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 September 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
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(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
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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
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
As of November 04, 2005, 3,421,059 shares of Class A Non-Voting Common Stock and
587,680 shares of Class B Common Stock were outstanding.
1
ARTESIAN RESOURCES CORPORATION
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS Page(s)
Consolidated Balance Sheets (unaudited)
September 30, 2005 and December 31, 2004 3
Consolidated Statements of Income (unaudited)
for the three months ended September 30, 2005 and 2004 4
Consolidated Statements of Income (unaudited)
for the nine months ended September 30, 2005 and 2004 5
Consolidated Statements of Retained Earnings (unaudited)
for the nine months ended September 30, 2005 and 2004 6
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2005 and 2004 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
ITEM 4 - CONTROLS AND PROCEDURES 19
PART II - OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS 19
ITEM 6 - EXHIBITS 20
SIGNATURES 21
2
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30, 2005 December 31, 2004
------------------ -----------------
ASSETS
Utility plant, at original cost less accumulated depreciation $ 223,690 $ 212,152
Current assets
Cash and cash equivalents 1,200 1,217
Accounts receivable, net 4,593 3,806
Unbilled operating revenues 2,597 2,372
Materials and supplies-at cost on FIFO basis 936 932
Prepaid property taxes 1,264 765
Prepaid expenses and other 912 566
-------------- ------------
Total current assets 11,502 9,658
-------------- ------------
Other assets
Non-utility property (less accumulated depreciation 2005-$124; 2004-$108) 322 337
Restricted cash - 503
Other deferred assets 3,720 2,626
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Total other assets 4,042 3,466
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Regulatory assets, net 2,017 2,104
-------------- ------------
$ 241,251 $ 227,380
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock $ 4,006 $ 3,956
Additional paid-in capital 43,162 42,222
Retained earnings 10,027 8,765
-------------- ------------
Total stockholders' equity 57,195 54,943
-------------- ------------
Long-term debt, net of current portion 92,385 82,356
Current liabilities
Notes payable 16 9,213
Current portion of long-term debt 346 1,082
Accounts payable 2,794 2,173
Accrued expenses 1,535 2,028
Overdraft payable 2,421 1,812
Deferred income taxes 375 150
Interest accrued 458 354
Customer deposits 465 470
Reserved water sales revenue 1,025 217
Other 2,189 941
-------------- ------------
Total current liabilities 11,624 18,440
-------------- ------------
Deferred credits and other liabilities
Net advances for construction 24,097 21,456
Postretirement benefit obligation 1,115 1,169
Deferred investment tax credits 796 816
Deferred income taxes 17,117 14,774
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Total deferred credits and other liabilities 43,125 38,215
-------------- ------------
Commitments and contingencies - -
Net contributions in aid of construction 36,922 33,426
-------------- ------------
$ 241,251 $ 227,380
============== ============
See notes to the consolidated financial statements.
3
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
For the three months
Ended September 30,
-----------------------------
2005 2004
-------- --------
OPERATING REVENUES
Water sales $ 11,289 $ 10,133
Other utility operating revenue 290 248
Non-utility revenue 801 220
--------- --------
12,380 10,601
--------- --------
OPERATING EXPENSES
Utility operating expenses 5,827 4,958
Non-utility operating expenses 557 142
Depreciation and amortization 1,098 998
State and federal income taxes 1,116 993
Property and other taxes 618 537
--------- --------
9,216 7,628
--------- --------
OPERATING INCOME 3,164 2,973
OTHER INCOME, NET
Allowance for funds used during construction 48 6
Miscellaneous expense (15) (6)
--------- --------
INCOME BEFORE INTEREST CHARGES 3,197 2,973
INTEREST CHARGES 1,518 1,493
--------- --------
NET INCOME APPLICABLE TO COMMON STOCK $ 1,679 $ 1,480
========= ========
INCOME PER COMMON SHARE:
Basic $ 0.42 $ 0.38
========= ========
Diluted $ 0.41 $ 0.36
========= ========
CASH DIVIDEND PER COMMON SHARE $ 0.2175 $ 0.2075
========= ========
AVERAGE COMMON SHARES OUTSTANDING
Basic 3,998 3,944
========= ========
Diluted 4,125 4,073
========= ========
See notes to the consolidated financial statements.
