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, 1997
or
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-18516
ARTESIAN RESOURCES CORPORATION
(exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or organization: Delaware
I.R.S. Employer Identification Number: 51-0002090
Address of principal executive offices: 664 Churchmans Road, Newark, Delaware
Zip Code: 19702
Registrant's telephone number, including area code: (302) 453-6900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. X Yes No
As of November 3, 1997, 1,266,657 shares and 506,490 shares of Class A
Non-Voting Common Stock and Class B Common Stock, respectively, were
outstanding.
ARTESIAN RESOURCES CORPORATION
INDEX TO FORM 10-Q
Part I - Financial Information: Page(s)
Item 1 - Financial Statements
Consolidated Balance Sheet -
September 30, 1997 and December 31, 1996 3
Consolidated Statement of Income for
the quarters ended September 30, 1997 and 1996 4
Consolidated Statement of Income for
the nine months ended September 30, 1997 and 1996 5
Consolidated Statement of Retained Earnings for
the nine months ended September 30, 1997 and 1996 5
Consolidated Statement of Cash Flows for the
nine months ended September 30, 1997 and 1996 6
Notes to the Consolidated Financial Statements 7-9
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition 10-11
Part II - Other Information:
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 12
Part I - Financial Information
Item I - Financial Statements
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands) Unaudited
September 30, December 31,
1997 1996
ASSETS
Utility plant, at orig. cost less
accumulated depreciation $ 94,080 $ 88,993
CURRENT ASSETS
Cash and cash equivalents 629 148
Accounts receivable 2,222 1,884
Unbilled operating revenue 1,631 1,663
Materials and supplies - FIFO 667 621
Prepaid property taxes 778 490
Prepaid expenses and other 464 320
State and federal income taxes --- 233
6,391 5,359
OTHER ASSETS
Non-utility property (less accumulated
depreciation 1997-$144,;1996-$1,505) 349 874
Deferred income taxes 669 731
Other deferred assets 1,205 1,156
2,223 2,761
REGULATORY ASSETS 2,769 2,595
$105,463 $ 99,708
LIABILITIES AND STOCKHOLDERS' EQUITY
Common stock $ 1,765 $ 1,748
Additional paid-in capital 17,381 17,125
Retained earnings 6,627 6,614
Preferred stock 272 272
Total common stockholders' equity 26,045 25,759
Preferred stock-mandatorily
redeemable 712 825
Long-term debt, net of current
portion 32,133 26,259
58,890 52,843
CURRENT LIABILITIES
Notes payable --- 25
Current portion of long-term debt 100 350
Dividends payable 22 ---
Accounts payable 1,254 2,883
Overdraft payable 793 687
State and federal income taxes 622 ---
Deferred income taxes --- 179
Interest accrued 779 630
Customer deposits 363 378
Other 888 519
4,821 5,651
DEFERRED CREDITS AND OTHER LIABILITIES
Net advances for construction 19,327 19,080
Postretirement benefit obligation 1,754 1,759
Deferred investment tax credits 995 1,025
22,076 21,864
NET CONTRIBUTIONS IN AID OF CONSTRUCTION 19,676 19,350
$105,463 $ 99,708
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
(In thousands, except per share amounts)
For the Quarter
Ended September 30,
1997 1996
OPERATING REVENUES
Water sales $5,780 $5,219
Other utility operating revenue 84 75
5,864 5,294
OPERATING EXPENSES
Utility operating expenses 3,225 2,987
Non-utility operating expenses (Note 3) 12 12
Related party expenses (Note 4) 62 61
Depreciation 599 542
Income taxes 400 316
Taxes other than income 343 367
4,641 4,285
OPERATING INCOME 1,223 1,009
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION 24 46
OTHER EXPENSE 4 (12)
INCOME BEFORE INTEREST CHARGES 1,251 1,043
INTEREST CHARGES
Long-term debt 274 510
Short-term debt 377 38
Amortization of debt expense 7 6
Other 7 11
665 565
NET INCOME 586 478
DIVIDENDS ON PREFERRED STOCK 22 25
NET INCOME APPLICABLE
TO COMMON STOCK $ 564 $ 453
PER SHARE OF COMMON STOCK:
Net income $ 0.32 $ 0.26
Cash dividends $ 0.23 $ 0.23
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
