ARTESIAN RESOURCES CORP - Quarter Report: 2000 March (Form 10-Q)

See notes to the consolidated financial statements.

See notes to the consolidated financial statements.

See Notes to the consolidated financial statements.

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 prescribed by generally accepted accounting principles. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1999 included in the Company's Annual Report on Form 10-K. The accompanying consolidated financial statements have not been audited by independent accountants in accordance with generally accepted auditing standards, but have been reviewed by independent accountants, 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, which are recoverable through rates, without a return on investment, 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 a period of two to five 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:

NOTE 3 - DEBT

       On May 4, 1999, Artesian repurchased 126,353 shares of Class B Common Stock and 24,165 shares of Class A Non-Voting Common Stock Ellis D. and Helena C. Taylor in exchange for a promissory note (the "Note") in the principal amount of $4,450,000 representing the purchase price of the stock, with a discounted present value of $4,307,000. The Note is payable quarterly, on a calendar basis, over a four year period and in sixteen equal principal installments of $278,125 commencing on June 30, 1999. The outstanding balance on the Note bears interest in an amount computed based on the quarterly dividend the Taylors would have received on the Stock transferred to Artesian but not yet paid for by Artesian. In addition, the principal installment is adjusted on a quarterly basis to reflect increases in the book value per common share of the Company as reported in its most recent quarterly financial statement distributed to stockholders prior to the quarterly payment. Such amounts, if any, represent contingent purchase price of the stock and will be charged to retained earnings. At March 31, 2000, Artesian had $3,337,500 outstanding under this promissory note.

NOTE 4 - NON-UTILITY OPERATING EXPENSES

       Artesian Wastewater, began operating a small wastewater treatment spray irrigation facility owned by a municipality in Southern New Castle County Delaware in 1999. Artesian Wastewater is paid a lump sum fee to maintain operations at the facility. The expenses associated with the provision of this service are categorized as non-utility operating expenses, because the cost of wastewater service is not regulated by the PSC in Delaware.

NOTE 5 - 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 Dian Taylor an officer and director of Artesian Resources' is a partner. The lease expires in December, 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 leased certain parcels of land for water production wells from Glendale Enterprises Limited, a company wholly-owned by Ellis D. Taylor, the father of William Taylor a director, at an annual rental of $44,000. Renewal of the lease has been automatic from year to year unless 60 days' written notice is given by either party before the end of the year's lease. Artesian Water received notice that Glendale Enterprises Limited desires to discontinue the lease for the well sites. Artesian Water is negotiating the purchase of the land rights for the well sites associated with the Glendale Lease. Artesian Water has received a claim from an unrelated third party with regard to lease payments made since 1986 in this matter and the current ownership of the easements, which the Company intends to vigorously contest. Artesian Water believes any claims or judgement paid is recoverable from Glendale Enterprises. However, if the claim is upheld, subject to the amount and timing of potential recoveries, if any, such amounts could be material to the Statement of Income.

       Expenses associated with related party transactions are as follows:

NOTE 6 - 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 potentially dilutive effect of employee stock options. The following table summarizes the shares used in computing basic and diluted net income per share:

       Equity per common share was $15.93 and $15.30 at March 31, 2000 and 1999, respectively. These amounts were computed by dividing common stockholders' equity, excluding preferred stock, by the number of shares of common stock outstanding on March 31, 2000 and 1999, respectively.

NOTE 7 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

       In June 1998, FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which established accounting and reporting standards for derivative instruments and hedging activities. In June 1999, FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," moving the effective date for this standard from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. We plan to adopt this statement effective January 1, 2001. Our adoption of this statement will not have a material impact on our financial condition or results of operations.

NOTE 8 - RATE PROCEEDINGS

       On April 30, 1999, Artesian Water filed a petition with the Delaware Public Service Commission to implement new rates to meet a requested increase in revenue of approximately 10.35%, or $2.7 million on an annualized basis. On September 30, 1999, Artesian Water filed a supplemental rate request which reduced the Company's increase from $2.7 million to approximately $2.5 million. Artesian Water is permitted to collect a temporary increase not in excess of $2.5 million on an annualized basis, under bond, until the level of permanent rates are decided by the Delaware Public Service Commission. The temporary rates became effective on July 1, 1999. Of the amount collected, $1,045,000 was reserved, pending the final outcome of the rate proceeding.

ITEM 2

RESULTS OF OPERATIONS

Overview

       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, 2000, we had approximately 63,000 metered customers and served a population of approximately 200,000, representing approximately 27% of Delaware's total population. We believe that we have a reputation for providing water and service of superior quality to our customers.

       The Delaware Public Service Commission regulates Artesian Water's rates charged for water service, the sale and issuance of securities, mergers and other matters. We 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. Increases in customers served by Artesian Water also contribute to increases in our operating revenues, although such increases have been offset slightly by reductions in customers' individual usage. We continue our efforts to contain expenses and improve efficiencies which contribute to increases in our operating income. Our business is also subject to seasonal fluctuations and the effects of weather.