4
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
For the Nine Months
Ended September 30,
---------------------------------
2005 2004
----------- -----------
OPERATING REVENUES
Water sales $ 30,986 $ 28,166
Other utility operating revenue 749 652
Non-utility revenue 2,049 554
---------- ----------
33,784 29,372
---------- ----------
OPERATING EXPENSES
Utility operating expenses 16,635 15,138
Non-utility operating expenses 1,701 348
Depreciation and amortization 3,220 3,014
State and federal income taxes 2,561 2,112
Property and other taxes 1,790 1,619
---------- ----------
25,907 22,231
---------- ----------
OPERATING INCOME 7,877 7,141
OTHER INCOME, NET
Allowance for funds used during construction 171 260
Miscellaneous income 332 186
---------- ----------
INCOME BEFORE INTEREST CHARGES 8,380 7,587
INTEREST CHARGES 4,543 4,430
---------- ----------
NET INCOME 3,837 3,157
PREFERRED DIVIDEND REQUIREMENT - 2
---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK $ 3,837 $ 3,155
========== ==========
INCOME PER COMMON SHARE:
Basic $ 0.96 $ 0.80
========== ==========
Diluted $ 0.93 $ 0.78
========== ==========
CASH DIVIDEND PER COMMON SHARE $ 0.6475 $ 0.6175
========== ==========
AVERAGE COMMON SHARES OUTSTANDING:
Basic 3,981 3,931
========== ==========
Diluted 4,116 4,059
========== ==========
See notes to the consolidated financial statements.
5
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Unaudited
(In thousands)
For the Nine Months
Ended September 30,
---------------------------
2005 2004
--------- -----------
Balance, beginning of period $ 8,765 $ 7,630
Net income 3,837 3,157
--------- ----------
12,602 10,787
Dividends (2,575) (2,438)
--------- ----------
Balance, end of period $ 10,027 $ 8,349
========= ==========
See notes to the consolidated financial statements.
6
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
For the Nine Months
Ended September 30,
---------------------------------
2005 2004
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 3,837 $ 3,157
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,220 3,014
Deferred income taxes, net 2,548 2,952
Allowance for funds used during construction (171) (260)
Changes in assets and liabilities:
Accounts receivable, net (787) (541)
Income tax receivable - 437
Unbilled operating revenues (225) (401)
Materials and supplies (4) (154)
Prepaid property taxes (499) (437)
Prepaid expenses and other (347) (853)
Other deferred assets (1,123) (82)
Regulatory assets 87 91
Postretirement benefit obligation (54) (46)
Accounts payable 621 (493)
Accrued expenses (493) (648)
Interest accrued 104 220
Reserved water sales revenue 808 -
Customer deposits and other, net 1,243 545
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NET CASH PROVIDED BY OPERATING ACTIVITIES 8,765 6,501
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (net of AFUDC) (15,053) (23,677)
Investment in AquaStructure - (4)
Proceeds from sale of assets 6 11
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (15,047) (23,670)
------------- ------------
CASH FLOW FROM FINANCING ACTIVITIES
Net repayments under line of credit agreements (9,197) (1,337)
Proceeds from issuance of long-term debt 10,029 2,516
Restricted funds from issuance of tax-free bonds 502 12,798
Overdraft payable 609 410
Net advances and contributions in aid of construction 6,614 4,363
Principal (repayments) borrowings of long-term debt (736) 176
Net proceeds from stock transactions 990 835
Dividends (2,575) (2,438)
Deferred debt issuance costs 29 (20)
Redemption of preferred stock - (100)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 6,265 17,203
------------- ------------
NET (DECREASE ) INCREASE IN CASH AND CASH (17) 34
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 1,217 1,128
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,200 $ 1,162
============= ============
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 4,347 $ 4,149
============= ============
Income taxes paid $ -- $ --
============= ============
See notes to the consolidated financial statements.
