and Series N First Mortgage Bonds. The remainder of the bond proceeds were used
to pay down the Company's currently outstanding short-term line of credit, which
was used to finance investments in utility plant and equipment. Accordingly,
Notes Payable, included under current liabilities in the June 30, 2005 balance
sheet, excludes $9.1 million reclassified to long-term debt, representing the
amount of short-term debt refinanced on a long-term basis with the proceeds from
the issuance of the Series R Bonds. The Company expects to recover the
redemption premium over the life of the Series R bond and will record this
premium as a regulatory asset.
NOTE 7 - SALE OF LAND
On May 2, 2005, Artesian Development Corporation, Artesian Development, signed a
Letter of Intent with The Commonwealth Group, Ltd., Commonwealth, for the sale
of a parcel of land of approximately four acres in exchange for a non-refundable
deposit in the amount of $30,000.
On August 5, 2005, Artesian Development entered into an Agreement of Sale, the
Agreement, with Commonwealth for the sale of this land. The sale price is $1.35
million, which includes a $170,000 non-refundable deposit due within 14 days
upon execution of the Agreement, in addition to the $30,000 discussed above.
Settlement is to occur not later than 12 months after execution of the
Agreement. The sale and settlement are contingent on Commonwealth's ability to
obtain 1) all governmental approvals necessary to construct a medical office
facility of at least 42,000 square feet of leasable space and 2) an acceptable
environmental audit report. The Company's estimated cost basis for the property
is approximately $8,000.
NOTE 8 - PURCHASED WATER EXPENSE
Effective July 1, 2005, Chester Water Authority ("Chester") increased the rate
for water purchased by Artesian from $2.44 per thousand gallons to $2.47 per
thousand gallons. In addition, Chester discontinued the early payment discount
of 2% per month and passed on an increase in the consumptive use base charge
assessed by the Susquehanna River Basin Commission amounting to approximately
$3,600 annually. The Company's agreement with Chester, which expires on December
31, 2021, stipulates an average minimum purchase of 3.0 million gallons per day
on an annual basis. Based on our minimum purchases from Chester, these changes
will increase our expense by approximately $45,000 for the second half of 2005
and approximately $90,000 on an annualized basis. Also effective July 1, 2005,
the City of Wilmington (the "City") increased the rate for water purchased by
Artesian from $1.47 per thousand gallons to $1.678 per thousand gallons. Based
on our minimum purchases from the City, these changes will increase our expense
by approximately $21,000 for the second half of 2005 and approximately $42,000
on an annualized basis.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 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 six 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 designing,
building, operating and owning systems throughout Delaware and surrounding
areas. 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., 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. Artesian Wastewater
began providing service to a community in Sussex County in July 2005. The PSC
approved the tariff to serve this community on July 15, 2005. 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 $10.2 million through the six months ended June 30, 2005, in order to
assure reliability of our systems and sources of supply for 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 that time. On June 21, 2005, the PSC issued Order No.
6660, in which they indicated that they are unable to consider our filing under
the Self Sufficiency Act, since the Water Supply Coordinating Council has not
yet published its determination of projected water demand. However, the PSC
accepted our filing, directing the PSC Staff to review and confirm our assertion
of adequate supply through 2006. The Company will update and refile its
application prior to July 2006, requesting certification by the PSC of self
sufficiency through 2009.
REGULATORY MATTERS AND INFLATION
As of June 30, 2005, we had approximately 71,000 metered water customers and
served a population of approximately 233,000, 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. The facility began providing service to this
development in July 2005. The PSC approved the tariff to serve this community on
July 15, 2005.
