ARTESIAN RESOURCES CORP - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
fiscal year ended December 31, 2007
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
file number 000-18516
ARTESIAN
RESOURCES CORPORATION
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(Exact
name of registrant as specified in its charter)
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Delaware
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51-0002090
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification Number)
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664
Churchmans Road, Newark, Delaware 19702
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Address
of principal executive offices
(302)
453 – 6900
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Registrant's
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Class
A Non-Voting Common Stock
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The
NASDAQ Global Market
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Securities
registered pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
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o
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Yes
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þ
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No
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Indicate
by check mark if the registrant is not required to file report reports pursuant
to Section 13 or Section 15(d) of the Act.
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o
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Yes
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þ
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No
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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.
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þ
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Yes
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o
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No
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Indicate
by check mark if the disclosure of delinquent filers pursuant to Item 405
of
Regulation S-K is not contained herein, and will not be contained, to the
best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “small reporting company” in Rule 12(b)-2 of the
Exchange Act.:
Large
accelerated filer o
Accelerated filer þ Non-accelerated
filer
o Small reporting
company o
Indicate
by check mark whether the registrant is a shell company ( as defined in Exchange
Act Rule 12b-2)
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o
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Yes
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þ
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No
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The
aggregate market value of the Class A Non-Voting Common Stock and Class B Common
Stock held by non-affiliates of the registrant at June 30, 2007 was $115,214,000
and $7,402,000, respectively. The aggregate market value of Class A
Non-Voting Common Stock was computed by reference to the closing price of such
class as reported on the Nasdaq National Market on June 30, 2007. The
aggregate market value of Class B Common Stock was computed by reference to
the
last reported trade of such class as reported on the OTC Bulletin Board as
of
June 30, 2007, which trade date was June 27, 2007.
As
of
March 7, 2008, 6,435,473 shares of Class A Non-Voting Common Stock and 881,452
shares of Class B Common Stock were outstanding.
General
Artesian
Resources Corporation, or “Artesian Resources” operates as the parent holding
company of Artesian Water Company, Inc., or “Artesian Water,” Artesian Water
Pennsylvania, Inc., or “Artesian Water Pennsylvania,” Artesian Water Maryland,
Inc, or “Artesian Water Maryland,” Artesian Wastewater Management, Inc., or
“Artesian Wastewater,” each a regulated public utility, and two non-regulated
subsidiaries; Artesian Utility Development, Inc., or “Artesian Utility,” and
Artesian Development Corporation, or “Artesian Development.” The
terms "we," "our" and the "Company" as used herein refer to Artesian Resources
and its subsidiaries. The business activity conducted by each of our
subsidiaries is discussed below under separate headings.
The
Company has no collective bargaining agreements with any of its employees,
and
its work force is not union organized or union represented. As of
December 31, 2007, we employed 205 full-time and 4 part-time
employees. Of these employees, 15 were officers and managers; 128
were employed as operations personnel, including engineers, technicians,
draftsman, maintenance and repair persons, meter readers and utility personnel;
and 57 were employed in the accounting, budgeting, information systems, human
resources, customer relations, public relations and conservation
departments. The remaining 9 employees were administrative
personnel. We believe that our employee relations are
good.
We
file
our annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Exchange Act
electronically with the Securities and Exchange Commission, SEC. The
public may read or copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC, 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-202-551-8090. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address
of that site is http://www.sec.gov.
We
are a
Delaware corporation with our principal executive offices located at 664
Churchmans Road, Newark, Delaware, 19702. Our telephone number is
(302) 453-6900 and our website address is www.artesianwater.com. We
make available free of charge through the Investor Information section of our
website our Code of Ethics, Annual Reports on Form 10-K, Quarterly Reports
on
Form 10-Q, current reports on Form 8-K and all amendments to those reports
as
soon as reasonably practicable after such material is electronically filed
with
or furnished to the SEC. We include our website address in this
Annual Report on Form 10-K only as an inactive textual reference and do not
intend it to be an active link to our website.
Our
current market area is the Delmarva Peninsula. Our largest service
area is primarily in the State of Delaware, which had a population of
approximately 865,000 at July 1, 2007. According to the US
Census Bureau, Delaware's population increased an estimated 10.4% from 2000
to
2007, as compared to the nationwide growth rate of approximately
7.2%. Substantial portions of Delaware, particularly outside of New
Castle County, are not served by a public water system and represent potential
opportunities for Artesian Water to obtain new exclusive franchised service
areas. We continue to focus resources on developing and serving
existing service territories and obtaining new territories throughout the
State. In 2007, we added approximately 15 square miles of
franchised water service area.
In
addition, we have expanded the provision of our services into
Maryland. Cecil County has designated the Interstate 95 corridor as a
preferred growth area for business and residential
expansion. Recently, the federal Base Re-Alignment and Closure
Commission announced the relocation of approximately 14,000 jobs to nearby
Aberdeen, Maryland by 2011. The Wilmington Metropolitan Area Planning
Commission projects Cecil County will grow 86 percent between 2000 and 2030
and
the Maryland Department of Planning projects that Cecil County will experience
the highest rate of household growth through 2025 of any jurisdiction in the
state. We have entered into interconnection agreements with the towns
of Elkton and Chesapeake City, Maryland to sell water to
them. Construction of the transmission main to Elkton is expected to
begin in the spring and we anticipate supplying water to the town by summer
2008. Additional approvals are necessary to construct the
transmission line to Chesapeake City.
On
August
7, 2007, we completed the acquisition of the Carpenters Point Water Company,
which served a 141 home community near the I-95 growth corridor in Cecil County,
Maryland. Also, we have entered into an agreement to purchase the
Mountain Hill Water Company, which currently serves two commercial accounts
in
the Principio Business Park and which is located within Cecil County’s
designated growth corridor. We have also been selected by Cecil
County as the water and wastewater utility to serve a designated service
territory within the growth corridor and we are in negotiations with the County
regarding terms of the water and wastewater franchise agreements for the
area.
Artesian
Water
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. It was organized in 1927 as the successor to the
Richardson Park Water Company, founded in 1905. In 1984, the name of
Artesian Water Company was changed to Artesian Resources Corporation and the
utility assets were contributed to the newly formed subsidiary, Artesian
Water. Artesian Water distributes and sells water to residential,
commercial, industrial, governmental, municipal and utility customers throughout
the State of Delaware. As of December 31, 2007, we had approximately
75,100 metered customers and served a population of approximately 250,000
(including contract services), representing approximately 29% of Delaware's
total population. We also provide water for public and private fire
protection to customers in our service territories. Our gross water
sales revenue for 2007 was approximately $48.5 million, which was 92.3% of
total
operating revenues for the consolidated group. Our water customer
base is diversified among residential, commercial, and industrial
customers. Residential customers account for 94% of our customer
base, 5% are commercial entities, and the remaining 1% are industrial and
other. Whereas, residential customers account for 58% of our total
revenue, 22% is from commercial entities and the remaining 20% is from
industrial and other customers.
Substantially
all of our water customers are metered, which allows us to measure and bill
for
our customers’ water consumption. Demand for water during the warmer
months is generally greater than during cooler months due primarily to
additional customer requirements for water in connection with cooling systems,
swimming pools, irrigation systems and other outside water
use. Throughout the year, and particularly during typically warmer
months, demand for water will vary with temperature and rainfall. In
the event that temperatures during the typically warmer months are cooler than
expected, or there is more rainfall than expected, the demand for water may
decrease and our revenues may be adversely affected.
In
Delaware, a Certificate of Public Convenience and Necessity, or “CPCN,” grants a
water company the exclusive right to serve all existing and new customers within
a designated area. Effective July 1, 2001, the authority to issue
these CPCNs was transferred to the Delaware Public Service Commission, or the
“PSC,” from the Delaware Department of Natural Resources and Environmental
Control, or “DNREC”. In this Form 10-K, we may refer to CPCNs as
"franchises" or "service territories." The PSC grants a CPCN under
circumstances where there has been a determination that the water in the
proposed service area does not meet the regulations governing drinking water
standards of the State Division of Public Health for human consumption, where
the supply is insufficient to meet the projected demand, or where the applicant
is in possession of one of the following:
Øa
signed service
agreement with the developer of a proposed subdivision or development, which
subdivision or development has been duly approved by the respective county
government;
Øa
petition requesting
such service signed by a majority of the landowners of the proposed territory
to
be served; or
Øa
duly certified copy of
a resolution from the governing body of a county or municipality requesting
the
applicant to provide service to the proposed territory to be
served.
CPCNs
are
not transferable. Once a CPCN is granted to a water utility, it may
not be suspended or terminated unless the PSC determines in accordance with
its
rules and regulations that good cause exists for any such suspension or
termination. In addition, a water utility that has a CPCN must obtain
the approval of the PSC to abandon a service territory.
On
March
20, 2007, the PSC entered Order No. 7142 which re-opened Regulation Docket
No.
51. By this Order, the Commission proposes to repeal rules
implemented in 2001 and replace them with new "Regulations Governing
Certificates of Public Convenience and Necessity." The proposed rules
address the content of how notifications are sent to landowners, the definitions
for the “Proposed Service Area,” and the requirement of the applying utility to
certify that it will actually provide water services to a new proposed service
territory within three years. If water service is not provided within
the three year time frame, the proposed rule provides a mechanism for the
Commission to determine whether the utility should be able to retain the new
CPCN. These proposed rules have not been adopted and they may not be
adopted or could be modified prior to adoption.
Our
business in our franchised service area is substantially free from direct
competition with other public utilities, municipalities and other
entities. Even though Artesian Water has been granted an exclusive
franchise for each of our existing community water systems, our ability to
expand service areas can be affected by the PSC awarding franchises to other
regulated water utilities with whom competes for such franchises.
We
hold
CPCNs for approximately 225 square miles of exclusive water service territory,
about 11.3% of the total square miles in Delaware, which is segmented into
a
number of service areas. Our largest connected regional water system,
consisting of approximately 98.6 square miles and 68,000 customers, is located
in northern Delaware. A significant portion of our exclusive service
territory remains undeveloped, and if and when development occurs and there
is
population growth in these areas, we will increase our customer base by
providing water service to the newly developed areas and new
customers.
Our
primary sources of water are our wells that pump groundwater from aquifers
and
other formations. To supplement our groundwater supply, we purchase
surface water through interconnections only in the northern service area of
our
New Castle County system. The purchased surface water is blended with
our groundwater supply for distribution to our customers. Nearly 86%
of the overall 7.8 billion gallons of water we distributed in all of our systems
during 2007 came
from our groundwater wells, while the remaining 14% came from interconnections
with other utilities and municipalities. During 2007, our average
rate of water pumped was approximately 18.4 million gallons per day, “mgd,” from
our groundwater wells and approximately 3.0 mgd was supplied from
interconnections. Our peak water supply capacity currently is
approximately 56.0 mgd. We believe that we have in place sufficient
capacity to provide water service for the foreseeable future to all existing
and
new customers in all of our service territories.
Under
state laws and regulations, we are required to file applications with the
Delaware Department of Natural Resources and Environmental Control for water
allocation permits for each of our operating wells pumping greater than 50,000
gallons per day. We have 116 operating and 56 observation and
monitoring wells in our systems. At December 31, 2007, we had
allocation permits for 77 wells, permit applications pending for 12 wells,
and
27 wells that do not require a permit. Our access to aquifers within
our service territory is not exclusive. Water allocation permits
control the amount of water that can be drawn from water resources and are
granted with specific restrictions on water level draw down limits, annual,
monthly and daily pumpage limits, and well field allocation pumpage
limits. We are also subject to water allocation regulations that
control the amount of water that we can draw from water sources. As a
result, if new or more restrictive water allocation regulations are imposed, they could have an
adverse effect on our ability to supply the demands of our customers, and in
turn, our water supply revenues and results of operations. Our
ability to supply the demands of our customers historically has not been
affected by private usage of the aquifers by landowners or the limits imposed
by
the state of Delaware. Because of the extensive regulatory
requirements relating to the withdrawal of any significant amounts of water
from
the aquifers, we believe that third party usage of the aquifers within our
service territory will not interfere with our ability to meet the present and
future demands of our customers. In 2003, Delaware passed legislation
requiring all water utilities to certify by July 2006 that they had sufficient
sources of self-supply to serve their respective systems. We filed
our certification of self-sufficiency of supply with the PSC on March 8,
2005. The review was completed on June 20, 2006, and the PSC
concluded that we demonstrated that we had sufficient water supply to meet
the
demands of our customers through 2006. As required by law, on
June 30, 2006, we filed with the PSC a new certification of
self-sufficiency for the period through 2009. On July 24, 2007, after
completion of their review the PSC accepted our certification of sufficient
water supply through 2009.
Most
of
our New Castle County system is interconnected. In the remainder of
the State, we have several satellite systems that have not yet been connected
by
transmission and distribution facilities. We intend to join these
systems into larger integrated regional systems through the construction of
a
transmission and distribution network as development continues and our expansion
efforts provide us with contiguous exclusive service territories.
We
have
18 interconnections with 2 neighboring water utilities and 5 municipalities
that
provide us with the ability to purchase or sell water. An
interconnection agreement with the Chester Water Authority has a "take or pay"
clause requiring us to purchase 1.095 billion gallons
annually. During the fiscal year ended December 31, 2007, we used the
minimum draw under this agreement. The Chester Water Authority
agreement, which expires December 31, 2021, provides for the right to extend
the
term of this agreement through and including December 31, 2047, at our option,
subject to the approval of the Susquehanna River Basin Commission. On
June 20, 2006, Artesian Water provided the City of Wilmington, Delaware or
“City” with notice of non-renewal of the interconnection agreement with the City
upon its December 22, 2006 termination. Artesian Water is no longer
required to purchase 200 million gallons annually from the City after
December 22, 2006. All of the interconnections provide Artesian
Water the ability to sell water to neighboring water utilities or
municipalities.