(In thousands, except per share amount)
For the Nine Months
Ended September 30,
1997 1996
OPERATING REVENUES
Water sales $ 16,145 $ 15,364
Other utility operating revenue 248 184
Non-utility operating revenue --- 80
16,393 15,628
OPERATING EXPENSES
Utility operating expenses 9,348 8,627
Non-utility operating expenses (Note 3) 12 63
Related party expenses (Note 4) 185 184
Depreciation 1,826 1,605
Income taxes 849 892
Taxes other than income 1,077 1,005
13,297 12,376
OPERATING INCOME 3,096 3,252
ALLOWANCE FOR FUNDS USED
DURING CONSTRUCTION 112 118
OTHER EXPENSE (26) (72)
INCOME BEFORE INTEREST CHARGES 3,182 3,298
INTEREST CHARGES
Long-term debt 1,444 1,570
Short-term debt 383 348
Amortization of debt expense 16 20
Other 23 23
1,866 1,961
NET INCOME 1,316 1,337
DIVIDENDS ON PREFERRED STOCK 70 79
NET INCOME APPLICABLE
TO COMMON STOCK $ 1,246 $ 1,258
PER SHARE OF COMMON STOCK:
Net income $ 0.70 $ 0.90
Cash dividends $ 0.69 $ 0.67
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Unaudited
(In thousands)
For the Nine Months
Ended September 30,
1997 1996
BALANCE, beginning of period $ 6,614 $ 6,317
NET INCOME 1,316 1,337
7,930 7,654
DIVIDENDS 1,303 960
BALANCE, end of period $ 6,627 $ 6,694
ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
(In thousands)
For the Nine Months
Ended September 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 1,316 $ 1,337
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,711 1,494
Allowance for funds used during
construction (113) (119)
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable (338) 143
Unbilled operating revenue 32 (293)
Materials and supplies (46) (84)
State and federal income taxes payable (80) 403
Prepaid property taxes (288) (273)
Deferred income taxes, net 788 85
Deferred debits (77) 158
Prepaid expenses and other (105) (72)
Regulatory assets (184) 102
Postretirement benefit obligation (5) (15)
Accounts payable (1,629) (1,339)
Dividends payable 22 ---
Interest accrued 149 59
Other and customer deposits, net 354 344
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,507 1,930
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (6,785) (4,648)
Proceeds from sale of assets 162 2,103
NET CASH USED IN INVESTING ACTIVITIES (6,623) (2,545)
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments under
line of credit agreement (9,058) (6,383)
Net advances and contributions
in aid of construction 875 469
Proceeds from long-term debt 15,000 ---
Repayment on term note --- (2,006)
Proceeds from issuance of common stock --- 9,366
Proceeds from common stock dividends
reinvested and stock options exercised 272 418
Dividends (1,281) (936)
Overdraft payable 106 235
Principal payments under capital
lease obligations (204) (251)
Principal payments under long-term
debt obligations --- (11)
Retirement of preferred stock (113) (147)
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,597 754
NET INCREASE IN CASH AND CASH EQUIVALENTS 481 139
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 148 150
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 629 $ 289
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 1,701 $ 1,882
Income taxes paid $ 272 $ 418
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Capital lease obligations incurred $ 67 $ ---
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The unaudited 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 required by generally accepted accounting principles. These
statements should be read in conjunction with the financial statements and
notes thereto for the year ended December 31, 1996 included in the Company's
Annual Report on Form 10-K. The accompanying financial statements have not
been examined by independent accountants in accordance with generally accepted
auditing standards, but in the opinion of management such 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 quarter and nine months ended
September 30, 1997 may not be indicative of the results that may be expected
for the year ending December 31, 1997.