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
Artesian Resources Corporation, or Artesian Resources, operates as a holding
company, whose income is derived from the earnings of our four wholly owned
subsidiary companies and our one-third interest in AquaStructure Delaware,
L.L.C., a Limited Liability Corporation whose primary activity is marketing
wastewater services. The terms "we", "our" and the "Company" as used herein
refer to Artesian Resources and its subsidiaries.
Artesian Water Company, Inc., or 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., or
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 a related
order was entered on February 4, 2005.
Another subsidiary of ours, Artesian Wastewater Management, Inc., or Artesian
Wastewater, is a regulated entity that owns 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, or the PSC, approved the tariff to serve this community on
July 15, 2005.
Our two other subsidiaries, neither of which is regulated, are Artesian Utility
Development, Inc., or Artesian Utility, which designs and builds wastewater
infrastructure and provides contract wastewater services in Delaware, and
Artesian Development Corporation, or Artesian Development, 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 period amounts have been reclassified to conform with current
period presentation.
Basis of Presentation
- ---------------------
The unaudited Consolidated Financial Statements are presented in accordance with
the requirements of Form 10-Q and consequently do not include all the
disclosures required in the financial statements included in the Company's
annual report on Form 10-K. Accordingly, these financial statements and related
notes should be read in conjunction with the financial statements and related
notes in the Company's annual report on Form 10-K for fiscal year 2004.
In the opinion of the Company, the accompanying unaudited Consolidated Financial
Statements reflect all normal recurring adjustments necessary to present fairly
the Company's balance sheet position as of September 30, 2005 and the result of
operations for the three and nine month periods ended September 30, 2005 and
2004 and cash flows for the nine month periods ended September 30, 2005 and
2004.
The results of operations for the interim period presented are not necessarily
indicative of the results to be expected for the full year or for future
periods.
Stock Compensation Plans
- ------------------------
On May 25, 2005, the Company's stockholders approved a new Equity Compensation
Plan, or the Plan, which authorizes up to 500,000 shares of Class A Non-Voting
Common Stock for issuance. Since May 25, 2005, no additional grants were made
under the Company's three other stock-based compensation plans that were
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 $124,800 for the nine months ended September 30,
2004 and $75,300 for the three months ended September 30, 2004. No expense was
8
incurred for the nine months or the three months ended September 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:
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2005 2004 2005 2004
------ ------ ------ ------
In thousands, except per share data
NET INCOME APPLICABLE TO COMMON STOCK
As reported $ 1,678 $ 1,480 $ 3,836 $ 3,155
Add: compensation expense included
in net income (net of tax) (1) 45 (1) 75
Deduct: compensation expense using
fair value based method (net of tax) (1) (115) (7) (197)
---------- -------- --------- --------
Pro-forma $ 1,676 $ 1,410 $ 3,828 $ 3,033
BASIC NET INCOME PER COMMON SHARE
As reported $ 0.42 $ 0.38 $ 0.96 $ 0.80
Pro-forma $ 0.42 $ 0.36 $ 0.96 $ 0.77
DILUTED NET INCOME PER COMMON SHARE
As reported $ 0.41 $ 0.36 $ 0.93 $ 0.78
Pro-forma $ 0.41 $ 0.35 $ 0.93 $ 0.75
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:
September 30, 2005 December 31, 2004
------------------ -----------------
(in thousands)
Postretirement benefit obligation $ 1,115 $ 1,169
Deferred income taxes recoverable in future rates 601 612
Expense of rate proceedings 275 289
Other 26 34
---------- ----------
$ 2,017 $ 2,104
========== ==========
Expenses related to the Net Periodic Pension Cost for the postretirement benefit
obligation are as follows:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 2004
--------- ---------
NET PERIODIC PENSION COST
Interest cost $ 40 $ 43
Amortization of net gain (26) (27)
Amortization of transition obligation 6 6
--------- ---------
Total net periodic benefit cost $ 20 $ 22
========= =========
CONTRIBUTIONS
Artesian Water contributed $75,000 to its postretirement benefit plan in the
first nine months of 2005 and expects to contribute another $25,000 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.