As
of
December 31, 2007, we were serving customers through approximately
1,086 miles of transmission and distribution mains. Mains range in
diameter from two inches to twenty-four inches, and most of the mains are made
of ductile iron or cast iron. We supply public fire protection
service through approximately 5,055 hydrants installed throughout our service
territories.
We
have
27 storage tanks, most of which are elevated, providing total system storage
of
40.5 million gallons. We have developed and are using an Aquifer
Storage and Recovery or “ASR” system in northern Delaware. Our ASR
system provides approximately 130 million gallons of storage capacity, which
can
be withdrawn at a rate of approximately 1 million gallons per day. At
some locations, we rely on hydropneumatic tanks to maintain adequate system
pressures. Where possible, we combine our smaller satellite systems
with systems having elevated storage facilities.
We
pump
all of our water with electric power purchased from major electric utilities
such as Delaware Electric Cooperative and Delmarva Power. We also
have diesel and propane powered generating equipment at most treatment and
elevated storage facilities for the provision of basic water service during
possible electrical outages. Price caps instituted by electric
restructuring legislation in Delaware in 1999 were lifted in 2005 for Delaware
Electric Cooperative’s customers, and in 2006 for Delmarva Power’s customers,
resulting in extreme price increases. Although we were unable to
escape the significant increase associated with the expiration of the price
caps, we sought to mitigate future significant increases by signing a two-year
supply contract, at a fixed price, with Pepco Energy Services. This
supply contract is due to expire in May 2008. To continue to mitigate
future increases we are currently examining new bids for service for the next
two years.
We
derive
about 95% of our self-supplied groundwater from wells located in the Atlantic
Coastal Plain. The remaining 5% comes from wells in the Piedmont
Province. We use a variety of treatment methods, including aeration,
pH adjustment, chlorination, fluoridation and iron removal, to meet federal,
state and local water quality standards. Additionally, a corrosion
inhibitor is added to all of our self-supplied groundwater and most of the
supply from interconnections. We have 53 different water treatment
facilities. All water supplies that we purchase from neighboring
utilities are potable. Based on our experience, we believe that the
costs of treating groundwater are significantly lower than those of treating
surface water.
The
United States Environmental Protection Agency, or the “EPA,” DNREC, and the
Delaware Division of Public Health or the “DPH,” regulate the water quality of
our treatment and distribution systems. We believe that we are in
material compliance with all current federal, state and local water quality
standards, including regulations under the federal Safe Drinking Water
Act. However, if new water quality regulations are too costly, or if
we fail to comply with such regulations, it could have a material adverse affect
on our financial condition and results of operations. Chester Water
Authority, which supplies water to Artesian Water through interconnections
in
northern New Castle County, is regulated by the Pennsylvania Department of
Environmental Protection, as well as the EPA.
As
required by the Safe Drinking Water Act, the EPA has established maximum
contaminant levels for various substances found in drinking
water. DPH has set maximum contaminant levels for certain substances
that are more restrictive than the maximum contaminant levels set by the
EPA. The DPH is the EPA's agent for enforcing the Safe Drinking Water
Act in Delaware and, in that capacity, monitors the activities of Artesian
Water
and reviews the results of water quality tests performed by Artesian Water
for
adherence to applicable regulations. Artesian Water is also subject
to other laws regulating substances and contaminants in water, including the
Lead and Copper Rule, rules for volatile organic compounds and the Total
Coliform Rule. Because we have no surface water sources of supply
that we treat for consumption, the Surface Water Treatment Rule generally does
not apply to us.
Delaware
enacted legislation in 1998 requiring water utilities to meet secondary water
quality standards that include limitations on iron content, odor and other
water
quality-related issues that are not proven health risks but may be objectionable
for consumption. We believe our current treatment systems and
facilities meet these secondary standards.
A
normal
by-product of our iron removal treatment facilities is a solid consisting of
the
iron removed from untreated groundwater plus residue from chemicals used in
the
treatment process. The solids produced at our facilities are either
disposed directly into approved wastewater facilities or removed from our
facilities by a licensed third party vendor. Management believes that compliance
with
existing federal, state or local laws and regulations regulating the discharge
of materials into the environment, or otherwise relating to the protection
of
the environment, has no material effect upon the business and affairs of the
Company, but there is no assurance that such compliance will continue to not
have a material effect in the future.
Artesian
Water, as a public utility, is regulated by the PSC with respect to rates and
charges for 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. 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
currently derive our water service revenues from water distribution, upon which
base rates are applied. Our last increases in rates were effective
January 1, 2007 and July 24, 2007, which reflected a settlement agreement
between Artesian Water and the PSC, Public Advocate, and other interested
parties. In 2006, we resolved two separate rate cases with the PSC,
one filed on February 5, 2004 and one filed on May 9, 2006.
In
February 2004, we requested an increase in rates of 24%. We
recognized revenues reflecting a temporary increase of $2.5 million on an annual
basis between April and September 2004, and a second temporary increase of
$3.0 million on an annual basis effective September 2004, for a total of
$5.5 million on an annual basis. A portion of the second increase was
held in reserve based on an estimated outcome and was not reflected in
income. In May 2006, the PSC issued the final order in this
case. Based on the PSC decision, Artesian Water’s new rates were
designed to generate approximately $4.9 million in additional revenue on an
annual basis, or an increase of approximately 13.4% over rates in effect before
the implementation of temporary rates in 2004. We were required by
law to refund the portion of the temporary rate increase in excess of the 13.4%
plus interest to our customers. The refund was completed in December
2006.
In
May
2006, Artesian Water filed a petition with the PSC to implement new rates to
meet a requested increase in revenue of 23%, or approximately $9.9 million,
on
an annualized basis. This request was primarily due to the Company’s
significant investment in infrastructure, as well as an approximately 92%
increase in purchased power expense due to the expiration of price caps imposed
in 1999 when deregulation of the electric industry in Delaware was
adopted. As permitted by law, in July 2006 we placed into effect
temporary rates designed to generate an increase in annual operating revenue
of
approximately 5.9%, or $2.5 million on an annual basis, until new rates are
approved by the PSC.
On
December 19, 2006, the PSC approved a Settlement Agreement in this
case. The increase in annual revenue requirement under the Settlement
Agreement of $6 million would be generated in two steps. The first
step was placed in effect on January 1, 2007 to generate approximately $4.8
million in annual revenue. The second step was placed in effect July
24, 2007. The second step rates were designed to recover
approximately $1.2 million of annual revenue which reflected the issuance of
additional equity issued by Artesian Resources and invested in Artesian Water
in
June and July of 2007 of approximately $20 million.
Artesian
Water
Pennsylvania
Our
other
water utility subsidiary, Artesian Water Pennsylvania, began operations upon
receiving recognition as a regulated public water utility by the Pennsylvania
Public Utility Commission in 2002. It provides water service to a
residential community consisting of 39 customers in Chester
County. Artesian Water Pennsylvania filed an application with the
Pennsylvania Public Utilities Commission to increase our service area in
Pennsylvania, which was approved and a related order was entered on
February 4, 2005. This application concerned four specific
developments that are expected to add 350 customers. Development in
these specific developments has not progressed pending resolution of developer
related township approvals.
Artesian
Water
Maryland
On
July
20, 2007, the Maryland Public Service Commission, or the MDPSC, approved our
acquisition of Carpenters Point Water Company. Carpenters Point Water
Company has been renamed Artesian Water Maryland, Inc., or “Artesian Water
Maryland”. The acquisition was completed on August 7, 2007 in a
transaction accounted for under Statement of Financial Accounting Standards
No.
141 “Business Combinations” (SFAS 141) and the results of operations are
included in the Consolidated Statement of Income as of the August 7, 2007 date
of acquisition. While this acquisition is integral to our expansion
into Maryland, it did not have a material effect on the financial statements
in
2007. Carpenters Point Water Company served a 141 home community in
Cecil County, Maryland near the Interstate 95 growth corridor between
Philadelphia and Baltimore and has sufficient groundwater supply to serve
additional customers in the undeveloped portions of its franchise and
surrounding area.
In
order
for Artesian Water Maryland to expand its franchise area, we must first obtain
approval from the county in Maryland in which we intend to expand. We
also need to seek approval from the MDPSC. In addition, we are
required to provide to the MDPSC any plans, permits, maps and proof of ownership
of easements for our facilities.
We
have
entered into an agreement to purchase the Mountain Hill Water Company, which
currently serves two commercial accounts in the Principio Business Park and
which is located within Cecil County’s designated growth corridor. We
have also been selected by Cecil County as the water and wastewater utility
to
serve a designated service territory within the growth corridor and we are
in
negotiations with the County regarding terms of the water and wastewater
franchise agreements for the area.
Artesian
Wastewater
Artesian
Wastewater Management owns wastewater collection and treatment infrastructure
and provides wastewater services to customers in Delaware as a regulated public
wastewater service company. In Delaware, a CPCN grants a wastewater
company the exclusive right to serve all existing and new customers within
a
designated area. On July 6, 2004, legislation was enacted by the
Delaware General Assembly, which granted the PSC jurisdiction over
non-governmental wastewater utilities having fifty or more customers in the
aggregate and authorizing the PSC to regulate wastewater companies, which
includes rates charged for wastewater service, issuance of securities and other
matters. This authority includes the jurisdiction to grant and revoke
CPCNs.
The
PSC
has adopted rules, regulations and procedures necessary to implement this
authority. CPCNs are not transferable, and a wastewater utility must
obtain the approval of the PSC to abandon a service territory once
granted. Once a CPCN is granted to a wastewater utility, it may not
be suspended or terminated unless the PSC determines in accordance with its
rules and regulations that good cause exists for any such suspension or
termination. Although Artesian Wastewater has been granted an
exclusive franchise for each of its existing wastewater systems, its ability
to
expand service areas can be affected by the PSC awarding franchises to other
regulated wastewater utilities with whom we compete for such
franchises.
Artesian
Wastewater received recognition as a regulated public wastewater utility by
the
PSC on March 8, 2005, and began providing service to a planned 725 home
residential community in Sussex County, Delaware in July
2005. Artesian Wastewater subsequently received approval for another
CPCN in 2005 to provide service to a 97 home community in Sussex County,
Delaware. In 2006 Artesian Wastewater received approvals on CPCNs for
six planned communities in Sussex County and three planned communities in Kent
County, Delaware to provide service to an estimated 1,548
customers. As of December 31, 2007, Artesian Wastewater provided
wastewater services to 414 residential customers.
Artesian
Utility
Artesian
Utility, one of our non-regulated subsidiaries, designs and builds water and
wastewater infrastructure and provides contract water and wastewater services
on
the Delmarva Peninsula. Artesian Utility also evaluates land parcels,
provides recommendations to developers on the size of a water or wastewater
facility and the type of technology that should be utilized for treatment at
said facilities, and operates 26 water and wastewater facilities in Delaware,
Maryland and Pennsylvania for others. Artesian Utility is currently
evaluating several land parcels within the state of Delaware for their
feasibility to handle a wastewater facility and their capacity for such a
wastewater facility. Artesian Utility also has several contracts with
developers for design and construction of wastewater facilities within the
Delmarva Peninsula, utilizing a number of different technologies for treatment
of wastewater at each facility.
On
May 1,
2007, Artesian Utility acquired all rights, titles and interest in the
operations contracts of TMH Environmental Services, Inc. or
“TMH”. TMH, incorporated in Pennsylvania, provided contract water and
wastewater operation services to 25 private, municipal and governmental
institutions in the southeastern part of Pennsylvania. In connection
with this acquisition, we expanded our water and wastewater contract activity
in
the region and added experienced, qualified and licensed water and wastewater
operators to our staff. We believe this strategic expansion will
provide Artesian Utility with additional potential for continued
growth.
Artesian
Utility is also a one-third participant, along with heavy-construction
contractor George and Lynch, Inc and engineering firm D. Preston Lee, Jr.,
P.E.,
Inc., in a limited liability company called AquaStructure Delaware, L.L.C.,
or "AquaStructure" that is inactive. The purpose of
AquaStructure was to develop and market proposals for design, construction
and
operation of wastewater facilities. In 1999, we began operating a
250,000-gallon per day wastewater facility for the town of Middletown, in
southern New Castle County. In 2002,
AquaStructure completed construction of a 2.5 million gallon per day
wastewater facility for Middletown. Artesian Utility now operates
this facility for Middletown under a 20-year contract that expires on February
1, 2021.
Artesian
Development
Our
other
non-regulated subsidiary, Artesian Development, owns an approximately six-acre
parcel of land zoned for office buildings located immediately adjacent to our
corporate headquarters. In September 2006, Artesian Development sold
a parcel of land of approximately four acres at the same location, resulting
in
a gain on sale of land of $1.3 million.
On
October 8, 2007, Artesian Development purchased approximately twenty acres
of
land located on Route 9, west of the city of Lewes in Sussex County,
Delaware. Artesian Development received a conditional use for this
land from Sussex County to construct an office facility as we continue to expand
our operations in southern Delaware. This conditional use also
includes allowing for the construction of water treatment and wastewater
facilities and elevated storage on the site to provide service to the area
between Lewes and Georgetown, Delaware. Once permits and approvals to
construct the facilities are received, appropriate agreements with the utility
affiliates of Artesian Development for its use will be developed.
Our
operating revenue is
primarily from water sales. The rates that we charge our customers
are subject to the regulations of the PSC. Additionally, our business
requires significant capital expenditures on an annual basis and these
expenditures are made for additions and replacement of property. If
the PSC disapproves or is unable to timely approve our requests for rate
increase or approves rate increases that are inadequate to cover our investments
or increased costs, our profitability may suffer.
We
file
rate increase requests, from time to time, to recover our investments in utility
plant and expenses. Once a rate increase petition is filed with the
PSC, the ensuing administrative and hearing process may be lengthy and
costly. We can provide no assurances that any future rate increase
request will be approved by the PSC; and if approved, we cannot guarantee that
these rate increases will be granted in a timely manner and/or will be
sufficient in amount to cover the investments and expenses for which we
initially sought the rate increase.