NOTE 2 - REGULATORY ASSETS
Certain expenses, which are recoverable through rates as permitted by the
State of Delaware Public Service Commission ("PSC"), are deferred and
amortized during future periods using various methods. Expenses related to
rate proceedings are amortized on a straight-line basis over three years. The
post retirement benefit obligation, which is being amortized over twenty
years, is adjusted for the difference between the net periodic post retirement
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 customer reverse. Regulatory assets, net of
amortization, comprise:
September 30, 1997 December 31, 1996
(In thousands)
Postretirement benefit obligation $1,754 $1,759
Deferred income taxes recoverable
in future rates 714 725
Expense of rate proceedings 301 111
$2,769 $2,595
NOTE 3 - NON-UTILITY OPERATING REVENUE AND EXPENSES
Non-utility operating revenue for the nine months ended September 30, 1996
consisted of $80,000 in rental income received by Artesian Development
Corporation ("Artesian Development"). Non-utility operating expenses are
attributable to the operation of Artesian Development's rental office building
prior to its sale on March 13, 1996 and to Artesian Wastewater Management,
Inc. ("Artesian Wastewater") start-up expenses in 1997 as follows:
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
(In thousands)
1997 1996 1997 1996
Artesian Development $-- $12 $-- $63
Artesian Wastewater 12 -- 12 --
$12 $12 $12 $63
On December 19, 1996, Artesian Wastewater was created as an additional
non-regulated subsidiary of Artesian Resources. Artesian Wastewater plans to
provide wastewater treatment services in New Castle County, Delaware.
NOTE 4 - RELATED PARTY TRANSACTIONS
The office building and shop complex utilized by Artesian Water are
leased at an annual rental of $204,052 from a partnership, White Clay Realty,
in which certain of Artesian Resources' officers and directors are partners.
The lease expires in 2002, with provisions for renewals for two five year
periods thereafter. Management believes that the payments made to White Clay
Realty for the lease of its office building and shop complex are comparable
to what Artesian Water would have to pay to unaffiliated parties for similar
facilities.
Artesian Water leases certain parcels of land for water production wells
from Glendale Enterprises Limited, a company wholly-owned by Ellis D. Taylor,
Director and Chairman Emeritus of Artesian Resources, at an annual rental of
$41,707. The initial term of the lease was for ten years ending September 30,
1995 and, thereafter, renewal is automatic from year to year unless 60 days
written notice is given by either party before the end of the year's lease.
The annual rental is adjusted each year by the consumer price index as of
June 30 of the preceding year. Artesian Water has the right to terminate this
lease by giving 60 days written notice should the water supply be exhausted or
other conditions beyond the control of Artesian Water materially and adversely
affect its interest in the lease.
Expenses associated with related party transactions are as follows:
For the Quarter Ended For the Nine Months
September 30, Ended September 30,
(In thousands)
1997 1996 1997 1996
White Clay Realty $51 $51 $153 $153
Glendale Enterprises 11 10 32 31
$62 $61 $185 $184
NOTE 5 - DEBT
On June 17, 1997, Artesian Water issued a $10.0 million, 7.84%, ten year
Series M Mortgage Bond and borrowed $2.5 million against a $5.0 million, ten
year Series N Mortgage Bond to repay the outstanding balance on the lines of
credit. On September 18, 1997, Artesian Water issued the remaining $2.5
million on the Series N Mortgage Bond. The $5.0 million, ten year Series N
First Mortgage Bond has a fixed interest rate of 7.56%.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
statement No. 128, Earnings Per Share (SFAS 128), which supersedes APB
opinion No. 15. SFAS 128 specifies the computation, presentation, and
disclosure requirements for earnings per share for entities with publicly
held common stock. SFAS 128 is effective for financial statements issued
for periods ending after December 15, 1997. The Company will adopt SFAS 128
in the fourth quarter of 1997 and does not expect it to have a material
impact on the Company's earnings per share.
The FASB has recently issued three new accounting standards, Statement
No. 129, "Disclosure of Information about Capital Structure," Statement
No. 130, "Reporting Comprehensive Income" and Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," and if adopted will
be effective for periods presented after December 31, 1997. The Company is
evaluating the effect of these new statements.