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 law 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 Six Months of 2005
Compared to First Six Months of 2004
Operating Revenues
Revenues totaled $21.4 million for the six months ended June 30, 2005, $2.6
million, or 14.0%, above revenues for the six months ended June 30, 2004, of
$18.8 million. Water sales revenues increased 9.2% for the six months ended June
30, 2005, over the corresponding period in 2004. A portion of the increase in
water sales revenue reflects a 1.0% 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 six months ended June 30, 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 six
months of 2005 than a year ago and the first six months of 2005 contained one
less calendar day than the leap year of 2004, resulting in a reduction of about
0.5% in system delivery. We realized 92.0% of our total revenue for the six
months ended June 30, 2005, from the sale of water, compared to 96.1% during the
same period last year. Non-utility revenue totaled $1,248,000 for the six months
ended June 30, 2005, $914,000 above non-utility revenue for the six months ended
June 30, 2004, of $334,000. This increase is a result of additional revenue from
our non-regulated wastewater subsidiary, Artesian Utility, to design, build and
operate wastewater facilities throughout Delaware and surrounding areas. These
revenues are offset by associated non-utility expenses for contracted
engineering design services. They also reflect $177,000 charged to unearned
revenue based on the stages of completion of the wastewater projects.
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, the Company, as is permitted by law, placed a portion of the proposed rates
into effect under surety, in lieu of bond, on April 6, 2004. Beginning September
7, 2004, Artesian Water placed an additional portion of the proposed rates into
effect. These temporary rates were designed to generate an increase in operating
revenue of approximately 15%, or $5.5 million on an annualized basis. On June
21, 2005, the PSC ruled on various issues within Artesian's rate application;
however, on July 5, 2005, they remanded two issues related to rate base
valuation to the Hearing Examiner for further consideration. These two issues
comprised approximately $350,000 of our requested increase in annualized
revenue. Based on the PSC decisions to date, Artesian will be required to refund
a portion of the temporary rate increase to its customers, but until a final
decision is reached on all issues, it is uncertain as to the level of the
refund. The refund, plus interest, for the overpayment from customers, will be
applied to current and future customer bills. The Company had reserved revenue
related to the second temporary increase of approximately $743,000, based on the
estimated amount of the customer refund. However, the amount of the refund would
be less if the matters remanded to the Hearing Examiner are found in our favor.
Delaware law permits water utilities to put into effect, on a semi-annual basis,
increases related to specific types of distribution system improvements through
a 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 May 31, 2005, and subsequently implemented, a 0.35% DSIC surcharge
for bills rendered subsequent to July 1, 2005. This surcharge was designed to
generate approximately $72,000 in revenues between July and December of 2005.
Operating Expenses
Operating expenses, excluding depreciation and income taxes, increased $1.7
million, or 14.4%, to $13.1 million for the six months ended June 30, 2005,
compared to $11.5 million for the same period in 2004. The components of the
increase in operating expenses included increases in non-utility expense of
$938,000, utility payroll and employee benefit expense of $593,000, utility
water treatment expense of $41,000, utility purchased water expense of $39,000,
offset by decreases in utility administrative expense of $25,000 and utility
CPCN applications expense in Pennsylvania of $71,000.
Non-utility expense increased approximately $938,000 for the six months ended
June 30, 2005, over the six months ended June 30, 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. The increase in non-utility expense included a $73,000
increase in payroll and employee benefits associated with non-utility
operations.
Utility payroll and employee benefit expense increased approximately $593,000
for the six months ended June 30, 2005, or 11.7%, over the six months ended June
30, 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 certain payroll and related benefit
costs in accordance with AICPA Statement of Position (SOP) 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use of
approximately $116,000. These costs were related to personnel expenses allocated
to the development of interface and other software programs necessary to
implement our new customer information system that was purchased from a third
party vendor in 2004.
Utility water treatment expense increased approximately $41,000 for the six
months ended June 30, 2005, over the six months ended June 30, 2004, primarily
due to an increase in the use of caustic soda at our Chesapeake City Road
treatment station that came on line in August 2004.
