UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2002or
For the transaction period from to
Commission file number 0-18516
ARTESIAN RESOURCES CORPORATION (exact name of registrant as specified in its charter)
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.
Yesý No o
As of March 31, 2002, 1,663,262, shares and 391,824 shares of Class A Non-Voting Common Stock and Class B Common Stock, respectively, were outstanding.
ARTESIAN RESOURCES CORPORATION INDEX TO FORM 10-Q
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Part I—Financial Information
Item I—Financial Statements ARTESIAN RESOURCES CORPORATION CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands)
The notes are an integral part of the consolidated financial statements.
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ARTESIAN RESOURCES CORPORATION CONSOLIDATED STATEMENT OF INCOME (Unaudited) (in thousands, except per share amounts)
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CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited) (in thousands)
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ARTESIAN RESOURCES CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (in thousands)
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ARTESIAN RESOURCES CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — General
The unaudited consolidated financial statements of Artesian Resources Corporation and its wholly-owned subsidiaries (the Company or Artesian Resources), including its principal operating company, Artesian Water Company, Inc. (Artesian Water), presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures prescribed by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2001, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. The accompanying consolidated financial statements have not been audited by independent accountants in accordance with generally accepted auditing standards and, in the opinion of management such consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to fairly summarize the Company's financial position and results of operations. The results of operations for the interim periods may not be indicative of the results that may be expected for the entire year.
Note 2 — Regulatory Assets
Certain expenses are recoverable through rates, without a return on investment, and are deferred and amortized during future periods using various methods as permitted by the Delaware Public Service Commission (Delaware PSC). Expenses related to rate proceedings are amortized on a straight-line basis over a period of 2 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, comprise:
Note 3 — Related Party Transactions
The office building and shop complex utilized by Artesian Water are leased at an average annual rental of $180,000 from a partnership, White Clay Realty, in which certain of Artesian Resources' officers and directors are partners. The lease expires at the end of 2002, with provisions for renewals for two consecutive 5-year periods thereafter. Management believes that the payments made to White Clay Realty for the lease of its office building and shop complex and maintenance costs, taxes and other ownership type costs paid are comparable to what Artesian Water would have to pay to unaffiliated parties for similar facilities.
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Expenses associated with related party transactions are as follows:
Note 4 — Net Income Per Common Share and Equity Per Common Share
Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share is based on the weighted average number of common shares outstanding and the potentially dilutive effect of employee stock options. The following table summarizes the shares used in computing basic and diluted net income per share:
Book value per common share was $16.71 and $16.75 at March 31, 2002 and December 31, 2001, respectively. These amounts were computed by dividing stockholders' equity excluding preferred stock by the number of shares of common stock outstanding at the end of each period.
Note 5 — Impact of Recent Accounting Pronouncements
In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 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 statement is effective June 2003. Our adoption of this statement will not have a material impact on our financial condition or results of operations.
Note 6 — Rate Proceedings
On April 2, 2002, Artesian Water filed a rate increase application with the Delaware PSC to request a rate increase of 23.1%, or approximately $7.5 million on an annualized basis. Artesian Water anticipates placing temporary rates into effect, 60 days from the filing date, June 1, 2002, up to the statutory limit of $2.5 million on an annualized basis, until the level of permanent rates is decided by the Delaware PSC.
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ITEM 2—ARTESIAN RESOURCES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2002
RESULTS OF OPERATIONS
Overview
Artesian Resources is a non-operating holding company whose income is derived from the earnings of its four wholly owned subsidiary companies and its interest in AquaStructure Delaware LLC. Artesian Water, our principal subsidiary, is the oldest and largest regulated public water utility in the State of Delaware and has been providing water within the state since 1905. We distribute and sell water to residential, commercial, industrial, governmental, municipal and utility customers throughout Delaware. As of March 31, 2002, we had approximately 66,477 metered customers and served a population of approximately 220,000, approximately 27% of Delaware's total population.
The Delaware Public Service Commission, or Delaware PSC, regulates Artesian Water's rate charges for water service, the issuance of Certificates of Public Conveniences and Necessity, the sale and issuance of securities by Artesian Water and other matters. We periodically seek and receive rate increases to cover the cost of increased expenses due to additional investments in utility plant and equipment and other costs of doing business. Increases in customers served by Artesian Water also contribute to increases in our operating revenues. We continue our efforts to contain expenses and improve efficiencies that contribute to increases in our operating income. Our business is also subject to seasonal fluctuations and the effects of weather.
Operating Revenues
Revenues totaled $7.7 million for the quarter ended March 31, 2002 and were 11.3% above revenues of $7.0 million for the quarter ended March 31, 2001, reflecting an increase in water sales of 10.8% due to customer growth and rate increases approved by the Delaware PSC, effective February 1, 2001 and July 1, 2001. We realized 97.8% of our total revenue for the quarter ended March 31, 2002 from the sale of water and 2.2% of our revenue principally from contract operations, antenna leases on water tanks and wastewater management services.