9
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 Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- --------------------
2005 2004 2005 2004
------ ------ ------ ------
(in thousands) (in thousands)
Average common shares outstanding during 3,998 3,944 3,981 3,931
the period for Basic computation
Dilutive effect of employee stock options 127 129 135 128
----- ----- ----- -----
Average common shares outstanding during
the period for Diluted computation 4,125 4,073 4,116 4,059
===== ===== ===== =====
Equity per common share was $14.28 at September 30, 2005 and $13.75 at September
30, 2004. These amounts were computed by dividing common stockholders' equity,
excluding preferred stock, by the number of shares of common stock outstanding
on September 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
10
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.
In October 2005, FASB issued Staff Position (FSP) No. 123 (R)-b that provides
guidance on the application of grant date as defined in FASB Statement No. 123
(revised 2004), Share-Based Payment. The definition of grant date in Statement
123 (R) includes criteria for determining that a share-based payment award has
been granted. One of the criteria is a mutual understanding by the employer and
employee of the key terms and conditions of a share-based payment award. The FSP
further clarifies in determining the grant date of the award subject to
Statement 123 (R), assuming all other criteria have been met, a mutual
understanding of the key terms and conditions of an award to individual
employees shall be presumed to exist at the date of the award approved in
accordance with corporate governance requirements if both the following
conditions are met (i) the recipient does not have ability to negotiate the key
terms and conditions of the award with the employer; (ii) the key terms of the
award are expected to be communicated to all of the recipients within a
relatively short time period from the date of approval. The guidance in this FSP
shall be applied upon initial adoption of Statement 123 (R). The Company expects
to apply FSP No. 123 (R)-b effective January 1, 2006 upon adoption of Statement
No. 123 (R).
In October 2005, FASB issued Staff Position (FSP) No. FAS 13-1 that addresses
the accounting for rental costs associated with operating leases that are
incurred during a construction period. The FSP provides answers to questions
that have arisen as to whether rental costs associated with ground and building
operating leases that are allocated to the period of construction of a lessee
asset (directly related to the leased property) may be capitalized. It clarifies
that the rental costs incurred during and after a construction period are for
the right to control the use of a leased asset during and after construction of
a lessee asset. There is no distinction between the right to use a leased asset
during the construction period and the right to use that asset after the
construction period. Therefore, rental costs associated with ground or building
operating leases that are incurred during a construction period shall be
recognized as rental expense. These rental costs shall be included in income
from continuing operations. A lessee shall follow the guidance in Statement 13
and Technical Bulletin 85-3 in determining how to allocate rental costs over the
lease term. The guidance in this FSP shall be applied to the first reporting
period beginning after December 15, 2005. Retrospective application in
accordance with FASB Statement No. 154, Accounting Changes and Error
Corrections, is permitted but not required. The Company does not have any
operating leases in effect. However, if the Company enters into an operating
lease agreement in the future, this FSP will be applied.
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 annual 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
related to approximately $320,000 of our requested increase in annual revenue.
In addition, effective July 1, 2005, Chester Water Authority and the City of
Wilmington increased the rate for water purchased by Artesian. On August 15,
2005, we filed a petition with the PSC to place into effect increased rates
resulting from the increased costs. The PSC stated in Order No. 6728 dated
September 20, 2005, that it would be more efficient for the petition to be
consolidated with the already-pending remanded issues in rate case Docket 04-42.