Our
business is subject to
seasonal fluctuations, which could affect demand for our water service and
our
revenues.
Demand
for water during warmer months is generally greater than during cooler months
primarily due to additional customer requirements in irrigation systems,
swimming pools, cooling systems and other outside water use. In an
event when temperatures during typically warmer months are cooler than normal,
or if there is more rainfall than normal, the demand for our water may decrease
and adversely affect our revenues.
Drought
conditions may
impact our ability to serve our current and future customers, and may impact
our
customers’ use of our water, which may adversely affect our financial condition
and results of operations.
We
believe that we have in place sufficient capacity to provide water service
for
the foreseeable future to all existing and new customers in all of our service
territories. However, severe drought conditions could interfere with
our sources of water supply and could adversely affect our ability to supply
water in sufficient quantities to our existing and future
customers. This may adversely affect our revenues and
earnings. Moreover, governmental restrictions on water usage during
drought conditions may result in a decreased demand for water, which may
adversely affect our revenue and earnings.
Our
operating costs could be
significantly increased if new or stricter regulatory standards are imposed
by
Federal and State Environmental agencies.
Our
water
and wastewater services are governed by various federal and state environmental
protection and health and safety laws and regulations, including the federal
Safe Drinking Water Act, the Clean Water Act and similar state
laws. These federal and state regulations are issued by the United
States Environmental Protection Agency and state environmental regulatory
agencies. Pursuant to these laws, we are required to obtain various
water allocation permits and environmental permits for our
operations. The water allocation permits control the amount of water
that can be drawn from water resources. New or stricter water
allocation regulations can adversely affect our ability to meet the demands
of
our customers. While we have budgeted for future capital and
operating expenditures to maintain compliance with these laws and our permits,
it is possible that new or stricter standards would be imposed that will raise
our operating costs. Thus, we can provide no assurances that our
costs of complying with, or discharging liability under current and future
environmental and health and safety laws will not adversely affect our business,
results of operations or financial condition.
Turnover
in Management
Team.
Our
success depends significantly on the continued contribution of our management
team both individually and collectively. The loss of the services of
any member of our management team or the inability to hire and retain
experienced management personnel could harm our operating results.
We
face competition from
other water utilities for the acquisition of new exclusive service
territories.
Water
utilities competitively pursue the right to exclusively serve territories in
Delaware by entering into agreements with landowners, developers or
municipalities and, under current law, then applying to the PSC for a CPCN,
which grants a water utility the exclusive right to serve all existing and
new
customers of a water utility within a designated area. Typically,
water utilities enter into agreements with developers who have approval from
county governments with respect to proposed subdivisions or
developments. Once a CPCN is granted to a water utility, generally it
may not be suspended or terminated unless the PSC determines in accordance
with
its rules and regulations that good cause exists for any such suspension or
termination. Therefore, we face competition from other water
utilities as we pursue the right to exclusively serve territories. If
we are unable to enter into agreements with landowners, developers or
municipalities and secure CPCNs for the right to exclusively serve territories
in Delaware, our ability to expand may be significantly impeded.
We
depend on the
availability of capital for expansion, construction and
maintenance.
Our
ability to continue our expansion efforts and fund our utility construction
and
maintenance program depends on the availability of adequate
capital. There is no guarantee that we will be able to obtain
sufficient capital in the future on favorable terms and conditions for
expansion, construction and maintenance. In the event we are unable
to obtain sufficient capital, our expansion efforts could be curtailed, which
may affect our growth and may affect our future results of
operations.
Any
future acquisitions we
undertake or other actions to further grow our water and wastewater business
may involve risks.
An
element of our growth strategy is the acquisition and integration of water
and
wastewater systems in order to broaden our current service areas, and move
into
new ones. It is our intent, when practical, to integrate any
businesses we acquire with our existing operations. The negotiation
of potential acquisitions as well as the integration of acquired businesses
could require us to incur significant costs and cause diversion of our
management’s time and resources. We may not be successful in the
future in identifying businesses that meet our acquisition
criteria. The failure to identify such businesses may limit the rate
of our growth. In addition, future acquisitions or expansion of our
service areas by us could result in:
ØDilutive
issuance of our
equity securities;
ØIncurrence
of debt and
contingent liabilities;
ØDifficulties
in
integrating the operations and personnel of the acquired
businesses;
ØDiversion
of our
management’s attention from ongoing business concerns;
ØFailure
to have
effective internal control over financial reporting;
ØShuffling
of human
resources; and
ØOther
acquisition-related expense
Some
or
all of these items could have a material adverse effect on our business and
our
ability to finance our business and comply with regulatory
requirements. The businesses we acquire in the future may not achieve
sales and profitability that would justify our investment.
Contamination
of our water
supply may result in disruption in our services and could lead to litigation
that may adversely affect our business, operating results and financial
condition.
Our
water
supplies are subject to contamination from naturally-occurring compounds as
well
as pollution resulting from man-made sources. Even though we monitor
the quality of water on on-going basis, any possible contamination due to
factors beyond our control could interrupt the use of our water supply until
we
are able to substitute it from an uncontaminated water
source. Additionally, treating the contaminated water source could
involve significant costs and could adversely affect our business. We
could also be held liable for consequences arising out of human or environmental
exposure to hazardous substances, if found, in our water supply. This
could adversely affect our business, results of operations and financial
condition.
Potential
terrorist attacks
may disrupt our operations and adversely affect our business, operating
results and financial condition.
In
the
wake of the September 11, 2001 terrorist attacks, we have taken steps to
increase security measures at our facilities and heighten employee awareness
of
threats to our water supply. We also have tightened our security
measures regarding delivery and handling of certain chemicals used in our
business. We are currently not aware of any specific threats to our
facilities, operations or supplies, however, it is possible that we would not
be
in a position to control the outcome of terrorist events, if they
occur.
None.
Our
corporate headquarters, owned by
Artesian Water, are located at 664 Churchmans Road, Newark,
Delaware.
Artesian
Development, a wholly owned subsidiary of Artesian Resources, owns approximately
6 acres of land in New Castle County, Delaware zoned for office development
and
approximately 20 acres of land in Sussex County, Delaware for an office
facility, water and wastewater treatment facilities and elevated water
storage.
Artesian
Water owns land, transmission and distribution mains, pump facilities, treatment
plants, storage tanks and related facilities throughout Delaware, of which
the
majority is used for utility operations. Artesian Water Pennsylvania
owns transmission and distribution mains. Artesian Water Maryland owns land,
transmission and distribution mains, pump facilities and storage
tanks. Artesian Wastewater owns treatment, disposal plants collection
mains and lift stations. The following table indicates our utility
plant as of December 31, 2007.
|
Utility
plant
comprises:
|
||||||||
|
$
In thousands
|
||||||||
|
Estimated
Useful Life
|
||||||||
|
(In
Years)
|
2007
|
|||||||
|
Utility
plant at original cost
|
||||||||
|
Utility
plant in service
|
||||||||
|
Intangible
plant
|
--- | $ | 140 | |||||
|
Source
of supply plant
|
45-85 | 15,231 | ||||||
|
Pumping
and water treatment plant
|
35-62 | 46,808 | ||||||
|
Transmission
and distribution plant
|
||||||||
|
Mains
|
81 | 155,927 | ||||||
|
Services
|
39 | 26,162 | ||||||
|
Storage
tanks
|
76 | 17,376 | ||||||
|
Meters
|
26 | 10,728 | ||||||
|
Hydrants
|
60 | 8,359 | ||||||
|
Treatment
and Disposal Plant (Artesian Wastewater)
|
35-62 | 7,646 | ||||||
|
General
plant
|
3-31 | 26,971 | ||||||
|
Property
held for future use
|
--- | 7,362 | ||||||
|
Construction
work in progress
|
--- | 4,325 | ||||||
| 327,035 | ||||||||
|
Less
– accumulated depreciation
|
52,895 | |||||||
| $ | 274,140 | |||||||
In
aggregate, we own land, rights-of-way and easements totaling approximately
722
acres, which includes the additional 20 acres of land purchased from Island
Farms in October 2007 by Artesian Development. In January 2007, we
entered into an agreement for the use of approximately 460 acres in Sussex
County for wastewater disposal in perpetuity. Substantially all of
Artesian Water's utility plant, except the utility plant in the town of
Townsend, Delaware, is pledged as security for First Mortgage
Securities. Of the 722 acres we own, Artesian Development owns
approximately 6 acres zoned for office buildings located immediately adjacent
to
our corporate headquarters.
We
believe that our properties are generally maintained in good condition and
in
accordance with current standards of good water and wastewater works industry
practice. We believe that all of our existing facilities adequately
meet current necessary production capacities and current levels of
utilization.
There
are
no material legal proceedings pending at this time to which we or any of our
subsidiaries is a party or to which any of our properties is the subject that
are material or are expected to have a material effect on our financial
position, results of operations or cash flows.
There
were no matters submitted to a vote of security holders during the fourth
quarter of 2007.
Item
5. - Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.
Market
Information for the
Company’s Common Equity
Artesian
Resources' Class A Non-Voting Common Stock, or “Class A Stock,” is listed on
NASDAQ Global Market and trades under the symbol "ARTNA." On March 7,
2008, the last closing sale price as reported by the NASDAQ Global Market was
$18.960 per share. On March 7, 2008, there were 854 holders of record
of the Class A Stock. The following table sets forth, for the periods
indicated, the high and low closing sale prices for the Class A Stock as
reported by NASDAQ Global Market and the cash dividends declared per
share.
CLASS
A
NON-VOTING COMMON STOCK
|
High
|
Low
|
Dividend
Per Share
|
|||||||||||
|
2006
|
|||||||||||||
|
First
Quarter
|
$ | 22.27 | $ | 19.51 | $ | 0.1488 | |||||||
|
Second
Quarter
|
22.27 | 18.40 | 0.1523 | ||||||||||
|
Third
Quarter
|
20.41 | 18.03 | 0.1523 | ||||||||||
|
Fourth
Quarter
|
19.70 | 18.25 | 0.1600 | ||||||||||
|
2007
|
|||||||||||||
|
First
Quarter
|
$ | 20.60 | $ | 18.71 | $ | 0.1600 | |||||||
|
Second
Quarter
|
20.59 | 18.71 | 0.1660 | ||||||||||
|
Third
Quarter
|
19.50 | 18.41 | 0.1660 | ||||||||||
|
Fourth
Quarter
|
19.49 | 18.68 | 0.1720 | ||||||||||
Our
Class B Voting Stock, or “Class B
Stock,” is quoted on the OTC Bulletin Board under the symbol
"ARTNB.OB." There has been a limited and sporadic public trading
market for the Class B Stock. As of March 7, 2008, the last reported
trade of the Class B Stock on the OTC Bulletin Board was at a price of $20.00
per share on January 25, 2008. As of March 7, 2008, we had 183
holders of record of the Class B Stock. The Class B shares are paid
the same dividend as the Class A shares noted in the table
above.
Recent
Sales of Unregistered
Securities
During
the quarter ended December 31,
2007, we did not issue any unregistered shares of our Class A or Class B
stock.
Equity
Compensation Plan Information
The
following table provides information on the shares of our Class A Stock that
may
be issued upon exercise of outstanding stock options as of December 31, 2007
under the Company’s shareholder approved stock plans.
|
Equity
Compensation Plan Information
|
||||||||||||
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding
options
|
Weighted-average
exercise price of outstanding options
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|||||||||
|
(a)
|
||||||||||||
|
Equity
compensation plans approved by security holders
|
595,699 | $ | 14.62 | 579,700 | ||||||||
|
Equity
compensation plans not approved by security holders
|
----- | ----- | ||||||||||
|
Total
|
595,699 | 579,700 | ||||||||||
The
following graph compares the
percentage change in cumulative shareholder return on the company’s common stock
with the Standard & Poor’s 500 Index and Peer Group since December 2002
(assuming a $100 investment on December 31, 2002, and the reinvestment of
any
dividends).
|
INDEXED
RETURNS
|
||||||
|
Base
Period
|
Years
Ending December 31
|
|||||
|
Company
Name / Index
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|
Artesian
Resources Corporation
|
100
|
145.78
|
151.56
|
164.26
|
168.83
|
167.96
|
|
S&P
500 Index
|
100
|
128.68
|
142.69
|
149.70
|
173.34
|
182.86
|
|
Peer
Group
|
100
|
127.24
|
146.91
|
192.86
|
193.10
|
185.81
|
The
Peer
Group includes American States Water Company, Aqua America, Inc., BIW LTD,
California Water Service Group, Connecticut Water Service, Inc., Middlesex
Water
Company, Pennichuck Corporation, SJW Corporation, Southwest Water Company,
and
York Water Company.
Item
6. - Selected Financial Data.
