ARTESIAN RESOURCES CORP - Quarter Report: 2001 June (Form 10-Q)

(Mark One)
[ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001

OR

[    ]  TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     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 June 30, 1,631,124 shares and 391,824 shares of Class A Non-Voting Common Stock and Class B Common Stock, respectively, were outstanding.

Part I - Financial Information
Item I - Financial Statements

See notes to the consolidated financial statements.

See notes to the consolidated financial statements.

NOTE 1 - GENERAL

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 a period of two years. The postretirement benefit obligation, which is being amortized over twenty 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 customer reverse. Regulatory assets, net of amortization, comprise:

       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 from Helena C. Taylor and Ellis D. 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 changes 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 June 30, 2001, Artesian had $1,946,875 outstanding under this promissory note.

          On December 29, 2000, Artesian Water issued a $20.0 million, 8.17%, twenty year Series O First Mortgage Bond to redeem the Series K $7.0 million First Mortgage Bond and to pay down the lines of credit. On December 29, 2020 the Series O First Mortgage Bond matures.

           On January 31, 2001, Artesian Water Company, Inc. entered into a financing agreement with the Delaware Department of Health and Social Services to borrow funds totaling not more than $4,307,144 from the State's Revolving Loan Fund under an unsecured General Obligation Note. The note bears interest of 4.48%, and is payable ratably over twenty years. The effective rate of the loan, including expenses related to the closing, is 4.57%. The Company intends to use the proceeds of this revolving loan to repay outstanding short-term debt. As such, the Company has reclassified $4,307,144 from notes payable to long-term debt on the balance sheet. The proceeds are pending processing by the Delaware Department of Health and Social Services.

     Artesian Wastewater Management, Inc. (Artesian Wastewater) is an additional non-regulated subsidiary of Artesian Resources, which provides wastewater treatment services in Delaware. On March 12, 1997, Artesian Wastewater became a one-third owner in AquaStructure Delaware, L.L.C., which markets proposals to design and construct wastewater treatment facilities. Artesian Wastewater operates a small wastewater treatment spray irrigation facility owned by a municipality in Southern New Castle County Delaware. Artesian Wastewater is paid a lump sum fee to maintain operations at the facility.

     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. 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.

     Expenses associated with related party transactions are as follows:

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 $16.24 and $16.14 at June 30, 2001 and 2000, respectively. These amounts were computed by dividing common stockholders' equity, excluding preferred stock, by the number of shares of common stock outstanding on June 30, 2001 and 2000, respectively.

          In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

          The Company is required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, which it expects to account for using the pooling of interests method, and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142.

          Management is in the process of evaluating the impact of SFAS No. 141 and SFAS No. 142 on the Company's financial statements.

          On December 5, 2000, Artesian Water filed a petition with the PSC to implement new rates seeking increased revenues of approximately 22.57% or $6.4 million on an annualized basis. Effective February 3, 2001, Artesian Water was permitted, through temporary rates approved by the PSC, to collect an increase of $2.5 million on an annualized basis, subject to refund, until permanent rates were approved by the PSC.

       On June 19, 2001, the PSC approved a settlement that Artesian Water entered into with Staff of the Delaware Public Service Commission ("Staff") and the Division of the Public Advocate ("DPA") on June 6, 2001. The parties' stipulated agreement provides for an increase in rates designed to provide the Company an additional $3.7 million in annualized revenues. The settlement, as approved, also allowed the Company a return on equity of 10.5%. The new rates approved by the PSC became effective July 1, 2001. As a result of these new rates, approximately $1.2 million in additional annualized revenues will be reflected in rates for service beginning July 1, 2001.

     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 June 30, 2001, we had approximately 66,000 metered customers and served a population of approximately 214,000, representing approximately 28% of Delaware's total population. We believe that we have a reputation for providing water and service of superior quality to our customers.

     The PSC 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. Our business is also subject to seasonal fluctuations and the effects of weather. We continue our efforts to contain expenses and improve efficiencies, which contribute to increases in our operating income.

     We realized 98.4% and 98.3% of our total revenue in the quarter ended June 2001 and the first six months of 2001 from the sale of water. Water sales revenue increased $729,000, or 10.2% and $1,332,000, or 10.0%, for the quarter ended June 30, 2001 and the six months ended June 30, 2001 compared to the quarter ended June 30, 2000 and the first six months of 2000. The increase for both periods was primarily due to a growth in the number of customers served, and implementation of temporary rates related to the recently completed rate proceeding. 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 Commission finds to be appropriate, the utility must refund the portion found in excess to customers with interest.

          On December 5, 2000, Artesian Water filed a petition with the PSC to implement new rates seeking increased revenues of approximately 22.57% or $6.4 million on an annualized basis. Effective February 3, 2001, Artesian Water was permitted, through temporary rates approved by the PSC, to collect an increase of $2.5 million on an annualized basis, subject to refund, until permanent rates were approved by the PSC.