Utility purchased water expense increased approximately $39,000 for the six
months ended June 30, 2005, over the six months ended June 30, 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. Effective July 1, 2005, Chester Water Authority ("Chester")
increased the rate for water purchased by Artesian from $2.44 per thousand
gallons to $2.47 per thousand gallons. In addition, Chester discontinued the
early payment discount of 2% per month and passed on an increase in the
consumptive use base charge assessed by the Susquehanna River Basin Commission
amounting to approximately $3,600 annually. The Company's agreement with
Chester, which expires on December 31, 2021, stipulates an average minimum
purchase of 3.0 million gallons per day on an annual basis. Based on our minimum
purchases from Chester, these changes will increase our expense by approximately
$45,000 for the second half of 2005 and approximately $90,000 on an annualized
basis. Also effective July 1, 2005, the City of Wilmington (the "City")
increased the rate for water purchased by Artesian from $1.47 per thousand
gallons to $1.678 per thousand gallons. Based on our minimum purchases from the
City, these changes will increase our expense by approximately $21,000 for the
second half of 2005 and approximately $42,000 on an annualized basis.
Utility administrative expense decreased by $25,000, primarily due to a decrease
of $115,000 in rate case expense reflecting the effect of the accelerated
amortization of the 2002 rate case in the first four months of 2004 and our
reimbursement of $70,000 in consulting fees incurred by the PSC in the first six
months 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 $75,000,
directors' fees of $42,000 and miscellaneous and general expense for temporary
employee services of $20,000. CPCN applications expense decreased by
approximately $71,000. The regulatory processing of a CPCN application in
Pennsylvania during 2004, which is further described in Note 1 to the financial
statements included in this report, increased this expense in 2004.
Delaware House Bill No. 78 was enacted by the General Assembly of the State of
Delaware on June 30, 2005, and signed into law by the Governor on July 12, 2005.
This bill increases the millage assessment of public utilities regulated by the
PSC from 0.002 per dollar (2 mills) to 0.003 per dollar (3 mills) of utility
revenue for calendar year 2005. The law further allows affected utilities to
recover this increase without a base rate case through a rate change made
effective as soon as reasonably practicable. Artesian Water intends to apply for
and implement the rate change by September 1, 2005. This change will increase
regulatory commission expense going forward.
The ratio of operating expense, excluding depreciation and income taxes, to
total revenue was 61.3% for the six months ended June 30, 2005, compared to
61.1% for the six months ended June 30, 2004.
Depreciation and amortization expense increased $106,000, or 5.3%, over the six
months ended June 30, 2004, due to increases in our utility plant in service
providing supply, treatment, storage and distribution of water. Income tax
expense increased $326,000 due to higher profitability for the six months ended
June 30, 2005, compared to the six months ended June 30, 2004.
Other Income, Net
Our Allowance for Funds Used During Construction, AFUDC, decreased $131,000 as a
result of lower long-term construction activity subject to AFUDC for the first
six months of 2005 compared to the same period in 2004, as further discussed
under "Liquidity and Capital Resources" below. Miscellaneous Income increased
$155,000 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 First Mortgage Bonds to
CoBank. Dividends received in 2005 were based on the issuance of $40 million in
First Mortgage Bonds.
Interest Charges
Interest charges increased $88,000, or 3.0%, for the six months ended June 30,
2005, compared to the six months ended June 30, 2004, primarily due to higher
average short-term interest rates on the lines of credit. While the average
outstanding line of credit balances were lower for the six months ended June 30,
2005 compared to the same period in 2004, the average interest applied to these
balances increased from 2.03% for the six months ended June 30, 2004 to 3.75%
for the six months ended June 30, 2005.
Net Income
Our net income increased $481,000 for the six months ended June 30, 2005,
compared to the same period a year ago. The increase in net income for the six
months was primarily due to temporary rate increases placed in effect during the
period. Additional causes for the increase were an increased annual dividend
received from CoBank, non-recurring regulatory expenses recorded in the prior
period and capitalization of labor costs associated with the implementation of a
new Customer Information System.