The
selected consolidated financial data for each of the years in the 5-year period
ended December 31, 2007 are derived from the audited financial statements of
the
Company. The following data should be read in conjunction with the
financial statements and related notes and also with Management's Discussion
and
Analysis of Financial Condition and Results of Operations, which are included
elsewhere in this Annual Report on Form 10-K. The historical results
presented are not necessarily indicative of results to be expected in any future
period.
|
In
thousands, except per share and operating data
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
STATEMENT
OF OPERATIONS DATA
|
||||||||||||||||||||
|
Operating
revenues
|
||||||||||||||||||||
|
Water
sales
|
$ | 48,461 | $ | 44,272 | $ | 41,638 | 37,985 | $ | 35,164 | |||||||||||
|
Other
utility operating revenue
|
1,699 | 1,268 | 1,073 | 867 | 744 | |||||||||||||||
|
Non-utility
operating revenue
|
2,364 | 1,725 | 2,574 | 730 | 387 | |||||||||||||||
|
Sale
of land
|
--- | 1,322 | --- | --- | --- | |||||||||||||||
|
Total
operating revenues
|
$ | 52,524 | $ | 48,587 | $ | 45,285 | 39,582 | $ | 36,295 | |||||||||||
|
Operating
expenses
|
||||||||||||||||||||
|
Operating
and maintenance
|
$ | 28,594 | $ | 25,733 | $ | 24,543 | 20,700 | $ | 19,629 | |||||||||||
|
Depreciation
and amortization
|
5,162 | 4,610 | 4,365 | 4,046 | 3,635 | |||||||||||||||
|
State
and federal income taxes
|
4,134 | 3,887 | 3,347 | 2,892 | 2,387 | |||||||||||||||
|
Property
and other taxes
|
2,868 | 2,562 | 2,389 | 2,070 | 2,115 | |||||||||||||||
|
Total
operating expenses
|
$ | 40,758 | $ | 36,792 | $ | 34,644 | 29,708 | $ | 27,766 | |||||||||||
|
Operating
income
|
$ | 11,766 | $ | 11,795 | $ | 10,641 | 9,874 | $ | 8,529 | |||||||||||
|
Other
income, net
|
802 | 613 | 515 | 471 | 277 | |||||||||||||||
|
Total
income before interest charges
|
$ | 12,568 | $ | 12,408 | $ | 11,156 | 10,345 | $ | 8,806 | |||||||||||
|
Interest
charges
|
$ | 6,305 | $ | 6,337 | $ | 6,121 | 5,943 | $ | 4,889 | |||||||||||
|
Net
income
|
$ | 6,263 | $ | 6,071 | $ | 5,035 | 4,402 | $ | 3,917 | |||||||||||
|
Dividends
on preferred stock
|
0 | 0 | 0 | 2 | 71 | |||||||||||||||
|
Net
income applicable to common stock
|
$ | 6,263 | $ | 6,071 | $ | 5,035 | 4,400 | $ | 3,846 | |||||||||||
|
Net
income per share of common stock:
|
||||||||||||||||||||
|
Basic
|
$ | 0.92 | $ | 1.00 | $ | 0.84 | 0.75 | $ | 0.66 | |||||||||||
|
Diluted
|
$ | 0.90 | $ | 0.97 | $ | 0.81 | 0.72 | $ | 0.64 | |||||||||||
|
Avg.
shares of common stock outstanding
|
||||||||||||||||||||
|
Basic
|
6,787 | 6,055 | 5,984 | 5,904 | 5,820 | |||||||||||||||
|
Diluted
|
6,936 | 6,235 | 6,182 | 6,099 | 5,990 | |||||||||||||||
|
Cash
dividends per share of common stock
|
$ | 0.66 | $ | 0.61 | $ | 0.58 | 0.55 | $ | 0.53 | |||||||||||
|
BALANCE
SHEET DATA
|
||||||||||||||||||||
|
Utility
plant, at original cost
|
||||||||||||||||||||
|
less
accumulated depreciation
|
$ | 274,140 | $ | 253,182 | $ | 227,566 | 212,152 | $ | 187,893 | |||||||||||
|
Total
assets
|
$ | 294,589 | $ | 269,360 | $ | 243,854 | 227,380 | $ | 216,324 | |||||||||||
|
Notes
payable
|
$ | 898 | $ | 7,906 | $ | 1,786 | 9,213 | $ | 12,499 | |||||||||||
|
Long-term
obligations and
|
||||||||||||||||||||
|
redeemable
preferred stock,
|
||||||||||||||||||||
|
including
current portions
|
$ | 92,073 | $ | 92,383 | $ | 92,680 | 83,438 | $ | 80,846 | |||||||||||
|
Stockholders’
equity
|
$ | 85,132 | $ | 61,800 | $ | 57,813 | 54,943 | $ | 52,691 | |||||||||||
|
Total
capitalization
|
$ | 176,889 | $ | 153,873 | $ | 150,192 | 137,299 | $ | 133,249 | |||||||||||
|
OPERATING
DATA
|
||||||||||||||||||||
|
Average
water sales per customer
|
$ | 645 | $ | 600 | $ | 575 | $ | 535 | $ | 505 | ||||||||||
|
Water
pumped (millions of gallons)
|
7,755 | 7,608 | 7,468 | 7,166 | 7,199 | |||||||||||||||
|
Number
of metered customers
|
75,149 | 73,814 | 72,383 | 70,993 | 69,687 | |||||||||||||||
|
Miles
of water main
|
1,086 | 1,051 | 1,001 | 977 | 938 | |||||||||||||||
Item
7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
Our
profitability is primarily attributable to the sale of water by Artesian Water,
which comprises 92.3% of total operating revenues, the amount of which is
subject to seasonal fluctuations, particularly during summer when water demand
may vary with rainfall and temperature. In the event 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.
Our
water
sales revenues were affected in 2007 by rate increases approved by the Delaware
Public Service Commission. As permitted under Delaware law, a 5.9%
interim increase in rates was placed in effect July 10, 2006 pending conclusion
of our filing with the PSC for rate relief. On December 19, 2006 the
PSC approved a settlement agreement in this case. The increase in
annual revenue requirement under the settlement agreement of $6 million was
to
be implemented in two steps. As a result of the PSC approval of the
settlement agreement, water rates were further adjusted effective January 1,
2007 to reflect a total approved increase of 11% with an additional 3% second
step increase in rates that became effective July 24, 2007 upon completion
of
our issuance of common stock. The first step, placed in effect
January 1, 2007, was to generate approximately $4.8 million in annual
revenue. Following the common stock issuance, Artesian Resources
contributed additional paid in capital to Artesian
Water. Subsequently, the second step rates, designed to recover
approximately $1.2 million of annual revenue, which reflected approximately
$20
million of additional equity, were placed in effect July 24, 2007.
Artesian
Water Pennsylvania, our wholly owned Pennsylvania water utility subsidiary,
began operations in 2002, providing water service to a residential community
in
Chester County, consisting of 39 customers. In 2005, the Pennsylvania
Public Utilities Commission approved our application to increase our service
area to encompass four specific developments that are expected to add 350
customers. Development in these specific developments has not
progressed pending resolution of developer related township
approvals.
On
July
20, 2007, the Maryland Public Service Commission approved the acquisition of
Carpenters Point Water Company. The acquisition was completed on
August 7, 2007 in a transaction accounted for under Statement of Financial
Accounting Standards No. 141 “Business Combinations” (SFAS 141) and the results
of operations have been included in the Consolidated Statement of Income as
of
the August 7, 2007 acquisition date. Carpenters Point Water Company
has been renamed Artesian Water Maryland. Artesian Water Maryland
serves a 141 home community near the Interstate 95 growth corridor between
Philadelphia and Baltimore in Cecil County, Maryland, and has sufficient
groundwater supply to serve additional customers in the undeveloped portions
of
its franchise and surrounding area.
Cecil
County has designated the Interstate 95 corridor as a preferred growth area
for
business and residential expansion. Recently, the federal Base
Re-Alignment and Closure Commission announced the relocation of approximately
14,000 jobs to nearby Aberdeen, Maryland by 2011. The Wilmington
Metropolitan Area Planning Commission projects Cecil County will grow 86 percent
between 2000 and 2030 and the Maryland Department of Planning projects that
Cecil County will experience the highest rate of household growth through 2025
of any jurisdiction in the state. We have entered into an agreement
to purchase the Mountain Hill Water Company, which currently serves two
commercial accounts in the Principio Business Park and which is located within
Cecil County’s designated growth corridor. We have also been selected
by Cecil County as the water and wastewater utility to serve a designated
service territory within the growth corridor and we are in negotiations with
Cecil County regarding terms of the water and wastewater franchise agreements
for the area.
Our
regulated wastewater subsidiary, Artesian Wastewater, owns wastewater
infrastructure and began providing wastewater services in Delaware in July
2005. Our wastewater customers are billed a flat monthly fee, which
contributes to providing a revenue stream unaffected by weather. As
of December 2007, Artesian Wastewater had 414 customers in six
communities.
Our
two
other subsidiaries, neither of which is regulated, are Artesian Utility
Development, Inc., or Artesian Utility, which designs and builds water and
wastewater infrastructure and provides contract water and wastewater services
on
the Delmarva Peninsula, and Artesian Development Corporation, or Artesian
Development, owns an approximately six-acre parcel of land zoned for office
buildings located immediately adjacent to our corporate
headquarters.
On
October 8, 2007, Artesian Development purchased approximately twenty acres
of
land located on Route 9, west of the city of Lewes in Sussex County,
Delaware. Artesian Development received a conditional use for this
land from Sussex County to construct an office facility to serve southern
Delaware. This conditional use also includes allowing for the
construction of water treatment and wastewater facilities and elevated water
storage on the site to provide service to the area between Lewes and Georgetown,
Delaware. Once permits and approvals to construct the facilities are
received, appropriate agreements with the utility affiliates of Artesian
Development for its use will be developed.
On
May 1,
2007, Artesian Utility acquired all rights, titles and interest in the
operations contracts of TMH Environmental Services, Inc. or
“TMH”. TMH, incorporated in Pennsylvania, provided contract water and
wastewater operation services to 25 private, municipal and governmental
institutions in the southeastern part of Pennsylvania.
In
addition to services discussed above, Artesian Resources initiated a Service
Line Protection Plan, or SLP Plan, in March 2005. The SLP Plan covers
all parts, material and labor required to repair or replace participants’
leaking water service lines up to an annual limit. As of December 31,
2007, approximately 9,600, or 16%, of our 60,000 eligible water customers had
signed up for the SLP Plan.
While
water sales revenues are our primary source of revenues, we continue to explore
and develop relationships with developers and municipalities in order to
increase revenues from contract water operations and wastewater management
services. Our contract operations and wastewater management services
provide a revenue stream that is not affected by changes in weather
patterns. We plan to continue developing and expanding our contract
operations and wastewater services in a manner that complements our growth
in
water service to new customers. Our anticipated growth in these areas
is subject to changes in residential and commercial construction, which may
be
affected by interest rates, inflation and general housing and economic market
conditions. We will continue to focus attention on expanding our
contract operations opportunities with municipalities and private water
providers in Delaware and surrounding areas.
Ensuring
our customers have a dependable supply of safe, high-quality water has been,
and
will continue to be, our highest priority. In 2003, Delaware passed
legislation requiring all water utilities to certify by July 2006 that they
had
sufficient sources of self-supply to serve their respective
systems. On March 8, 2005, we filed our certification of
self-sufficiency of supply with the PSC. The review was completed on
June 20, 2006, and the PSC concluded that we demonstrated that we had
sufficient water supply to meet the demands of our customers through
2006. In addition and as required by law, on June 30, 2006, we
filed with the PSC a new certification of self-sufficiency for the period
through 2009. After completion of their review, on July 24, 2007, the
PSC accepted our certification of sufficient water supply through
2009.
Also
on
June 20, 2006, Artesian Water provided the City of Wilmington, Delaware
(City) with notice of non-renewal of the interconnection agreement with the
City
upon its December 22, 2006 termination. Artesian Water is no
longer required to purchase 200 million gallons annually from the City after
December 22, 2006. At 2006 rates, that obligation was
approximately $336,000.
Water
Industry
The
Federal Environmental Protection Agency’s May 2005 report states that the United
States’ water industry is comprised of approximately 54,000 community water
systems, 84% of which serve less than 3,300 customers. Only 14% of
all community water systems are run by investor-owned
utilities. There are currently 12 publicly traded water utilities
based in the United States. The rest are privately or municipally
owned systems. The water industry is capital intensive, with the
highest capital investment in plant and equipment per dollar of revenue among
all utilities. Increasingly stringent drinking water regulations to
meet the requirements of the Safe Drinking Water Act of 1974 have required
the
water industry to invest in more advanced treatment systems and processes,
which
require a heightened level of expertise. We are currently in full
compliance with the requirements of the Safe Drinking Water Act. Even
though our water utility was founded in 1905, the majority of our investment
in
infrastructure occurred in the last 30 years.
We
believe that Delaware's generally lower cost of living in the region,
availability of development sites in relatively close proximity to the Atlantic
Ocean in Sussex County, and attractive financing rates for construction and
mortgages have resulted, and will continue to result, in increases to our
customer base. Substantial portions of Delaware are currently not
served by a public water system, which could also assist in an increase to
our
customer base as systems are added. According to the US Census
Bureau, Delaware's population increased an estimated 10.4% from 2000 to 2007,
as
compared to the nationwide growth rate of approximately 7.2%.
Interest
rates for mortgages have fallen from 7.16% on average in December 2001 to 6.23%
through December 2007. Long-term interest rates for our recent First
Mortgage Bond issuance (see Note 6 to our Financial
Statements) reflect a similar trend, as we were able to reduce our overall
weighted cost of debt from 7.93% in 2001 to 6.21% at the end of
2007.
Strategic
Direction
We
believe the effects of weather are short term and do not materially affect
the
execution of our strategic initiatives. As we anticipated, our
initiatives south of the Chesapeake & Delaware Canal, or the “C&D
Canal,” that began in 1992 are now providing the greatest portion of our
customer growth. This shift in growth is primarily the result of the
build out of our service area in northern New Castle County. In 2007,
we increased our customer base by 2.0% and increased our service territory
by
approximately 15.2 square miles, a 7.3% increase. We believe the
recent slow down in the housing market does not materially affect our strategic
goals and objectives. We continued to increase our sources of supply,
adding about 1.0 million gallons to our daily production capacity, to assure
we
have adequate high quality water supply to meet our customer growth
expectations.
Our
strategy is to focus on total resource management covering a wide spectrum
of
activities, which include identifying new and dependable sources of supply;
developing the wells, treatment plants and delivery systems to get water to
the
customers; educating customers on the wise use of water; and providing
responsible wastewater management to assist with recharge of the
aquifers. Our strategy includes focusing our efforts to expand in new
regions added to our service territory over the last 10 years, where growth
is
strong and demand is increasing. These regions have provided
approximately 81% of our growth in customers in 2007 and we expect continued
growth in these regions. We also foresee significant growth
opportunities in our wastewater subsidiaries and will continue to seek strategic
partnerships and relationships with developers and municipalities to complement
existing agreements for the provision of wastewater service in Delaware and
surrounding areas.