ITEM 2 ARTESIAN RESOURCES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER
AND NINE MONTHS ENDED SEPTEMBER 30, 1997.
RESULTS OF OPERATIONS
For the quarter ended September 30, 1997, Artesian Resources recorded net
income of $586,000 which represents a $108,000 increase as compared to
earnings of $478,000 for the quarter ended September 30, 1996. For the nine
months ended September 30, 1997, Artesian Resources recorded net income of
$1,316,000 which represents a $21,000 decrease as compared to net income of
$1,337,000 for the nine months ended September 30, 1996. The decrease is
primarily due to Artesian Water's increased purchased water expense.
Water sales revenue increased $561,000 and $781,000, respectively, for
the quarter and nine months ended September 30, 1997 due to an approximately
2.4% growth in customers served for the year to date, a 2% increase in per
capita customer consumption for the year to date attributable to the hotter,
drier summer in 1997 versus 1996, and an increase in rates of 1.13%,
effective May 1, 1997.
Purchased water expense increased $400,000 for the nine months ended
September 30, 1997 as compared to the same period in 1996 due primarily to a
19% price increase effective September 1, 1996 and a 12.3% increase in the
minimum monthly amount of water to be purchased under contract with Chester
Water Authority ("CWA"). Effective October 1996, the minimum monthly
purchase requirement from CWA increased to 121.6 million gallons, or
approximately 4 million gallons per day, from 108.3 million gallons, or
approximately 3.6 million gallons per day. Effective August 1, 1997,
Artesian Water renegotiated the contract with CWA to, among other things,
reduce the minimum purchase requirement to a minimum daily average of 3.0
million gallons on an annual basis through the year 2021. Purchased water
expense decreased $13,000 for the quarter ended September 30, 1997 as
compared to the same period in 1996.
For the nine months ended September 30, 1997, interest expense decreased
$91,000 as compared to the same period in 1996 due to a lower average debt
outstanding of $29.4 million for 1997 at a lower average interest rate
as compared to $29.8 million in debt outstanding for 1996.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of liquidity for the nine months ended September 30,
1997 is $15.0 million from the issuance of Artesian Water's Series M and N
First Mortgage Bonds. On June 17, 1997 Artesian Water issued a $10.0 million,
7.84%, ten year Series M Mortgage Bond and borrowed $2.5 million against a
$5.0 million, ten year Series N Mortgage Bond to repay the outstanding balance
on the lines of credit. The remaining $2.5 million available on the Series N
Bond was drawn down on September 18, 1997. The $5.0 million, ten year Series
N First Mortgage Bond has a fixed interest rate of 7.56%. The final Series N
Mortgage Bond Indenture is included as Exhibit 4 of this Form 10-Q. At
September 30, 1997, Artesian Water had no borrowings on the $15.0 million
available lines of credit and as of October 31, 1997 $0.2 million is borrowed
on the lines of credit. A portion of the $14.8 million available on the
$15.0 million lines of credit will be used to finance capital expenditures
during the fourth quarter of 1997.
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
The Hearing Examiner and the PSC approved the settlement of Artesian
Water's last rate case on August 15, 1997 and August 26, 1997, respectively;
finalizing an annualized revenue increase of approximately $248,000 or 1.13%,
effective May 1, 1997. In September 1997, Artesian Water refunded to
customers approximately $253,000 in excess billings collected May 1, 1997
through August 30, 1997 under the 4.5% temporary rate increase. The refund
had no impact on revenue as the entire increase was reserved as a liability.
On October 3, 1997, Artesian Water filed a petition with the PSC to
implement new rates to meet a projected increased revenue requirement of
approximately 25.6% or $5.6 million on an annualized basis which will allow
Artesian Water the opportunity to achieve a fair rate of return. Artesian
Water is permitted to collect a temporary rate increase not in excess of
$2.5 million on an annualized basis, under bond, until permanent rates are
approved. These temporary rates will become effective on or about
December 3, 1997.