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 future customer bills. The Company had reserved revenue related to
the second temporary increase of approximately $1,025,000, 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 or a DSIC. This charge is available to
11
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 implemented the rate
change on September 1, 2005. The requested adjustment also recovers the expenses
of $26,900 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 $25 million aggregate principal amount
of its 5.96% 23-year, Series R, First Mortgage Bonds. These bonds were purchased
for the Company to CoBank, a cooperative bank, and the proceeds were used on
August 1, 2005, to retire all of Artesian's Water outstanding $10 million
aggregate principal amount of 7.84% 10-year, Series M First Mortgage Bonds and
$5 million aggregate principal amount of 7.56% 10-year, Series N First Mortgage
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 short-term
line of credit, which had been used to finance investments in utility plant and
equipment. The Company expects to recover the redemption premium over the life
of the Series R bond and recorded this premium as a deferred asset.
NOTE 7 - SALE OF LAND
On May 2, 2005, Artesian Development signed a Letter of Intent with The
Commonwealth Group, Ltd., or 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, or
the Agreement, with Commonwealth for the sale of this land. The sale price is
$1.35 million and includes a $170,000 non-refundable deposit due within 14 days
upon execution of the Agreement, in addition to the $30,000 received with the
Letter of Intent. Closing is to occur not later than 12 months after execution
of the Agreement. The sale is 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 cost basis for the property is approximately $8,000.
NOTE 8 - PURCHASED WATER EXPENSE
Effective July 1, 2005, Chester Water Authority or 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 annual basis. Also effective July 1, 2005, the
City of Wilmington 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 of Wilmington, these changes will increase our expense
by approximately $21,000 for the second half of 2005 and approximately $42,000
on an annual basis.
On August 15, 2005, we filed a petition with the PSC to place into effect
increased rates resulting from these increased expenses. The PSC stated in Order
No. 6728 dated September 20, 2005 that it would be more efficient for the
petition to be consolidated with the already-pending remanded issues in rate
case Docket 04-42.
12
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2005
Overview
- --------
STRATEGIC DIRECTION
Our profitability is primarily attributable to the sale of water by Artesian
Water, the amount of which is subject to seasonal fluctuations, particularly
during summer 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 for the
first nine 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. 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., 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. In addition to services discussed
above, Artesian Resources initiated a Service Line Protection Plan or SLP Plan
in March 2005. For a $60 annual fee, the SLP Plan covers all parts, material and
labor required to repair or replace participants' leaking water service lines up
to an annual limit of $3,000.
Ensuring our customers to have a dependable supply of safe, high-quality water
has been, and will continue to be, our 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 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. This review is currently in progress. 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 September 30, 2005, we had approximately 71,385 metered water customers
and served a population of approximately 233,000, representing approximately
28.1% 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 or 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
13
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, the utility must refund
the portion found in excess to customers with interest. The timing of our rate
increase requests are therefore dependent upon the estimated cost of the
administrative process in relation to the investments and expenses that we hope
to recover through the rate increase. We can provide no assurances that rate
increase requests will be approved by applicable regulatory agencies; and, if
approved, we cannot guarantee that these rate increases will be granted in a
timely or sufficient manner to cover the investments and expenses for which we
initially sought the rate increase.