In
addition, we believe growth for Artesian Resources will be developed in the
Maryland counties on the Delmarva Peninsula. These opportunities
include the efforts of Artesian Water Maryland, which is currently serving
141
customers and is expected to provide sufficient groundwater supply and elevated
water storage to serve additional customers. We have also entered
into an agreement to purchase the Mountain Hill Water Company, which currently
serves two commercial accounts in the Principio Business Park and which is
located within Cecil County, Maryland designated growth
corridor. Also, the purchase of all the wastewater and water
operations agreements of TMH in Pennsylvania expanded our water and wastewater
activity in the region and added experienced, qualified and licensed water
and
wastewater operators to our staff. It is our opinion that this
expansion will provide Artesian Resources with additional potential for
continued growth.
Regulatory
Matters and Inflation
As
of
December 31, 2007, we had approximately 75,100 metered water customers, 414
wastewater customers, and served a population of approximately 250,000
(including contract services), representing approximately 29% of Delaware’s
total population. Increases in the number of customers served by
Artesian Water and Artesian Wastewater contributed to increases in our operating
revenues. The Delaware PSC regulates both Artesian Water's and
Artesian Wastewater’s rates charged for service, the sale and issuance of
securities and other matters. The additional customers served by
Artesian Water Maryland also contribute to increases in our operating
revenues. The Maryland Public Service Commission, or the MDPSC,
regulates rates charged for service, the sale and issuance of securities and
other matters in Maryland.
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 gross water sales. Should
the rate case not be completed within seven months, by law, the utility may
put
the entire requested rate relief, up to 15% of gross water sales, in effect
under bond until a final resolution is ordered and placed into
effect. If any such rates are found to be in excess of rates the PSC
finds to be appropriate, the utility must refund the portion found to be 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. Artesian Water’s last increase in
water rates was approved by the PSC and placed into effect on July 24,
2007. On January 25, 2008, Artesian Water submitted a notice to the
PSC of our intent to file an application for a rate increase, as is required
to
be submitted not less than 60 days prior to filing an application.
Delaware
statute 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 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. The DSIC rate applied between base rate filings is capped
at 7.5% of the amount billed to customers under otherwise applicable rates
and
charges, and the DSIC rate increase applied can not exceed 5% within any
12-month period. During 2006 we earned approximately $225,000 in
revenue. We did not have DSIC in effect during 2007. In
December 2007, Artesian Water filed an application with the PSC for approval
to
collect 0.46%, effective January 1, 2008, to recover the costs of eligible
non-revenue producing improvements made since the last rate case in
2006. The PSC approved the DSIC effective January 1, 2008 subject to
audit at a later date.
In
1999,
the General Assembly passed legislation restructuring the electric industry
in
Delaware. Since the passage of electric restructuring legislation in
1999, electricity prices had been capped for customers of Delmarva Power and
the
Delaware Electric Cooperative. Those rate caps were lifted in 2005
for customers of the Delaware Electric Cooperative and in May 2006 for Delmarva
Power customers. Our electric charges increased in 2005 due to higher
billing rates charged by Delaware Electric Cooperative after the cap was
removed. In 2006, our electric charges increased further due to the
increase from Delmarva Power. Artesian Resources sought to mitigate
future increases by signing a two-year fixed price supply contract with Pepco
Energy Services in May 2006. This contract is due to expire in May
2008. To continue to mitigate future increases we are currently
examining new bids for service for the next two years.
On
April
10, 2006, the PSC made effective new rules under Regulation Docket 15 that
govern the terms and conditions under which water utilities require advances
or
contributions from customers or developers. These regulations require
that developers pay for all water facilities within a new development, with
such
funding recorded as contributions in aid of construction by the water
utility. In addition, the utility is required to receive a
contribution in aid of construction of $1,500 for each new residential
connection to its system towards the cost of water supply, treatment and storage
facilities. These regulations further require developers to fully pay
for facilities to serve satellite systems. These required
contributions are intended to place a greater burden upon new customers to
pay
for the cost of facilities required to serve them.
We
are
affected by inflation, most notably by the continually increasing costs required
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.
CRITICAL
ACCOUNTING POLICIES
All
additions to plant are recorded at cost. Cost includes direct labor,
materials, and indirect charges for such items as transportation, supervision,
pension, medical, and other fringe benefits related to employees engaged in
construction activities. When depreciable units of utility plant are
retired, the cost of retired property, together with any cost associated with
retirement and less any salvage value or proceeds received, is charged to
accumulated depreciation. Maintenance, repairs, and replacement of
minor items of plant are charged to expense as incurred.
We
record
water service revenue, including amounts billed to customers on a cycle basis
and unbilled amounts, based upon estimated usage from the date of the last
meter
reading to the end of the accounting period. These estimates are made
on an individual customer basis, based on one of three methods (the previous
year’s consumption in the same period, the previous billing period’s
consumption, or trending) and are adjusted to reflect current changes in water
demand on a system-wide basis. While actual usage for individual
customers may differ materially from the estimate, we believe the overall total
estimate of consumption and revenue for the fiscal period will not differ
materially from actual billed consumption, as the overall estimate has been
adjusted to reflect any change in overall demand on the system for the
period.
We
record
accounts receivable at the invoiced amounts. The reserve for bad
debts is the Company's best estimate of the amount of probable credit losses
in
our existing accounts receivable, and is determined based on a five-year
historical write-off experience. The Company reviews the reserve for
bad debts on a quarterly basis. Account balances are written off
against the reserve when it is probable the receivable will not be
recovered.
We
review
for impairment of our long-lived assets, including Utility Plant in Service,
in
accordance with the requirements of SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". We also review regulatory assets
for the continued application of SFAS No. 71. Our review determines
whether there have been changes in circumstances or events that have occurred
that require adjustments to the carrying value of these assets. In
accordance with SFAS No. 71, adjustments to the carrying value of these assets
would be made in instances where the inclusion in the rate-making process is
unlikely.
Our
regulated utilities record deferred regulatory assets under Statement of
Financial Accounting Standards No. 71, “Accounting for the Effects of Certain
Types of Regulation,” which are costs that may be recovered over various lengths
of time as prescribed by the PSC, MDPSC and Pennsylvania Public Utility
Commission or the PAPUC. As the utility incurs certain costs, such as
expenses related to rate case applications, a deferred regulatory asset is
created. Adjustments to these deferred regulatory assets are made
when the PSC, MDPSC or PAPUC determines whether the expense is recoverable
in
rates, the length of time over which an expense is recoverable, or, because
of
changes in circumstances, whether a remaining balance of deferred expense is
recoverable in rates charged to customers. Adjustments to reflect
changes in recoverability of certain deferred regulatory assets may have a
material effect on our financial results.
Results
of Operations
2007
Compared to 2006
Operating
Revenues
Revenues
totaled $52.5 million in 2007 and were 8.1% above revenues in 2006 of $48.6
million, which is primarily due to an increase of $4.2 million, or 9.5% in
water
sales revenue. The increase in water sales revenue reflects a 2.0%
increase in the number of customers served and rate increases placed in effect
in 2007. We realized 92.3% of our total revenue in 2007 from the sale
of water. During 2006 we realized 91.1% of our total revenue from
water sales, which total included a recognition of a gain on the sale of land
by
Artesian Development of $1.3 million. Non-utility revenue totaled
$2.4 million in 2007 as compared to $1.7 million in 2006. This
revenue was primarily derived from the design, construction and operation of
wastewater projects. Artesian Utility records non-utility revenue
associated with developer financed construction projects based upon the
percent-of-completion method. The Company records deferred revenue
for the unearned portion until realized or realizable and earned.
|
Percentage
of Operating Revenues
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
|
||||||||||||
|
Residential
|
57.6 | % | 55.8 | % | 57.0 | % | ||||||
|
Commercial
|
22.3 | % | 22.2 | % | 22.6 | % | ||||||
|
Industrial
|
0.7 | % | 0.8 | % | 0.6 | % | ||||||
|
Government
and Other
|
11.7 | % | 12.3 | % | 11.7 | % | ||||||
|
Other
utility operating revenues
|
3.2 | % | 2.6 | % | 2.4 | % | ||||||
|
Non-utility
operating revenues
|
4.5 | % | 3.6 | % | 5.7 | % | ||||||
|
Sale
of land
|
0.0 | % | 2.7 | % | 0.0 | % | ||||||
|
|
||||||||||||
|
Total
|
100.00 | % | 100.00 | % | 100.00 | % | ||||||
Residential
Residential
water service revenues in 2007 amounted to $30.2 million, an increase of $3.1
million, or 11.4% over the $27.1 million recorded in 2006, primarily due to
rate
increases effective January 1, 2007 and July 24, 2007. The increase
in 2007 follows an increase of $1.3 million, or 5.0%, in 2006. The
volume of water sold to residential customers increased slightly from 3,934
million gallons in 2006 to 3,947 million gallons in 2007. The number
of residential customers served increased by 1,335 or 2.0% in 2007.
Commercial
Revenues
from commercial customers in 2007 increased by 8.3%, from $10.8 million in
2006
to $11.7 million in 2007, due to rate increases in 2007. The number
of commercial customers served increased by 17, or 0.5%, in 2007. We
sold 2,197 million gallons of water to commercial customers in 2007, a marginal
decrease as compared to 2,272 million gallons sold in 2006. The
decrease in gallons sold is primarily a result of the medical industry, which
had a decrease of 34 million gallons sold.
Industrial
Revenues
from industrial customers decreased by 2.7%, from $392,000 in 2006 to $381,000
in 2007. The volume of water sold to industrial customers decreased
by 14.1%, from 135 million gallons in 2006 to 116 million gallons in 2007,
primarily as a result of decreased usage by one industrial
customer.
Government
and Other
Government
and other revenues in 2007 increased by 1.7%, from $6.0 million in 2006 to
$6.1
million in 2007. This increase in revenue resulted from increases in
rates, offset by a reduction in private sprinkler consumption.
Other
Utility Operating Revenue
Other
utility operating revenue, derived from contract operations, antenna leases
on
water tanks, finance/service charges and wastewater customer service revenues
increased 31.0% in 2007, from $1.3 million in 2006 to $1.7 million in
2007. The increase is primarily the result of a 107% increase in
wastewater customer service revenues, from $385,000 in 2006 to $796,000 in
2007,
which includes monthly fees and operating subsidies from development
contracts.
Non-Utility
Operating Revenue
Non-utility
operating revenue, derived from non-regulated wastewater operations, increased
from $1.7 million in 2006 to $2.4 million in 2007. This increase
reflects higher contract revenues associated with wastewater treatment projects
in southern Delaware. The increase is also due to an increase in
Artesian Utility operations, which had a $369,000 increase for the construction
of a water treatment facility in Cecil County, Maryland. A portion of
the increase, approximately $233,000, includes contract service revenue in
Artesian Utility as a result of the TMH acquisition. The increase in
revenue also includes an increase in SLP Plan revenue, approximately $154,000,
from $267,000 in 2006 to $421,000 in 2007.
Operating
Expenses
Operating
expenses, excluding depreciation and taxes, increased approximately $2.9
million, or 11.3%, to $28.6 million in 2007. Payroll and benefits
increased $953,000 due to increased staffing at points throughout the year,
pay
increases and medical insurance premiums. Electric expense increased
$658,000 as a result of an increase in power and electric rates of approximately
92% due to the May 2006 expiration of price caps imposed in 1999 when
deregulation of the electric industry in Delaware was
adopted. Artesian Resources sought to mitigate these increases by
signing a two-year supply contract with another provider at a fixed price in
May
2006. Repair and maintenance expenses increased $546,000, due
primarily to an increase in tank painting costs of $175,000
associated with a new five year agreement effective July 2006, costs for carbon
filter water treatment replacements that increased $140,000 and other
miscellaneous increases in the maintenance of pump and water treatment
plants. Administrative expenses increased by approximately $536,000,
primarily due to an increase in temporary employment services, directors’ fees
and employee training related to the conversion of our financial reporting
system. These increases were offset by a reduction of $372,000, or
11.8%, in purchased water expense, primarily due to the expiration in December
2006 of our purchased water contract with the City of
Wilmington. Non-utility operating expenses increased approximately
$341,000, primarily as the result of more project activity as compared to the
same period in 2006.
|
Percentage
of Operating and Maintenance Expenses
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Payroll
and Associated Expenses
|
46.7 | % | 48.3 | % | 46.0 | % | ||||||
|
Purchased
Water
|
9.7 | % | 12.3 | % | 12.8 | % | ||||||
|
Repair
and Maintenance
|
7.6 | % | 6.3 | % | 5.9 | % | ||||||
|
Water
Treatment
|
3.7 | % | 3.4 | % | 3.1 | % | ||||||
|
Administrative
|
26.1 | % | 24.2 | % | 22.7 | % | ||||||
|
Non-utility
Operating
|
6.2 | % | 5.5 | % | 9.5 | % | ||||||
|
Total
|
100.00 | % | 100.00 | % | 100.00 | % | ||||||
Depreciation
and amortization expense increased $552,000, or 12.0%, due to increases in
our
utility plant in service providing supply, treatment, storage and distribution
of water during 2007. Income tax expense increased $247,000, or 6.4%,
due to higher profitability in 2007. Our total effective income tax
rate or ETR for 2007 and 2006 was 39.8% and 38.9%, respectively. The
increase in the ETR for 2007 was due to the utilization of net
operating losses used for the gain on the sale of land in 2006.
Other
Income, Net
Our
Allowance for Funds Used During Construction, or AFUDC, increased $36,000,
or
12.5%, as a result of higher long-term construction activity subject to
AFUDC. Miscellaneous Income increased $153,000, primarily due to an
increase in the 2007 CoBank dividend and income earned on our temporary
investments.