On October 2, 1997, Artesian Water completed the acquisition of Cat Hill
Water Company and Whites Haven Water Company located in Sussex County,
Delaware. These acquisitions add approximately 225 customers to Artesian
Water's customer base of approximately 60,000.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed for the quarter ended September 30, 1997.
EXHIBIT 11 - COMPUTATION OF EARNINGS PER COMMON SHARE
For the Nine Months Ended
September 30,
1997 1996
Earnings
Income applicable to Common Stock $1,246,000 $1,258,000
Shares
Weighted average number of Common Stock
Shares outstanding 1,779,406 1,390,847
Primary earnings per share $ 0.70 $ 0.90
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
[LEGEND]
This schedule contains summary financial information extracted from the
consolidated balance sheets, consolidated statements of income and the
consolidated statement of cash flows from the Company's September 30, 1997
Form 10-Q and is qualified in its entirety by reference to such financial
statements.
[/LEGEND]
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 3-MOS 9-MOS
[FISCAL-YEAR-END] DEC-31-1997 DEC-31-1997
[PERIOD-END] SEP-30-1997 SEP-30-1997
[BOOK-VALUE] PER-BOOK PER-BOOK
[TOTAL-NET-UTILITY-PLANT] 94,080,000 94,080,000
[OTHER-PROPERTY-AND-INVEST] 349,000 349,000
[TOTAL-CURRENT-ASSETS] 6,391,000 6,391,000
[TOTAL-DEFERRED-CHARGES] 4,643,000 4,643,000
[OTHER-ASSETS] 0 0
[TOTAL-ASSETS] 105,463,000 105,463,000
[COMMON] 1,765,000 1,765,000
[CAPITAL-SURPLUS-PAID-IN] 17,381,000 17,381,000
[RETAINED-EARNINGS] 6,627,000 6,627,000
[TOTAL-COMMON-STOCKHOLDERS-EQ] 25,773,000 25,773,000
[PREFERRED-MANDATORY] 599,500 599,500
[PREFERRED] 272,000 272,000
[LONG-TERM-DEBT-NET] 32,000,000 32,000,000
[SHORT-TERM-NOTES] 0 0
[LONG-TERM-NOTES-PAYABLE] 0 0
[COMMERCIAL-PAPER-OBLIGATIONS] 0 0
[LONG-TERM-DEBT-CURRENT-PORT] 0 0
[PREFERRED-STOCK-CURRENT] 112,500 112,500
[CAPITAL-LEASE-OBLIGATIONS] 133,000 133,000
[LEASES-CURRENT] 100,000 100,000
[OTHER-ITEMS-CAPITAL-AND-LIAB] 46,473,000 46,473,000
[TOT-CAPITALIZATION-AND-LIAB] 105,463,000 105,463,000
[GROSS-OPERATING-REVENUE] 5,864,000 16,393,000
[INCOME-TAX-EXPENSE] 400,000 849,000
[OTHER-OPERATING-EXPENSES] 4,241,000 12,448,000
[TOTAL-OPERATING-EXPENSES] 4,641,000 13,297,000
[OPERATING-INCOME-LOSS] 1,223,000 3,096,000
[OTHER-INCOME-NET] 28,000 86,000
[INCOME-BEFORE-INTEREST-EXPEN] 1,251,000 3,182,000
[TOTAL-INTEREST-EXPENSE] 665,000 1,866,000
[NET-INCOME] 586,000 1,316,000
[PREFERRED-STOCK-DIVIDENDS] 22,000 70,000
[EARNINGS-AVAILABLE-FOR-COMM] 564,000 1,246,000
[COMMON-STOCK-DIVIDENDS] 404,000 1,211,000
[TOTAL-INTEREST-ON-BONDS] 2,677,000 2,677,000
[CASH-FLOW-OPERATIONS] 506,000 1,507,000
[EPS-PRIMARY] 0.32 0.70
[EPS-DILUTED] 0.32 0.70
</TABLE>