We filed an application with the Delaware PSC on December 5, 2000, to increase rates for water service for all of Artesian Water's customers. A temporary rate increase, calculated to increase annualized revenues $2.5 million, was approved by the Delaware PSC and placed into effect on February 3, 2001. In Delaware, utilities are permitted to place rates into effect on a temporary basis pending completion of a rate increase proceeding. If such rates are found to be in excess of rates the Delaware PSC finds to be appropriate, the utility must refund the portion found in excess to customers with interest. We received final approval on June 19, 2001, to increase rates up to a total annualized increase in revenues of $3.7 million, or $1.2 million more than permitted under temporary rates. The approval was the result of a stipulated settlement reached by the Delaware PSC Staff and Division of Public Advocate. The increase in revenues for the various customer classes will not consistently match changes in consumption levels for the class primarily due to our use of a multiple rate block structure. This structure charges different rates for different levels of consumption. In addition, rate increases are distributed among the rate blocks and service charges through a cost of service analysis and may not reflect, on an individual class or charge basis, the overall increase in rates approved by the Delaware PSC.
Operating Expenses
Operating expenses, excluding depreciation and taxes, increased $242,000, or 5.6%, to $4.6 million for the quarter ended March 31, 2002. The increase in operating expenses resulted primarily from an
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increase in payroll and related expenses, purchased water expenditures and tank painting expenses. Payroll and related expenses increased $63,000 during the quarter ended March 31, 2002 compared to the quarter ended March 31, 2001 principally due to increases in annual merit compensation. Purchased water expenditures increased $61,000 during the quarter ended March 31, 2002 over the comparable period in 2001, primarily due to the resting of two well fields. Tank painting expenses increased $49,000 during the quarter ended March 31, 2002 compared to the quarter ended March 31, 2001 because the quarter ended March 31, 2002 includes three months of expense versus one month of expense in the quarter ended March 31, 2001 due to the March 1, 2001 start date of a five year tank painting contract. The ratio of operating expense, excluding depreciation and taxes, to total revenue was 59.4% for the quarter ended March 31, 2002, compared to 62.6% for the quarter ended March 31, 2001.
Depreciation and amortization expense increased $104,000, or 14.7%, for the quarter ended March 31, 2002 as compared to the quarter ended March 31, 2001, due to increases in our utility plant and equipment. Income tax expense increased $204,000 for the quarter ended March 31, 2002 over the quarter ended March 31, 2001 due to increased profitability.
Interest Charges
Interest charges increased $31,000, or 2.9%, for the quarter ended March 31, 2002 compared to the quarter ended March 31, 2001, primarily due to an increase in interest related to the $4.3 million note issued to the Delaware Department of Health and Social Services on January 31, 2001. Interest began to accrue when we received the funds in August 2001.
Net Income
For the quarter ended March 31, 2002, our net income applicable to common stock increased $280,000 compared to the same period in 2001. The increase in net income was primarily due to rate increases authorized in 2001 and continued customer growth.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity for the quarter ended March 31, 2002 were $3.9 million in proceeds from our lines of credit and $1.1 million provided by cash flow from operating activities. Cash flow from operating activities was primarily provided by our utility operations, and was impacted by the timeliness and adequacy of rate increases.
A significant part of our ability to maintain and meet our financial objectives is to assure our investments in utility plant and equipment are recovered in the rates charged to customers. As such, from time to time, we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment. On April 2, 2002, Artesian Water filed a rate increase application with the Delaware PSC to request a rate increase of 23.1%, or $7.5 million on an annualized basis. Artesian Water anticipates placing temporary rates into effect, 60 days from the filing date, June 1, 2002, up to the statutory limit of $2.5 million on an annualized basis, until the level of permanent rates is decided by the Delaware PSC.
At March 31, 2002, Artesian Water had lines of credit with three separate financial institutions totaling $35.0 million to meet its temporary cash requirements. These revolving credit facilities are unsecured. As of March 31, 2002, we had $15.0 million of available funds under these lines. The interest rate for borrowings under each of these lines is the London Interbank Offering Rate plus 1.0% or, at our discretion, the bank's federal funds rate plus 1.0% and at March 31, 2002 the weighted average rate was 2.52%. All the facilities are reviewed annually by each bank for renewal.
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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 facts including statements regarding the amount and timing of temporary and permanent rate increases, our investment plans in 2002 and whether we will conduct a equity or debt offering, 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 developments in our current rate proceeding, competitive market pressures, material changes in demand from larger customers, changes in weather, changes in government policies, changes in economic conditions, and other matters listed under the heading "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001, could cause results to differ materially from those in the forward-looking statements. The Company does not undertake to update any of the forwarding-looking statements included in this Quarterly Report on Form 10-Q.
ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to manage interest rates through the use of fixed rate, long-term debt and, to a lesser extent, short-term debt. The Company's interest rate risk related to existing fixed rate, long-term debt is not material due to the term of our First Mortgage Bonds, which have maturity dates ranging from 2003 to 2020.
PART II—OTHER INFORMATION
ITEM 1—LEGAL PROCEEDINGS
There are no material legal proceedings pending at this date.
ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K
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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 there unto duly authorized.
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EXHIBIT INDEX
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