Interest
Charges
Interest
charges decreased $32,000 or 0.5%, in 2007, primarily due to less short term
debt interest expense. We used the proceeds from our June 2007 equity
issuance to pay off the outstanding balances of our short term
debt. The average interest rate on our short term credit balance
increased from 5.4% in 2006 to 5.9% in 2007, while our average outstanding
balance was $5.3 million in 2007, compared to $6.1 million in 2006.
Net
Income
For
the
year ended December 31, 2007, our net income applicable to common stock
increased $192,000, or 3.2%, compared to 2006. The increase in net
income was primarily due to increases in Artesian Water operating revenues
derived from the 2007 rate increases, revenues generated by our regulated
wastewater operations and increased activity in contract operations of Artesian
Utility. In addition, 2006 net income included approximately $870,000
as a result of the sale of land by Artesian Development. If the
impact of the sale of land in 2006 is excluded, net income increased
approximately $1.1 million, or 20.4%.
2006
Compared to 2005
Operating
Revenues
Revenues
totaled $48.6 million in 2006 and were 7.3% above revenues in 2005 of $45.3
million, which is primarily due to an increase of $2.6 million, or 6.3% in
water
sales revenue, and the $1.3 million proceeds from the sale of land by Artesian
Development. The increase in water sales revenue reflects a 2.0%
increase in the number of customers served, rate increases placed in effect
in
2006, and an adjustment in the fourth quarter reflecting the difference between
estimated and actual customer refunds associated with the 2004 rate
case. We realized 91.1% of our total revenue in 2006 from the sale of
water, compared to 91.9% in 2005. The percentage decrease is
primarily due to the sale of land by Artesian Development. These
increases in revenue were partially offset by a $849,000 decrease in non-utility
revenue. Non-utility revenue totaled $1.7 million in 2006 as compared
to $2.6 million in 2005. This revenue was primarily derived from the
design, construction and operation of wastewater projects. AUDI
records non-utility revenue associated with developer financed construction
projects based upon the percent-of-completion method. The Company
records deferred revenue for the unearned portion until realized or realizable
and earned. For the year ended December 31, 2006, $31,000 was charged
to unearned revenue based on the stage of completion of the wastewater design
and construction projects, as compared to $21,000 for the year ended December
31, 2005.
Residential
Residential
water service revenues in 2006 amounted to $27.1 million, an increase of $1.3
million, or 5.0% over the $25.8 million recorded in 2005, primarily due to
a
rate increase effective July 2006. The increase in 2006 follows an
increase of $2.5 million, or 10.5%, in 2005. The volume of water sold
to residential customers increased slightly from 3,911 million gallons in 2005
to 3,934 million gallons in 2006. The number of residential customers
served increased by 1,354 or 2.0% in 2006.
Commercial
Revenues
from commercial customers in 2006 increased by 5.9% from $10.2 million in 2005
to $10.8 million in 2006, due to rate increases in 2006. The number
of commercial customers served increased by 33, or 0.9% in 2006. We
sold 2,272 million gallons of water to commercial customers in 2006, a marginal
increase as compared to 2,221 million gallons sold in 2005.
Industrial
Revenues
from industrial customers increased by 38.5% from $283,000 in 2005 to
$392,000. The volume of water sold to industrial customers increased
by 51.7% from 89 million gallons in 2005 to 135 million gallons in 2006,
primarily as a result of increased usage by one industrial
customer. This customer was required by contract to pay for minimum
takes in 2005, and had a significant increase in usage in
2006. Therefore, the volumes of water sold increased more extensively
than the revenues between 2006 and 2005.
Government
and Other
Government
and other revenues in 2006 increased by 13.2% from $5.3 million in 2005 to
$6.0
million in 2006. The increase was primarily driven by revenues
derived from fire protection services, which totaled $3.2 and $2.8 million
in
2006 and 2005, respectively. This increase in fire protection
services revenue resulted from increases in rates.
Other
Utility Operating Revenue
Other
utility operating revenue, derived from contract operations, antenna leases
on
water tanks, finance/service charges and wastewater customer service revenues
increased 18.2% in 2006, from $1.1 million in 2005 to $1.3 million in
2006. The increase is primarily the result of a 333% increase in
wastewater customer service revenues, from $89,000 in 2005 to $385,000 in
2006.
Non-Utility
Operating Revenue
Non-utility
operating revenue, derived from non-regulated wastewater operations, decreased
from $2.6 million in 2005 to $1.7 million in 2006. The decrease
reflects lower contract revenues associated with wastewater treatment projects
in Southern Delaware. Although there were twelve new AUDI developer
financed wastewater projects recording revenue in 2006, these projects were
of a
smaller magnitude than those in 2005. This decrease was partially
off-set by an increase in SLP revenues, from $210,000 in 2005 to $267,000 in
2006.
Operating
Expenses
Operating
expenses, excluding depreciation and taxes, increased approximately $1.2
million, or 4.7%, to $25.7 million in 2006. The increase in operating
expenses resulted primarily from increases in payroll and benefits and
administrative expenses. Payroll and benefits increased $1.1 million
due to increased staffing and pay increases. Administrative expenses
increased by approximately $659,000. $450,000 of this increase was a
result of increased power and electric charges due to the May 2006 expiration
of
price caps imposed in 1999 when deregulation of the electric industry in
Delaware was adopted. Additional administrative expense increases
occurred in outside services related to the implementation of the geographic
information system used in system planning and operations. This
system was brought on-line in 2006 and the expense associated with it increased
by $100,000 between 2005 and 2006. These increases were off-set by a
$891,000 decrease in non-utility operating expenses, primarily the result of
smaller developer financed wastewater projects in AUDI.
Depreciation
and amortization expense increased $245,000, or 5.6%, due to increases in our
utility plant in service during 2006. Income tax expense increased
$540,000, or 16.1%. due to higher profitability in 2006. Our total
effective income tax rate or ETR for 2006 and 2005 was 38.9% and 39.9%,
respectively. The decrease in the ETR was due to utilization of net
operating losses used for the gain on the sale of land.
Other
Income, Net
Other
Income increased $98,000, due to higher long-term construction activity subject
to AFUDC and recording higher patronage income associated with our investment
in
CoBank in the first quarter of 2006 than in the first quarter of
2005.
Interest
Charges
Interest
charges increased $216,000, or 3.5%, in 2006. Interest on our
long-term debt increased $146,000, or 2.6%, due to higher long-term debt
balances. The average interest rate on our lines of credit also rose
from 4.3% in 2005 to 5.4% in 2006, causing interest on our lines of credit
to
increase by $91,000 in 2006 as compared to 2005.
Net
Income
For
the
year ended December 31, 2006, our net income applicable to common stock
increased $1,036,000, or 20.6%, compared to 2005. The increase in net
income was primarily due to the implementation of increases in water utility
rates to recover investments made in utility plant, as well as the gain on
sale
of land by Artesian Development.
Liquidity
and Capital Resources
Overview
Our
primary sources of liquidity for 2007 were $11.6 million provided by cash flow
from operating activities, $6.8 million in net contributions and advances from
developers, and $21.4 million net proceeds from the issuance of approximately
1,219,000 shares of Class A Non-Voting Common Stock. 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. During 2006, our cash flows from operating activities were
impacted by the refund of temporary rates plus interest, as required by law,
as
a result of Artesian Water’s 2004 rate case.
We
depend
on the availability of capital for expansion, construction and
maintenance. We rely on our sources of liquidity for investments in
our utility plant and to meet our various payment obligations. We
expect that our aggregate investments in our utility plant and systems in 2008
will be approximately $36.6 million. Our total obligations related to
interest and principal payments on indebtedness, rental payments and water
service interconnection agreements for 2008 are anticipated to be approximately
$9.5 million. We expect to fund our activities for the next year
using our available cash balances and bank credit lines, and projected cash
generated from operations and the capital markets.
Investment
in Utility Plant and Systems
We
invested $26.7 million in capital expenditures during 2007 compared to $30.9
million invested during the same period in 2006. Investment in
utility plant, excluding advances and contributions in aid of construction
received from real estate developers, was $20.9 million in 2007 compared to
$21.9 million in 2006. Additionally, developers financed $6.2 million
for the installation of water mains and hydrants in 2007 compared to
$9.3 million in 2006. These reduced investments are
attributable to several factors, including value engineering of capital
projects, regionalization to avoid construction of new facilities, greater
competition and thus lower bid prices received on construction contracts, and,
to a lesser extent, the general slowdown in the housing market. The
primary focus of Artesian Water’s investment was to continue to provide high
quality reliable service to our growing service territory.
We
invested approximately $8.0 million in new transmission and distribution
facilities in 2007, including refunds of advances for developer-financed
infrastructure. Of the $8.0 million invested, we invested $4.9
million in new infrastructure and $3.1 million in our rehabilitation program
for
transmission and distribution facilities, replacing aging or deteriorating
mains. Additionally, an investment of $4.4 million was made to
enhance or improve existing treatment facilities, rehabilitate pumping equipment
and install new wells to increase supply capabilities.
The
following chart summarizes our investment in utility plant and systems over
the
past three fiscal years.
|
In
thousands
|
2007
|
2006
|
2005
|
|||||||||
|
Source
of supply
|
$ | 3,173 | $ | 2,224 | $ | 100 | ||||||
|
Treatment
and pumping
|
1,196 | 973 | 1,660 | |||||||||
|
Transmission
and distribution
|
8,055 | 12,998 | 9,515 | |||||||||
|
General
plant and equipment
|
6,373 | 2,581 | 1,272 | |||||||||
|
Developer
financed utility plant
|
6,182 | 9,291 | 6,604 | |||||||||
|
Wastewater
facilities
|
2,081 | 3,111 | 1,236 | |||||||||
|
Allowance
for Funds Used During Construction, AFUDC
|
(324 | ) | (288 | ) | (223 | ) | ||||||
|
Total
|
$ | 26,736 | $ | 30,890 | $ | 20,164 | ||||||
We
have
planned to invest approximately $36.6 million in utility plant in
2008. Developers are expected to finance an additional $15.9 million
in utility plant construction. Of the $36.6 million we expect to
invest in 2008, approximately $7.2 million will be for new treatment facilities,
equipment and wells throughout Delaware to identify, develop, treat and protect
sources of water supply to assure uninterrupted service to our
customers.
The
largest portion of the projected investment in 2008, $17.3 million, will be
in
transmission and distribution facilities. Approximately $6.9 million
of this amount will be invested in the relocations of facilities as a result
of
government mandates and renewals associated with the rehabilitation of aging
infrastructure. The remaining $10.4 million of this investment in new
transmission and distribution facilities will be to improve our system
hydraulics and address service needs in growth areas of our service
territory.
We
plan
to construct two new water storage tanks in Kent County, Delaware, investing
$1.2 million in the Magnolia area and $1.0 million in the Clayton
area. We also plan to invest $1.0 million in a water storage tank in
Sussex County, Delaware.
An
additional expenditure of approximately $8.4 million is anticipated to complete
the construction of a new office building addition to our corporate headquarters
in New Castle County in 2008, to meet our growing space
requirements. An additional $5.6 million will be spent on wastewater
projects in Sussex County, Delaware. We plan to initiate capital
investment in the growth corridor in Cecil County, Maryland, starting with
$0.7
million to upgrade the Artesian Maryland water system purchased from the
Carpenters Point Water Company in 2007. Additionally, $6.7 million is
planned to be invested in new transmission mains to provide water supply to
the
Cecil County, Maryland growth area.
Financing
We
have
several sources of liquidity to finance our investment in utility plant and
other fixed assets. We estimate that the projected investment of
approximately $36.6 million will be financed by our operations and external
sources, including a combination of capital investment, short-term borrowings
under our revolving credit agreements discussed below, as well as a debt
issuance. Developers are expected to finance, through contributions
in aid of construction, an additional $15.9 million of capital expenditures,
which includes the installation of mains and hydrants in new
developments.
Our
cash
flows from operations are primarily derived from water sales revenues and may
be
materially affected by changes in water sales due to weather and the timing
and
extent of increases in rates approved by the PSC.
At
December 31, 2007, Artesian Water had lines of credit of $20.0 million each
with
two separate financial institutions totaling $40.0 million to meet temporary
cash requirements. These revolving credit facilities are
unsecured. As of December 31, 2007, we had $39.1 million of available
funds under these lines, as we used the proceeds from the June 2007 common
stock
issuance to pay off the then outstanding balance. 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 banks’ federal funds rate plus
1.0%. Each bank reviews all of their facilities annually for
renewal.
At
December 31, 2007, Artesian Utility and Artesian Wastewater had lines of credit
with a financial institution for $3.5 million and $10.0 million, respectively,
to meet temporary cash requirements. These revolving credit
facilities are unsecured. As of December 31, 2007, we had
not borrowed funds under these lines. The interest rate for
borrowings under each of these lines is the LIBOR plus 1.75%. The
bank reviews its facilities annually for renewal.
We
may,
from time to time, sell our securities to meet capital
requirements. The amount and timing of future sales of our securities
will depend upon market conditions and our specific needs. Artesian
Water’s trust indentures, which set certain criteria for the issuance of new
long-term debt, limit long-term debt, including the short-term portion thereof,
to 66 2/3% of total capitalization. Our debt to total
capitalization, including the short-term portion thereof, was 52.0% at
December 31, 2007.
On
June
21, 2007, Artesian Water, Artesian Utility, and Artesian Wastewater entered
into
an agreement with a financial institution to invest excess funds overnight,
with
interest paid at the overnight $100,000 repurchase rate established each day
by
the bank. As of December 31, 2007, the interest rate was
3.0%.