We are affected by inflation, most notably by the continually increasing costs
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 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 Nine Months of 2005 Compared to First
Nine Months of 2004
Operating Revenues
- ------------------
Revenues totaled $33.8 million for the nine months ended September 30, 2005 and
was $4.4 million, or 15.0%, above total revenues of $29.4 million for the nine
months ended September 30, 2004. Water sales revenues increased 10% for the nine
months ended September 30, 2005, compared to the corresponding period in 2004. A
portion of the increase in water sales revenue reflected a 1% increase in the
number of customers served and increased water consumption due to drier
conditions in the latter period of the summer season in 2005 compared to the
same period in 2004. 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 nine months ended September 30, 2005 is
primarily due to additional revenues generated by wastewater and contract
operations services. We realized 92.0% of our total revenue for the nine months
ended September 30, 2005 from the sale of water, compared to 95.9% during the
same period last year. Non-utility revenue totaled $2,049,000 for the nine
months ended September 30, 2005, and was $1,495,000 above non-utility revenue of
$554,000 for the nine months ended September 30, 2004. This increase was 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 were offset by associated
non-utility expenses for contracted engineering design services and construction
costs. The non-utility revenue is recorded based upon the percent-of-completion
method. The Company records deferred revenue for the unearned portion until
realized or realizable and earned. For the nine months ended September 30, 2005,
$38,000 was charged to unearned revenue based on the stage 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 24.0%, 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 15.0%, 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
14
valuation to the Hearing Examiner for further consideration. These two issues
related to approximately $320,000 of our requested increase in annualized
revenue. In addition, effective July 1, 2005, Chester Water Authority and the
City of Wilmington increased the rate for water purchased by Artesian. On August
15, 2005, we filed a petition with the Delaware Public Service Commission
("PSC") to place into effect increased rates resulting from the increased
expenses. The PSC stated in Order No. 6728 dated September 20, 2005, that it
would be more efficient for the petition to be consolidated with the
already-pending remanded issues in rate case Docket 04-42. Based on the PSC
decisions to date, Artesian will be required to refund a portion of the
temporary rate increase to its customers, but it is uncertain as to the level of
the refund until a final decision is reached on all issues. 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 $1,025,000, 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 $3.0
million, or 17.7%, to $20.1 million for the nine months ended September 30,
2005, compared to $17.1 million for the same period in 2004. The components of
the increase in operating expense included increases in non-utility expenses of
$1,353,000, Artesian Water's payroll and employee benefit expenses of
$1,024,000, utility administration expenses of $131,000, utility purchased power
expenses of $121,000 and utility repair and maintenance expenses of $104,000.
Non-utility expenses increased approximately $1,353,000 for the nine months
ended September 30, 2005, compared to the nine months ended September 30, 2004,
primarily due to contracted engineering design services and construction costs
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
expenses included a $143,000 increase in payroll and employee benefits
associated with non-utility operations due to an increase in number of
employees.
Artesian Water's payroll and employee benefit expenses increased approximately
$1,024,000 for the nine months ended September 30, 2005, or 13.6%, compared to
the nine months ended September 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 15.0% increase in medical insurance premiums effective August 2004.
Artesian Water's administrative expenses increased by $131,000, primarily due to
an increase of $146,000 in audit fees related to implementation of the
provisions of Section 404 of the Sarbanes-Oxley Act of 2002. There was also an
increase of $78,000 in directors' fees due to increased frequency of meetings
required as a result of our implementation of the provisions of the
Sarbanes-Oxley Act. The increase was offset by decrease in costs of $103,000
related to training and consulting services.
Artesian Water's purchased power expense increased approximately $121,000 for
the nine months ended September 30, 2005, compared to the nine months ended
September 30, 2004, primarily due to increased water consumption and also due to
two new water treatment stations going on-line in southern New Castle County,
Delaware. The two stations were needed to handle the growth in customers in that
service territory.
Artesian Water's repair and maintenance expenses increased by $104,000 primarily
due to the required change out of carbon filter media in our Llangollen
treatment station in northern New Castle County, Delaware and increased fuel
cost.
The ratio of operating expenses, excluding depreciation and income taxes, to
total revenue was 59.6% for the nine months ended September 30, 2005, compared
to 58.2% for the nine months ended September 30, 2004 primarily due to increase
15
in non-utility expenses for contracted engineering design services and
construction costs for new projects undertaken by Artesian Utility.
Depreciation and amortization expense increased $206,000, or 6.8%, compared to
the nine months ended September 30, 2004, due to increases in our utility plant
in service providing supply, treatment, storage and distribution of water.
Income tax expense increased $449,000 due to higher profitability for the nine
months ended September 30, 2005, compared to the nine months ended September 30,
2004.