Results of Operations - Analysis of Second Quarter of 2005 Compared
to Second Quarter of 2004
Operating Revenues
Revenues totaled $11.5 million for the quarter ended June 30, 2005, $1.5
million, or 15.2% above revenues for the quarter ended June 30, 2004 of $10.0
million. Water sales revenue increased 8.7% for the quarter ended June 30, 2005
over the corresponding period in 2004 primarily due to a second temporary rate
increase placed into effect on September 7, 2004, pursuant to the Company's 2004
rate application described above. The remaining increase in operating revenues
for the quarter ended June 30, 2005 is primarily due to additional revenues
generated by wastewater and contract operations services. We realized 90.4% of
our total revenue for the quarter ended June 30, 2005 from the sale of water.
Operating Expenses
Operating expenses, excluding depreciation and income taxes, increased $1.0
million, or 17.5%, to $6.9 million for the quarter ended June 30, 2005 compared
to $5.9 million for the same period in 2004. The components of the increase in
operating expenses for the quarter ended June 30, 2005 included increases in
non-utility expenses of $756,000, in utility payroll and employee benefit
expense of $174,000, in utility administrative expenses of $53,000, in utility
water treatment expense of $34,000, offset by a decrease of $50,000 in costs
associated with the regulatory processing of a utility CPCN application in
Pennsylvania during 2004, which is further described in Note 1 to the financial
statements included in this report, and which increased this expense in 2004.
Non-utility expenses increased approximately $756,000 for the quarter ended June
30, 2005 due primarily 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. The increase in non-utility
expense included an increase of approximately $32,000 in payroll and employee
benefits due to the addition of new employees and merit increases.
Utility payroll and associated employee benefits expense increased $174,000, or
6.9%, primarily due to an increase in medical insurance premiums effective
August 2004, an increase in the number of employees and merit increases
effective October 2004. These increases were partially offset by an increase in
the capitalization of certain payroll and related benefit costs in accordance
with AICPA Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use of approximately
$34,000. These costs were related to personnel expenses allocated to the
development of interface and other software programs necessary to implement our
new customer information system that was purchased from a third party vendor in
2004.
Utility administrative expenses increased approximately $53,000 for the quarter
ended June 30, 2005, or 6.7%, due primarily to an increase in auditing and tax
fees of $37,000 and in miscellaneous and general expense for temporary
employment services of $15,000.
Utility water treatment expense increased approximately $34,000, comprised of an
increase of approximately $24,000 for sludge removal costs and an increase of
approximately $20,000 for caustic soda chemicals at our Chesapeake City Road
treatment station that came on line in August 2004. These increases were offset
by a decrease of approximately $8,000 in lab chemicals and equipment due to the
use of new chemical analyzers that do not require additional chemical reagents
and have fewer associated replacement parts.
The ratio of operating expense, excluding depreciation and income taxes, to
total revenue was 60.1% for the quarter ended June 30, 2005, compared to 58.9%
for the quarter ended June 30, 2004.
Other Income, Net
Our Allowance for Funds Used During Construction, AFUDC, decreased $90,000 as a
result of lower long-term construction activity subject to AFUDC for the second
quarter of 2005 compared to the same period in 2004, as further discussed under
"Liquidity and Capital Resources" below. Miscellaneous Expense decreased $54,000
primarily due to the reversal of an accrual for patronage associated with our
investment in CoBank in the second quarter of 2004. 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 First Mortgage Bonds to
CoBank. Dividends received in 2005 were based on the issuance of $40 million in
First Mortgage Bonds. This was offset by a decrease in interest income primarily
due to interest earned in the second quarter of 2004 on an investment account.
This account held the proceeds of our Series Q bonds, which were restricted in
their use. As the proceeds were drawn upon for the applicable construction
projects, interest income declined. By January 31, 2005, the proceeds had been
completely utilized.