We
expect
to fund our activities for the next twelve months using our available cash
balances and bank credit lines, plus projected cash generated from operations
and the capital markets.
|
Contractual
Cash Obligations
|
Payments
Due by Period
|
|||||||||||||||||||
|
In
thousands
|
Less
than 1 Year
|
1-3
Years
|
4-5
Years
|
After
5 Years
|
Total
|
|||||||||||||||
|
First
Mortgage Bonds
|
$ | 5,553 | $ | 11,088 | $ | 11,097 | $ | 155,487 | $ | 183,225 | ||||||||||
|
State
revolving fund loans
|
590 | 1,180 | 1,180 | 6,068 | 9,018 | |||||||||||||||
|
Operating
leases
|
195 | 252 | 91 | 1,851 | 2,389 | |||||||||||||||
|
Unconditional
purchase obligations
|
2,836 | 5,656 | 5,664 | 27,968 | 42,124 | |||||||||||||||
|
Tank
painting contractual obligation
|
374 | 749 | 174 | --- | 1,297 | |||||||||||||||
|
Total
|
$ | 9,548 | $ | 18,925 | $ | 18,206 | $ | 191,374 | $ | 238,053 | ||||||||||
Long-term
debt obligations reflect the maturities of certain series of our first mortgage
bonds, which we intend to refinance when due, and also include interest payments
on this debt. The state revolving fund loan obligation has an
amortizing mortgage payment payable over a 20-year period, and will be
refinanced as future securities are issued, this also includes
interest. Both the long-term debt and the state revolving fund loan
have certain financial covenant provisions, the violation of which could result
in default and require the obligation to be immediately repaid, including all
interest. We have not experienced conditions that would result in our
default under these agreements, and we do not anticipate any such
occurrence. Payments for unconditional purchase obligations reflect
minimum water purchase obligations based on rates that are subject to change
under our interconnection agreement with the Chester Water
Authority.
|
Commitments
|
Committed
|
Less
than 1 Year
|
1-3
Years
|
4-5
Years
|
Over
5 Years
|
|||||||||||||||
|
Lines
of Credit
|
$ | 898 | $ | 898 | $ | ---- | $ | ---- | $ | ---- | ||||||||||
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements, including any arrangements with any
structured finance, special purpose or variable interest entities.
IMPACT
OF RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board, FASB, issued Statement
of Financial Accounting Standards No. 160 (SFAS 160), “Noncontrolling Interests
in Consolidated Financial Statements”-An Amendment of ARB No.
51. SFAS 160 establishes new accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of
a
subsidiary. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008. We do not currently expect the adoption of
SFAS 160 to have a material impact on our consolidated financial position,
results of operations and cash flows.
In
December 2007, the Financial Accounting Standards Board, FASB, issued Statement
No. 141 (revised 2007), “Business Combinations.” The objective of
this Statement is to improve the relevance, representational faithfulness,
and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. This
Statement establishes principles and requirements for how the acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. This Statement also establishes requirements for how the
acquirer recognizes and measures goodwill acquired in the business combination
and how the acquirer determines what information to disclose to enable users
of
the financial statements to evaluate the nature and financial effects of the
business combination. This Statement applies to all transactions or
other events in which an entity obtains control of one or more
businesses. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15,
2008. The Company expects to adopt this statement effective January
1, 2009 and any impact will depend on the nature and size or business
combinations the Company consummates after the effective date.
In
February 2007, the Financial Accounting Standards Board, FASB, issued Statement
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB No.115.” This statement permits
entities to choose to measure many financial instruments and certain other
items
at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This Statement
is effective as of the beginning of an entity’s first fiscal year that begins
after November 15, 2007. The Company expects to adopt this
statement effective January 1, 2008 and does not expect it to have a material
effect on the financial statements.
In
September 2006, FASB issued Statement No. 157, “Fair Value
Measurements”. This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This
statement applies under other accounting pronouncements that require or permit
fair value measurements; however, the statement does not require any new fair
value measurements. This statement is effective for fiscal years
beginning after November 15, 2007 and interim periods within those
years. On February 12, 2008, the FASB issued FSP No. FAS 157-2,
"Effective Date of FASB Statement No. 157," which delays the effective date
of
SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements
on at
least an annual basis, until January 1, 2009 for calendar year-end
entities. The Company does not expect it to have a material effect on
the financial statements.
In
June
2006, FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes”, an interpretation of FASB Statement No. 109 “Accounting for Income
Taxes”. This Interpretation clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financials statements in
accordance with FASB Statement No. 109. The Interpretation prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. This interpretation allows an enterprise to recognize
economic benefits resulting from positions taken in income tax returns, as
long
as a more likely than not approach is taken. This interpretation is
effective for fiscal years beginning after December 15, 2006. The
Company adopted this statement effective January 1, 2007 and after its
evaluation determined that there was no material effect on the financial
statements (see Note 3 to our Financial
Statements).
In
March
2006, FASB issued Statement No. 156, “Accounting for Servicing of Financial
Assets”. This statement amends FASB Statement No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,” with respect to the accounting for separately recognized servicing
assets and servicing liabilities. This statement requires an entity
to recognize a servicing asset or servicing liability each time it undertakes
an
obligation to service a financial asset by entering into a servicing contract
in
some situations. It also requires all separately recognized servicing
assets and servicing liabilities to be initially measured at fair value, if
practicable. This statement is effective for fiscal years beginning
after September 15, 2006. The Company adopted this statement
effective January 1, 2007. It did not have a material effect on the
financial statements.
In
February 2006, FASB issued Statement No. 155, “Accounting for Certain Hybrid
Financial Instruments”. This statement amends FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” and No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities”. This statement permits fair value remeasurement for
any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation. This statement is effective for
all financial instruments acquired or issued after the beginning of an entity’s
first fiscal year that begins after September 15, 2006. The Company
adopted this statement effective January 1, 2007. It did not have a
material effect on the financial statements.
Caution Regarding
forward-looking
Statements
Statements
in this Annual Report on Form 10-K 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 Section 27A of the Securities
Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act and the Private Securities Litigation Reform Act of
1995. Statements regarding our goals, priorities, growth and
expansion plans for our water and wastewater subsidiaries, customer base growth
opportunities in Cecil County, Maryland, our belief regarding our capacity
to
provide water services for the foreseeable future to our customers, our belief
relating to our compliance and the cost to achieve compliance with relevant
governmental regulations, the impact of weather on our operations and the
execution of our strategic initiatives, our expectation relating to the adoption
of recent accounting pronouncements, contract operations opportunities, legal
proceedings, our properties, deferred tax assets, increases to purchased water
and electricity expense, adequacy of our available sources of financing, the
expected recovery of expenses related to our
long-term debt, our expectation to be in
compliance with
financial covenants in our debt instruments, plans to increase
our wastewater 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
2007 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 as discussed under Item 1A -Risk 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 Annual Report on
Form 10-K.
Item
7A. – Quantitative and Qualitative Disclosure 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 do to the term of the majority of our First Mortgage Bonds, which
have interest rates ranging from 4.75% to 8.17% and final maturity dates ranging
from 2019 to 2043.
Item
8. - Financial Statements and Supplementary
Data.
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
In
thousands
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Utility
plant, at original cost less accumulated depreciation
|
$ | 274,140 | $ | 253,182 | ||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
2,520 | 1,414 | ||||||
|
Accounts
receivable (less reserve for bad debts 2007 - $279;
2006-$225)
|
5,499 | 3,416 | ||||||
|
Unbilled
operating revenues
|
3,198 | 2,655 | ||||||
|
Materials
and supplies - at cost on FIFO basis
|
1,192 | 1,054 | ||||||
|
Prepaid
property taxes
|
1,058 | 924 | ||||||
|
Prepaid
expenses and other
|
857 | 756 | ||||||
| 14,324 | 10,219 | |||||||
|
Other
assets
|
||||||||
|
Non-utility
property (less accumulated depreciation 2007 - $177;
2006-$152)
|
288 | 307 | ||||||
|
Other
deferred assets
|
4,156 | 3,771 | ||||||
| 4,444 | 4,078 | |||||||
|
Regulatory
assets, net
|
1,681 | 1,881 | ||||||
| $ | 294,589 | $ | 269,360 | |||||
|
LIABILITIES
AND STOCKHOLDER'S EQUITY
|
||||||||
|
Stockholders’
equity
|
||||||||
|
Common
stock
|
$ | 7,300 | $ | 6,086 | ||||
|
Additional
paid-in-capital
|
65,363 | 45,052 | ||||||
|
Retained
earnings
|
12,469 | 10,662 | ||||||
|
Total
stockholders’ equity
|
85,132 | 61,800 | ||||||
|
Long-term
debt, net of current portion
|
91,757 | 92,073 | ||||||
| 176,889 | 153,873 | |||||||
|
Commitments
and contingencies (Note 10)
|
||||||||
|
Current
liabilities
|
||||||||
|
Lines
of credit
|
898 | 7,906 | ||||||
|
Current
portion of long-term debt
|
316 | 310 | ||||||
|
Accounts
payable
|
3,225 | 2,790 | ||||||
|
Accrued
expenses
|
2,483 | 3,287 | ||||||
|
Overdraft
payable
|
1,672 | 1,990 | ||||||
|
Income
tax payable
|
--- | --- | ||||||
|
Deferred
income taxes
|
301 | 284 | ||||||
|
Interest
accrued
|
326 | 360 | ||||||
|
Customer
deposits
|
746 | 472 | ||||||
|
Other
|
1,877 | 1,723 | ||||||
| 11,844 | 19,122 | |||||||
|
Deferred
credits and other liabilities
|
||||||||
|
Net
advances for construction
|
23,840 | 24,991 | ||||||
|
Postretirement
benefit obligation
|
868 | 927 | ||||||
|
Deferred
investment tax credits
|
740 | 765 | ||||||
|
Deferred
income taxes
|
25,170 | 21,505 | ||||||
| 50,618 | 48,188 | |||||||
|
Net
contributions in aid of construction
|
55,238 | 48,177 | ||||||
| $ | 294,589 | $ | 269,360 | |||||
The
notes are an integral part of
the consolidated financial statements.
|
CONSOLIDATED
STATEMENTS OF
OPERATIONS
|
||||||||||||
|
For
the Year Ended December 31,
|
||||||||||||
|
In
thousands, except per share amounts
|
2007
|
2006
|
2005
|
|||||||||
|
Operating
revenues
|
||||||||||||
|
Water
sales
|
$ | 48,461 | $ | 44,272 | $ | 41,638 | ||||||
|
Other
utility operating revenue
|
1,699 | 1,268 | 1,073 | |||||||||
|
Non-utility
operating revenue
|
2,364 | 1,725 | 2,574 | |||||||||
|
Sale
of land
|
--- | 1,322 | --- | |||||||||
| 52,524 | 48,587 | 45,285 | ||||||||||
|
Operating
expenses
|
||||||||||||
|
Utility
operating expenses
|
26,834 | 24,314 | 22,233 | |||||||||
|
Non-utility
operating expenses
|
1,760 | 1,419 | 2,310 | |||||||||
|
Depreciation
and amortization
|
5,162 | 4,610 | 4,365 | |||||||||
|
Taxes
|
||||||||||||
|
State
and federal income
|
||||||||||||
|
Currently
payable
|
608 | 162 | 111 | |||||||||
|
Deferred
|
3,526 | 3,725 | 3,236 | |||||||||
|
Property
and other
|
2,868 | 2,562 | 2,389 | |||||||||
| 40,758 | 36,792 | 34,644 | ||||||||||
|
Operating
income
|
11,766 | 11,795 | 10,641 | |||||||||
|
Other
income, net
|
||||||||||||
|
Allowance
for funds used during construction
|
324 | 288 | 223 | |||||||||
|
Miscellaneous
|
478 | 325 | 292 | |||||||||
| 802 | 613 | 515 | ||||||||||
|
Income
before interest charges
|
12,568 | 12,408 | 11,156 | |||||||||
|
Interest
charges
|
6,305 | 6,337 | 6,121 | |||||||||
|
Net
income
|
6,263 | 6,071 | 5,035 | |||||||||
|
Net
income applicable to common stock
|
$ | 6,263 | $ | 6,071 | $ | 5,035 | ||||||
|
Income
per common share:
|
||||||||||||
|
Basic
|
$ | 0.92 | $ | 1.00 | $ | 0.84 | ||||||
|
Diluted
|
$ | 0.90 | $ | 0.97 | $ | 0.81 | ||||||
|
Weighted
average common shares outstanding:
|
||||||||||||
|
Basic
|
6,787 | 6,055 | 5,984 | |||||||||
|
Diluted
|
6,936 | 6,235 | 6,182 | |||||||||
|
Cash
dividends per share of common stock
|
$ | 0.66 | $ | 0.61 | $ | 0.58 | ||||||
The
notes are an integral part of the consolidated financial
statements.