Other Income, Net
- -----------------
Our Allowance for Funds Used During Construction, or AFUDC, decreased $89,000 as
a result of lower long-term construction activity subject to AFUDC for the first
nine months of 2005 compared to the same period in 2004, as further discussed
under "Liquidity and Capital Resources" below. Miscellaneous income increased
$146,000 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.
Interest Charges
- ----------------
Interest charges increased $113,000, or 2.6%, for the nine months ended
September 30, 2005, compared to the nine months ended September 30, 2004,
primarily due to higher long-term debt balances and higher rate average
short-term interest rates on the lines of credit. While the average outstanding
line of credit balances were lower for the nine months ended September 30, 2005
compared to the same period in 2004, the average interest rate applied to these
balances increased from 2.62% for the nine months ended September 30, 2004 to
4.69% for the nine months ended September 30, 2005.
Net Income
- ----------
Our net income increased $682,000 for the nine months ended September 30, 2005,
compared to the same period a year ago. The increase in net income for the nine
months was primarily due to temporary rate increases placed in effect during the
period, increased water consumption due to drier conditions in the latter period
of the summer season, increased revenue generated by wastewater and contract
operations services and an increase in annual dividend received from CoBank.
Results of Operations - Analysis of Three Months Ended September 30, 2005
Compared to Three Months Ended September 30, 2004
Operating Revenues
- ------------------
Revenues totaled $12.4 million for the three months ended September 30, 2005,
$1.8 million, or 16.8% above revenues for the three months ended September 30,
2004 of $10.6 million. Water sales revenue increased 11.4% for the three months
ended September 30, 2005 compared to 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 increase in
water consumption due to drier conditions in the latter period of the summer
season in 2005 as compared to the same period in 2004. The remaining increase in
operating revenues for the three months ended September 30, 2005 is primarily
due to additional revenues generated by wastewater and contract operations
services. We realized 91.2% of our total revenue for the three months ended
September 30, 2005 from the sale of water.
Operating Expenses
- ------------------
Operating expenses, excluding depreciation and income taxes, increased $1.4
million, or 24.2%, to $7.0 million for the three months ended September 30,
2005, compared to $5.6 million for the same period in 2004. The components of
the increase in operating expenses for the three months ended September 30, 2005
included increase in non-utility expenses of $415,000, Artesian Water's payroll
and employee benefit expenses of $454,000, administrative expenses of $169,000
and purchased water power of $98,000.
16
Non-utility expenses increased approximately $415,000 for the three months ended
September 30, 2005 due primarily to contracted engineering design services and
construction costs 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.
Artesian Water's payroll and associated employee benefits expenses increased
$454,000, or 18.2%, primarily due to an increase in the number of employees and
merit increases.
Artesian Water's administrative expenses increased approximately $169,000 for
the three months ended September 30, 2005, or 28.3%, due primarily to an
increase in auditing fees of $73,000 and in rate case expenses of $59,000 due to
the extended time to adjudicate the case.
Artesian Water's purchased power expenses increased approximately by $98,000 due
to two new water treatment plants placed in service in southern New Castle
County, Delaware. These plants were needed to meet the needs of the growing
customer base.
The ratio of operating expenses, excluding depreciation and income taxes, to
total revenue was 56.6% for the three months ended September 30, 2005, compared
to 53.2% for the three months ended September 30, 2004 primarily due to increase
in non-utility expenses for contracted engineering design services and
construction costs for new projects undertaken by Artesian Utility.
Other Income, Net
- -----------------
Our AFUDC increased by $42,000 as a result of higher long-term construction
activity subject to AFUDC for the three months ended September 30, 2005 compared
to the same period in 2004.
Interest Charges
- ----------------
Interest charges increased $25,000, or 1.7%, for the three months ended
September 30, 2005, compared to the three months ended September 30, 2004,
primarily due to higher long-term debt balances.