Interest Charges
Interest charges increased $64,000, or 4.3%, for the quarter ended June 30,
2005, compared to the quarter ended June 30, 2004, primarily due to higher
average short-term interest rates on the lines of credit and the accelerated
amortization of debt issuance costs for the Series M and Series N First Mortgage
bonds in the second quarter of 2005 as a result of the August 1, 2005 redemption
of the Series M and Series N First Mortgage Bonds. While the average outstanding
line of credit balances were lower for the quarter ended June 30, 2005 compared
to the same period in 2004, the average interest applied to these balances
increased from 2.05% for the quarter ended June 30, 2004 to 3.98% for the
quarter ended June 30, 2005.
Net Income
Our net income increased $245,000 for the quarter ended June 30, 2005, compared
to the same period a year ago. The increase in net income for the quarter was
primarily due to temporary rate increases in effect during the period.
Additional causes for the increase were non-recurring regulatory expenses
recorded in the prior year period and the decrease in costs associated with the
regulatory processing of CPCN applications in Pennsylvania of $50,000.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity for the six months ended June 30, 2005, were
$6.6 million provided by cash flow from operating activities and $3.9 million
from financing activities, which includes $3.6 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 $10.2 million in capital expenditures during the first six months of
2005 compared to $20.4 million invested during the same period in 2004. During
the first six months of 2004, we had extensive projects underway to integrate
our water systems in northern and southern New Castle County, Delaware, to
construct a new one million gallon storage tank in southern New Castle County
and place into service a 3 million gallon per day treatment facility and
complete hydraulic improvements in New Castle County. In the first six months of
2005, we continued our investment to integrate our water systems in northern and
southern New Castle County, Delaware and in Kent County, Delaware and made
significant investments to relocate mains due to a major highway reconstruction
project.
On November 7, 2003, Artesian Water entered into an agreement to borrow
$5,456,495 from the Delaware Drinking Water State Revolving Fund, 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. Through June 30, 2005, the Company borrowed $2,222,960, of
which the entire amount was outstanding. We have notified the state that we will
not draw the remaining funds.
On August 1, 2005, Artesian Water issued Series R, 23-year, First Mortgage Bonds
totaling $25 million at an annual interest rate of 5.96%. These bonds were
issued for the Company to CoBank, a cooperative bank, and the proceeds were used
on August 1, 2005, to retire the Series M, 10-year, 7.84%, $10 million bonds and
the Series N, 10-year, 7.56%, $5 million bonds and to satisfy the $865,000
redemption premium required as a result of the early retirement of the Series M
and Series N First Mortgage Bonds. The remainder of the bond proceeds were used
to pay down the Company's currently outstanding short-term line of credit, which
was used to finance investments in utility plant and equipment. Accordingly,
Notes Payable, included under current liabilities in the June 30, 2005 balance
sheet, excludes $9.1 million reclassified to long-term debt, representing the
amount of short-term debt refinanced on a long-term basis with the proceeds from
the issuance of the Series R Bonds. The Company expects to recover the
redemption premium over the life of the Series R bond and will record this
premium as a regulatory asset.
At June 30, 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 June 30, 2005, we had
$29.8 million of available funds under these lines. Following the issuance of
the Series R bonds on August 1, 2005, and the repayment of $9.1 million, $38.9
million is available 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 June 30, 2005,
the rate on these lines was 4.07%. 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.
At June 30, 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 June 30, 2005, Artesian Utility had not drawn down on the
facility and Artesian Wastewater had borrowed less than $1,000. 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 154, Interpretation No. 47, and Statement 123R, our expectations
regarding the resolution of our February 2004 rate request, 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, exact amounts that may be collected under DSIC, our
application for recovery of the increase in the millage assessment, contract
operations opportunities, the safety and dependability of our water supply,
water quality standards, increases to purchased water expense, adequacy of our
available sources of financing, investment plans in 2005, the expected recovery
of expenses related to the issuance of long-term debt, 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. On August 1, 2005, Artesian Water issued Series R, 23-year, First
Mortgage Bonds totaling $25 million at an annual interest rate of 5.96%. These
bonds will enable the Company to retire the Series M, 10-year, 7.84%, $10
million bonds and the Series N, 10-year, 7.56%, $5 million bonds, which had
maturity dates of December 31, 2007. As of August 1, 2005, our First Mortgage
Bonds have maturity dates ranging from 2018 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.