       On June 19, 2001, the PSC approved a settlement that Artesian Water entered into with Staff of the Delaware Public Service Commission ("Staff") and the Division of the Public Advocate ("DPA") on June 6, 2001. The parties' stipulated agreement provides for an increase in rates designed to provide the Company an additional $3.7 million in annualized revenues. The settlement, as approved, also allowed the Company a return on equity of 10.5%. The new rates approved by the PSC became effective July 1, 2001. As a result of these new rates, approximately $1.2 million in additional annualized revenues will be reflected in rates for service beginning July 1, 2001.

     Operating and maintenance expenses increased $642,000 for the quarter ended June 30, 2001, and $952,000 for the six months ended June 30, 2001, over the comparable periods ended June 30, 2000. An increase of $146,000, for the quarter and $415,000 for the six months ended June 30, 2001, in payroll and benefits, due to additional positions and wage increases, contributed to the increase in operating and maintenance expenses. In addition, purchased water expense increased due to the timing of water purchases under minimum contract arrangements. We expect to purchase less water during the last six months of 2001 as compared to the same period a year ago. We target annual purchases of water to approximate the minimum contractual obligations.

     Depreciation and amortization expense increased $108,000, or 16.6% for the quarter ended June 30, 2001 and $180,000, or 14.0%, for the six months ended June 30, 2001, compared to the comparable period of 2000, due to capital additions. Income tax expense decreased $61,000 or 9.1% and $66,000, or 7.8% for the quarter and the six months ended June 30, 2001, as a result of reduced profitability.

     Interest charges increased $164,000, or 16.8% for the quarter ended June 30, 2001, and $358,000 or 19.2% for the first six months of 2001, compared to the quarter ended June 2000 and the first six months of 2000 due to interest related to the issuance of the $20 million, 8.17% series O bond, which included the refinancing of the $7 million 10.17%, series K bond.

     For the quarter and the six months ended June 30, 2001, Artesian Resources recorded earnings of $885,000, and $1,141,000, which represents a $106,000, or 10.7%, decrease and an $85,000, or 6.9%, decrease, respectively, as compared to earnings of $991,000 for the quarter ended June 2000 and $1,226,000 for the six months ended June 30, 2000.

     Our primary sources of liquidity for the first six months of 2001 were $10.2 million provided by borrowings on our line of credit and cash flow from operating activities that provided $4.3 million.

     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 2001 will be approximately $8.2 million. These obligations and our investments in utility plant will be financed with cash flow from our operating activities 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 2001 are anticipated to be approximately $3.8 million.

     Developer advances and contributions in aid of construction are used for the installation of mains and hydrants in new developments. We anticipate that an additional $1.9 million of capital expenditures will be financed by developers during the remainder of 2001.

     At June 30, 2001, we had a working capital deficit of $14.6 million mainly due to borrowings on our lines of credit incurred to finance investment in utility plant.

     At June 30, 2001, 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 June 30, 2001, we had $18.5 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.

     We expect that our available cash balance, together with projected cash generated from operations and the available bank credit line, will be sufficient to fund our activities for at least the next 24 months.

     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 future rate proceedings, competitive market pressures, material changes in demand from larger customers, changes in weather, availability of labor, changes in government policies and changes in economic conditions, could cause results to differ materially from those in the forward-looking statements.

     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.

          On December 5, 2000, Artesian Water filed a petition with the PSC to implement new rates seeking increased revenues of approximately 22.57% or $6.4 million on an annualized basis. Effective February 3, 2001, Artesian Water was permitted, through temporary rates approved by the PSC, to collect an increase of $2.5 million on an annualized basis, subject to refund, until permanent rates were approved by the PSC.

       On June 19, 2001, the PSC approved a settlement that Artesian Water entered into with Staff of the Delaware Public Service Commission ("Staff") and the Division of the Public Advocate ("DPA") on June 6, 2001. The parties' stipulated agreement provides for an increase in rates designed to provide the Company an additional $3.7 million in annualized revenues. The settlement, as approved, also allowed the Company a return on equity of 10.5%. The new rates approved by the PSC became effective July 1, 2001. As a result of these new rates, approximately $1.2 million in additional annualized revenues will be reflected in rates for service beginning July 1, 2001.

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

     Not applicable.

     Not applicable.

     On May 2, 2001 Mr. Norman H. Taylor Jr. was elected by the shareholders of the Company, as director for a term expiring at the third succeeding annual meeting from May 2, 2001. Mr. Norman H. Taylor, Jr. replaces the director position vacated by William H. Taylor II. Mr. William Wyer was re-elected as a director.

     Not applicable.

Form 8K reports were filed on June 8, 2001 and June 19, 2001 and are incorporated by reference.

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.