Operating Revenues

       We realized 98.2% of our total revenue in the three months of 2000 from the sale of water. Water sales revenue increased $376,000, or 6.4%, for the quarter ended March 31, 2000 compared to the first quarter of 1999. The increase was primarily due to growth in the number of customers served, and implementation of temporary rates related to a pending rate proceeding.

Operating Expenses

       Operating and maintenance expenses increased $462,000 for the quarter ended March 31, 2000, over the quarter ended March 31, 1999, primarily due to increased purchased water expense of $252,000 due to the resting of the Hockessin field, water placed in storage as part of the Aquifer Storage and Recovery system now in service, and the timing of purchases in order to obtain beneficial pricing for required purchases. In addition, payroll and benefits increased $192,000 due to additional employees and wage increases. The ratio of operating and maintenance expense to total revenue was 63.8% for the three months ended March 31, 2000, as compared to 60.4% for the same period in 1999.

       Depreciation and amortization expense increased $104,000, or 19.5%, for the quarter ended March 31, 2000, compared to the comparable quarter of 1999, due to capital additions. Income tax expense decreased $90,000, or 34.1% for the quarter ended March 31, 2000, due to decreased profitability.

Interest Charges

       Interest charges increased $83,000, or 10.3%, for the first quarter of 2000, compared to the first quarter of 1999 due to higher average borrowings on the lines of credit incurred to finance investment in utility plant. In addition, the first quarter of 2000 reflects interest on the note payable for the repurchase of stock that occurred in the second quarter of 1999.

Net Income

       For the quarter ended March 31, 2000, Artesian Resources recorded net income of $252,000 which represents a $143,000, or a 36.2%, decrease as compared to earnings of $395,000 for the quarter ended March 31, 1999. This decrease was primarily due to increased purchased water expense.

LIQUIDITY AND CAPITAL RESOURCES

       Our primary sources of liquidity for the first three months of 2000 were $4.8 million provided by borrowings on our line of credit. Cash flow from operating activities was primarily impacted by large payments made in the first quarter to contractors working on our system expansion in Southern Delaware and to an estimated income tax payment of $550,000.

       We rely on our sources of liquidity for investments in our utility plant and systems and to meet our various payment obligations. We currently estimate that our aggregate investments in our utility plant and systems for the remainder of 2000 will be approximately $12.2 million. These investments will be financed by our operations and short-term borrowings under our revolving credit agreements. Our total obligations related to dividend and sinking fund payments on preferred stock, interest payments on indebtedness, rental payments and water service interconnection agreements for the remainder of 2000 are anticipated to be approximately $5.3 million and will be financed with cashflow from our operating activities.

       Developer advances and contributions in aid of construction are used for the installation of mains and hydrants in new developments. In addition to the $12.2 million referred to above, $3.3 million of capital expenditures will be financed by developers during the remainder of 2000.

       At March 31, 2000, we had a working capital deficit of $13.2 million mainly due to borrowings on our lines of credit incurred to finance investment in utility plant.

       At March 31, 2000, 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, 2000, we had $22.6 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%. All the facilities are reviewed annually by each bank for renewal.

       On April 13, 1999, Artesian Resources issued 325,000 shares of Class A Non-Voting Common Stock at $25.00 per share in an underwritten public offering, and the net proceeds of approximately $7.5 million were used to reduce Artesian Water's borrowing on the lines of credit incurred to finance investment in utility plant.

YEAR 2000 COMPLIANCE

       In 1999, our management completed an assessment of all our information and non-information technology systems and implemented a company-wide program which was designed to assure Year 2000 compliance. Since then, there have been no identified problems related to recognition of the year 2000. We do not anticipate any problems related to the Year 2000 issue, however, we continue to monitor all our systems to assure continued uninterrupted operations.

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, 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, availability of labor, failure of critical suppliers to meet Year 2000 compliance, changes in government policies and changes in economic conditions, could cause results to differ materially from those in the forward-looking statements.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

       None.

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

       On April 30, 1999, Artesian Water filed a petition with the PSC to implement new rates to meet an increased revenue requirement of approximately 10.35%, or $2.7 million on an annualized basis. On September 30, 1999, Artesian Water filed a supplemental rate request which reduced the Company's increase from $2.7 million to approximately $2.5 million. Artesian Water is permitted to collect a temporary increase not in excess of $2.5 million on an annualized basis, under bond, until

permanent rates are approved by the PSC. Such temporary rates were placed in effect by Artesian July 1, 1999.

       There are no other material legal proceedings pending at this date.

ITEM 2 - CHANGES IN SECURITIES

       Not applicable.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

       Not applicable.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       Not applicable.

ITEM 5 - OTHER INFORMATION

       Not applicable.

ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K

       No reports on Form 8-K were filed for the quarter ended March 31, 2000.

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

EXHIBIT 27 - FINANCIAL DATA SCHEDULE

        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 March 31, 2000 Form 10-Q and is qualified in its entirety by reference to such financial statements.