(b) 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.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material legal proceedings pending at this date.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 2005 Annual Meeting of Stockholders on May 25, 2005.
(b) At the annual meeting, Mr. John R. Eisenbrey, Jr. and Ms. Dian C. Taylor
were elected to serve three year terms and until their respective successor
shall be elected and qualified or until their earlier resignation or
removal. Only holders of record of the Company's Class B Common Stock were
entitled to vote in respect to the election of directors. The following
directors continued to serve as directors of the Company immediately after
the annual meeting: Mr. Norman H. Taylor, Jr., Mr. Kenneth R. Biederman and
Mr. William C. Wyer.
(c) Only record holders of the Company's Class B Stock were entitled to vote at
the annual meeting. In addition to the election of two directors, the
shareholders of Class B Stock approved the following proposal:
Shareholders approved the Artesian Resources Corporation 2005 Equity
Compensation Plan (the "Plan"). The purpose of the Plan is to provide (i)
designated employees of the Company and its subsidiaries, and (ii)
non-employee members of the board of directors of the Company with the
opportunity to receive grants of stock options, stock units, stock awards,
dividend equivalents and other stock-based awards. Shareholder approval was
sought (i) in order to meet Nasdaq requirements, (ii) in order for incentive
stock options to meet the requirements of the Internal Revenue Code (the
"Code"), and (iii) so that the compensation attributable to grants under the
Plan may qualify for an exemption from the $1,000,000 deduction limit under
Section 162(m) of the Code.
The results of the vote tabulated at the meeting for the proposal are set forth
as follows:
Proposal Votes For Votes Against Abstentions
-------- --------- ------------- -----------
Approval of Artesian Resources Corporation 485,842 5,439 105
2005 Equity Compensation Plan
Two directors were elected at the Annual Meeting. The results of the vote
tabulated at the meeting for each nominee are set forth as follows:
Name Votes For Votes Withheld
---- --------- --------------
John R. Eisenbrey, Jr. 507,385 0
Dian C. Taylor 507,385 0
Directors are elected by a plurality of the votes cast, therefore, votes cast in
the election could not be recorded against or as an abstention, nor could broker
non-votes be recorded.
(d) Not applicable.
ITEM 6 - EXHIBITS
Exhibits
4.1 Artesian Resources Corporation 2005 Equity Compensation Plan.*
10.1 Eighteenth Supplemental Indenture dated as of August 1, 2005,
between Artesian Water Company, Inc., subsidiary of the Company, and
Wilmington Trust Company, as Trustee.
10.2 Agreement of Sale between Artesian Development Corporation and The
Commonwealth Group, dated as of August 5, 2005.
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.
* Compensation plan or arrangement required to be filed as an exhibit.
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: August 9, 2005 By: /s/ DIAN C. TAYLOR
------------------------------------
Dian C. Taylor,
(Principal Executive Officer)
Date: August 9, 2005 By: /s/ DAVID B. SPACHT
------------------------------------
David B. Spacht,
(Principal Financial and
Accounting Officer)
INDEX TO EXHIBITS
Exhibit Number Exhibit Title
4.1 Artesian Resources Corporation 2005 Equity Compensation Plan.*
10.1 Eighteenth Supplemental Indenture dated as of August 1, 2005,
between Artesian Water Company, Inc., subsidiary of the Company,
and Wilmington Trust Company, as Trustee.
10.2 Agreement of Sale between Artesian Development Corporation and
The Commonwealth Group, dated as of August 5, 2005.
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.
* Compensation plan or arrangement required to be filed as an exhibit.