Net Income
- ----------
Our net income increased $199,000 for the three months ended September 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, increased water consumption due to drier conditions in the latter period
of the summer season and increased revenue generated by wastewater and contract
operations services.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity for the nine months ended September 30, 2005
were $8.8 million provided by cash flow from operating activities and $6.3
million from financing activities, which includes $6.6 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 approximately $15 million in capital expenditures during the first
nine months of 2005 compared to $23.7 million invested during the same period in
2004. During the first nine 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
nine months of 2005, we continued our investment to integrate our water systems
in northern and southern New Castle County, Delaware and in Kent County,
17
Delaware and made significant investments to relocate mains due to a major state
highway reconstruction project. Our budget to invest in capital expenditure was
$20 million for the nine months ended September 30, 2005. The variance of $5
million between budget to actual for the nine months ended September 30, 2005 is
primarily due to our efforts to improve efficiencies and also due to a change in
schedule by developers for some projects. These projects are now scheduled
either in the fourth quarter of 2005 or in 2006.
On November 7, 2003, Artesian Water entered into an agreement to borrow up to
$5,456,000 from the Delaware Drinking Water State Revolving 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 September 30, 2005, the Company had drawn down
$2,222,960 under the agreement. We have notified the state that we will not draw
the remaining funds.
On December 23, 2003, Artesian Water issued $15.4 million aggregate principal
amount of its 4.75% 40 year Series Q First Mortgage Bonds. These bonds are
tax-free and were issued for the Company through the Delaware Economic
Development Authority to finance utility construction projects. The proceeds
from these bonds were held on our behalf by the First Mortgage Bond Trustee,
Wilmington Trust, and were disbursed to us as construction was completed.
Interest, which accrues to our benefit, is added to the fund for use in
completing construction of the various approved projects.
On August 1, 2005, Artesian Water issued $25 million aggregate principal amount
of its 5.96% 23-year, Series R First Mortgage Bonds. The Company recorded the
total expense of approximately $1,134,000 in connection with the issuance of
bond as deferred asset. These bonds were issued for the Company to CoBank, a
cooperative bank, and the proceeds were used on August 1, 2005, to retire all of
Artesian's Water outstanding $10 million aggregate principal amount of 7.84%
10-year, Series M First Mortgage Bonds and $5 million aggregate principal amount
of 7.56% 10-year, Series N First Mortgage 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 short-term line of credit, which was used to finance
investments in utility plant and equipment. The Company expects to recover the
redemption premium over the life of the Series R bond.
At September 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 September
30, 2005, we had approximately $40.0 million of available funds under these
lines. The interest rate for borrowings under each of these lines is the London
Interbank Offering Rate or LIBOR, plus 1.0%, or, at our discretion, the bank's
federal funds rate plus 1.0%. At September 30, 2005, the rate on these lines was
4.69%. 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 September 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 September 30, 2005, Artesian Utility and
Artesian Wastewater had not drawn down on the facilities. 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 impact of
weather on our operations and the execution of our strategic initiatives, 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, contract operations opportunities, increases to purchased water
expense, adequacy of our available sources of financing, the expected recovery
of expenses related to the issuance of long-term debt, our expectations
regarding the sale of land to Commonwealth, plans to increase our wastewater
18
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
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.
19
ITEM 6 - EXHIBITS
Exhibits
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. Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2005.
10.2 Agreement of Sale between Artesian Development Corporation and The
Commonwealth Group, dated as of August 5, 2005. Incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 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.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARTESIAN RESOURCES CORPORATION
Date: November 9, 2005 By: /s/ DIAN C. TAYLOR
--------------------------------
Dian C. Taylor,
(Principal Executive Officer)
Date: November 9, 2005 By: /s/ DAVID B. SPACHT
--------------------------------
David B. Spacht,
(Principal Financial and
Accounting Officer)
21
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title
-------- -------------
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.
Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2005.
10.2 Agreement of Sale between Artesian Development Corporation and
The Commonwealth Group, dated as of August 5, 2005.
Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
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.