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
In
thousands
|
For
the Year Ended December
31,
|
|||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 6,263 | $ | 6,071 | $ | 5,035 | ||||||
|
Adjustments
to reconcile net cash provided by operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
5,162 | 4,609 | 4,364 | |||||||||
|
Deferred
income taxes, net
|
3,657 | 3,711 | 3,104 | |||||||||
|
Allowance
for funds used during construction
|
(324 | ) | (288 | ) | (223 | ) | ||||||
|
Stock
compensation
|
196 | 322 | --- | |||||||||
|
Sale
of land
|
--- | (1,322 | ) | --- | ||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Accounts
receivable, net of reserve for bad debts
|
(2,083 | ) | 865 | (475 | ) | |||||||
|
Income
tax receivable
|
--- | --- | --- | |||||||||
|
Unbilled
operating revenues
|
(543 | ) | (281 | ) | (3 | ) | ||||||
|
Materials
and supplies
|
(138 | ) | (46 | ) | (75 | ) | ||||||
|
Prepaid
property taxes
|
(134 | ) | (73 | ) | (86 | ) | ||||||
|
Prepaid
expenses and other
|
(101 | ) | (221 | ) | 32 | |||||||
|
Other
deferred assets
|
(495 | ) | (78 | ) | (240 | ) | ||||||
|
Regulatory
assets
|
200 | (7 | ) | 230 | ||||||||
|
Accounts
payable
|
435 | --- | 620 | |||||||||
|
Accrued
expenses
|
(804 | ) | 1,339 | (83 | ) | |||||||
|
State
and federal income taxes
|
--- | (113 | ) | 111 | ||||||||
|
Interest
accrued
|
(34 | ) | 7 | --- | ||||||||
|
Customer
deposits and other, net
|
428 | (1,602 | ) | 1,634 | ||||||||
|
Postretirement
benefit obligation
|
(59 | ) | (170 | ) | (72 | ) | ||||||
|
Net
cash provided by operating activities
|
11,626 | 12,723 | 13,873 | |||||||||
|
CASH
FLOWS USED IN INVESTING ACTIVITIES
|
||||||||||||
|
Capital
expenditures (net of AFUDC)
|
(26,736 | ) | (30,890 | ) | (20,164 | ) | ||||||
|
Proceeds
from sale of assets
|
27 | 33 | 6 | |||||||||
|
Proceeds
from sale of land
|
--- | 1,330 | --- | |||||||||
|
Investments
from unconsolidated affiliates
|
2 | 37 | --- | |||||||||
|
Net
cash used in investing activities
|
(26,707 | ) | (29,490 | ) | (20,158 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Net
borrowings (repayments) under lines of credit agreements
|
(7,008 | ) | 6,120 | (7,427 | ) | |||||||
|
Increase
(decrease) in overdraft payable
|
(318 | ) | 573 | (394 | ) | |||||||
|
Net
advances and contributions in aid of construction
|
6,839 | 12,334 | 7,496 | |||||||||
|
Proceeds
from issuance of long-term debt
|
--- | --- | 25,000 | |||||||||
|
Increase
in restricted funds
|
--- | --- | 502 | |||||||||
|
Increase
(decrease) in deferred debt issuance costs
|
110 | 41 | (827 | ) | ||||||||
|
Net
proceeds from issuance of common stock
|
21,329 | 1,766 | 1,304 | |||||||||
|
Dividends
|
(4,455 | ) | (3,714 | ) | (3,470 | ) | ||||||
|
Principal
repayments of long-term debt
|
(310 | ) | (298 | ) | (15,757 | ) | ||||||
|
Net
cash provided by financing activities
|
16,187 | 16,822 | 6,427 | |||||||||
|
Net
increase in cash and cash equivalents
|
1,106 | 55 | 142 | |||||||||
|
Cash
and cash equivalents at beginning of year
|
1,414 | 1,359 | 1,217 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 2,520 | $ | 1,414 | $ | 1,359 | ||||||
|
Supplemental
Disclosures of Cash Flow Information:
|
||||||||||||
|
Interest
paid
|
$ | 6,230 | $ | 6,228 | $ | 6,001 | ||||||
|
Income
taxes paid
|
$ | 725 | $ | 261 | $ | --- | ||||||
See
Note
1 (Stock Split) for a discussion of non-cash financing activity.
The
notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
|
Common
Shares Outstanding Class A Non-Voting (1)
(4) (5)
(6)
|
Common
Shares Outstanding Class B Voting
(2)
(4)
|
$1
Par Value Class A Non-Voting
|
$1
Par Value Class B Voting
|
Additional
Paid-in Capital
|
Retained
Earnings (2)
|
Total
(2)
|
|
|
In
thousands
|
|||||||
|
Balance
as of December 31, 2004
|
5,052
|
882
|
$3,368
|
$588
|
$42,222
|
$8,765
|
$54,943
|
|
Net
income
|
5,035
|
5,035
|
|||||
|
Cash
dividends declared
|
|||||||
|
Common
stock
|
(3,470)
|
(3,470)
|
|||||
|
Issuance
of common stock
|
|||||||
|
Officer
bonus
|
9
|
6
|
166
|
172
|
|||
|
Dividend
reinvestment plan
|
15
|
10
|
284
|
294
|
|||
|
Employee
stock options and awards
|
52
|
35
|
612
|
647
|
|||
|
Employee
Retirement Plan(3)
|
11
|
7
|
185
|
192
|
|||
|
Balance
as of December 31, 2005
|
5,139
|
882
|
$3,426
|
$588
|
$43,469
|
$10,330
|
$57,813
|
|
Net
income
|
6,071
|
6,071
|
|||||
|
Cash
dividends declared
|
|||||||
|
Common
stock
|
(3,714)
|
(3,714)
|
|||||
|
Issuance
of common stock
|
|||||||
|
Stock
split
|
1,721
|
294
|
(2,025)
|
(10)
|
|||
|
Officer
bonus
|
9
|
6
|
183
|
189
|
|||
|
Dividend
reinvestment plan
|
15
|
14
|
321
|
335
|
|||
|
Employee
stock options and awards
|
12
|
10
|
551
|
561
|
|||
|
Employee
Retirement Plan(3)
|
29
|
27
|
528
|
555
|
|||
|
Balance
as of December 31, 2006
|
5,204
|
882
|
$5,204
|
$882
|
$45,052
|
$10,662
|
$61,800
|
|
Net
income
|
6,263
|
6,263
|
|||||
|
Cash
dividends declared
|
|||||||
|
Common
stock
|
(4,455)
|
(4,455)
|
|||||
|
Issuance
of common stock
|
|||||||
|
Stock
Issuance
|
1,129
|
1,129
|
19,290
|
(1)
|
20,418
|
||
|
Officer
bonus
|
|||||||
|
Dividend
reinvestment plan
|
18
|
18
|
326
|
344
|
|||
|
Employee
stock options and awards
|
50
|
50
|
374
|
424
|
|||
|
Employee
Retirement Plan(3)
|
17
|
17
|
321
|
338
|
|||
|
Balance
as of December 31, 2007
|
6,418
|
882
|
$6,418
|
$882
|
$65,363
|
$12,469
|
$85,132
|
|
(1)
|
At
December 31, 2007, 2006, and 2005, Class A Non-Voting Common Stock
had
15,000,000 shares authorized. For the same periods, shares
issued were 6,442,805, 5,228,284 and 5,163,165,
respectively.
|
|
(2)
|
At
December 31, 2007, 2006, and 2005, Class B Common Stock had 1,040,000
shares authorized and 882,000 shares issued.
|
|
(3)
|
Artesian
Resources Corporation registered 500,000 shares of Class A
Non-Voting Common Stock available for purchase through the Artesian
Retirement Plan and the Artesian Supplemental Retirement
Plan.
|
|
(4)
|
Artesian
Resources Corporation approved a three for two stock split on May
12, 2006
effected in the form of a 50% stock distribution. Each
shareholder of record on May 30, 2006 received one additional share
for
each two shares held. All share and per share data for all
prior periods have been restated to give effect to this stock
split.
|
|
(5)
|
Under
the Equity Compensation Plan, effective May 25, 2005 Artesian Resources
Corporation authorized up to 500,000 shares of Class A Non-Voting
Common
Stock for issuance of grants in forms of stock options, stock units,
dividend equivalents and other stock-based awards, subject to adjustment
in certain circumstances as discussed in the Plan.
|
|
(6)
|
At
June 19, 2007 Artesian Resources Corporation completed the sale of
1,000,000 shares and at July 10, 2007 Artesian Resources Corporation
completed the sale of an additional 129,000 shares of its Class A
Non-Voting Common Stock.
|
The
notes are an integral part of the consolidated financial
statements.
NOTES
TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
1
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
audited Consolidated Financial Statements are presented in accordance with
the
requirements of Form 10-K and consequently include all the disclosures required
in the financial statements included in the Company's annual report on Form
10-K.
The
consolidated financial statements include the accounts of Artesian Resources
and
its wholly owned subsidiaries, including its principal operating company,
Artesian Water. Appropriate eliminations have been made for all
inter-company transactions and account balances.
Utility
Subsidiary Accounting
The
accounting records of Artesian Water and Artesian Wastewater are maintained
in
accordance with the uniform system of accounts as prescribed by the Delaware
Public Service Commission or the PSC. The accounting records of
Artesian Water Pennsylvania are maintained in accordance with the uniform system
of accounts as prescribed by the Pennsylvania Public Utility Commission or
the
PAPUC. The accounting records of Artesian Water Maryland are
maintained in accordance with the uniform system of accounts as prescribed
by
the Maryland Public Service Commission or the MDPSC. All three
subsidiaries follow the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
which provides guidance for companies in regulated industries.
Utility
Plant
All
additions to plant are recorded at cost. Cost includes direct labor,
materials, and indirect charges for such items as transportation, supervision,
pension, and other fringe benefits related to employees engaged in construction
activities. When depreciable units of utility plant are retired, the
cost of retired property, together with any cost associated with retirement
and
less any salvage value or proceeds received, is charged to accumulated
depreciation. Maintenance, repairs, and replacement of minor items of
plant are charged to expense as incurred.
In
accordance with a rate order issued by the PSC, Artesian Water accrues an
Allowance for Funds Used During Construction or AFUDC. AFUDC, which
represents the cost of funds devoted to construction projects through the date
the project is placed in service, is capitalized as part of construction work
in
progress. The rate used for the AFUDC calculation is based on
Artesian Water's weighted average cost of debt and the rate of return on equity
authorized by the PSC. The rate used to capitalize AFUDC in 2007,
2006, and 2005 was 8.1%, 7.8%, and 8.0%, respectively.
|
Utility
plant
comprises:
|
||||||||||||
|
In
thousands
|
December
31,
|
|||||||||||
|
Estimated
Useful Life In Years
|
2007
|
2006
|
||||||||||
|
Utility
plant at original cost
|
||||||||||||
|
Utility
plant in service
|
||||||||||||
|
Intangible
plant
|
--- | $ | 140 | $ | 140 | |||||||
|
Source
of supply plant
|
45-85 | 15,231 | 14,759 | |||||||||
|
Pumping
and water treatment plant (Artesian Water)
|
35-62 | 46,808 | 42,495 | |||||||||
|
Transmission
and distribution plant
|
||||||||||||
|
Mains
|
81 | 155,927 | 145,794 | |||||||||
|
Services
|
39 | 26,162 | 24,528 | |||||||||
|
Storage
tanks
|
76 | 17,376 | 17,094 | |||||||||
|
Meters
|
26 | 10,728 | 10,061 | |||||||||
|
Hydrants
|
60 | 8,359 | 7,633 | |||||||||
|
Treatment
and Disposal Plant (Artesian Wastewater)
|
35-62 | 7,646 | 4,006 | |||||||||
|
General
plant
|
3-31 | 26,971 | 26,456 | |||||||||
|
Property
held for future use
|
--- | 7,362 | 1,960 | |||||||||
|
Construction
work in progress
|
--- | 4,325 | 6,188 | |||||||||
| 327,035 | 301,114 | |||||||||||
|
Less
– accumulated depreciation
|
52,895 | 47,932 | ||||||||||
| $ | 274,140 | $ | 253,182 | |||||||||
Depreciation
and Amortization
For
financial reporting purposes, depreciation is recorded using the straight-line
method at rates based on estimated economic useful lives, which range from
3 to
85 years. Composite depreciation rates for utility plant were 2.12%
in each of the past 3 years.. In a rate order issued by the PSC, the
Company was directed effective January 1, 1998 to begin using revised
depreciation rates for utility plant. In rate orders issued by the
PSC, Artesian Water was directed, effective May 28, 1991 and August 25, 1992,
to
offset depreciation recorded on utility plant by depreciation on utility
property funded by Contributions in Aid of Construction, CIAC, and Advances
for
Construction, Advances, respectively. This reduction in depreciation
expense is also applied to outstanding CIAC and Advances. Other
deferred assets are amortized using the straight-line method over applicable
lives, which range from 2 to 40 years.
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 PSC. Expenses related to rate proceedings are amortized on a
straight-line basis over a period of 2 years. The postretirement
benefit obligation (see Note 9 to our Financial Statements
for a description of the Company's Postretirement Benefit Plan), 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 with the reversal of tax
effects of temporary differences previously flowed through to the
customers.
Regulatory
assets at December 31, net of amortization, comprise:
|
In
thousands
|
2007
|
2006
|
||||||
|
Postretirement
benefit obligation
|
$ | 968 | $ | 1,027 | ||||
|
Deferred
income taxes recoverable in future rates
|
567 | 582 | ||||||
|
Expense
of rate proceedings
|
141 | 257 | ||||||
|
Other
|
5 | 15 | ||||||
| $ | 1,681 | $ | 1,881 | |||||
Impairment
or Disposal of Long-Lived Assets
A
review
of our long-lived assets, including Utility Plant in Service, is performed
in
accordance with the requirements of SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". In addition, the regulatory assets
are reviewed for the continued application of SFAS No. 71. The review
determines whether there have been changes in circumstances or events that
have
occurred requiring adjustments to the carrying value of these
assets. In accordance with SFAS No. 71, adjustments to the carrying
value of these assets would be made in instances where the inclusion in the
rate-making process is unlikely.
Other
Deferred Assets
Debt
issuance costs are amortized over the term of the related debt.
Other
deferred assets at December 31, net of amortization, comprise:
|
In
thousands
|
2007
|
2006
|
||||||
|
Debt
issuance expense
|
$ | 2,472 | $ | 2,582 | ||||
|
Other
|
1,684 | 1,189 | ||||||
| $ | 4,156 | $ | 3,771 | |||||
Advances
for Construction
Water
mains, services and hydrants, or cash advances to reimburse Artesian Water
for
its costs to construct water mains, services and hydrants are contributed to
Artesian Water by customers, real estate developers and builders in order to
extend water service to their properties. The value of these
contributions is recorded as Advances for Construction. Artesian
Water makes refunds on these advances over a specific period of time based
on
operating revenues generated by the specific plant or as new customers are
connected to the mains. After all refunds are made, any remaining
balance is transferred to CIAC.
Contributions
in Aid of Construction
CIAC
includes the non-refundable portion of advances for construction and direct
contributions of water mains, services and hydrants, and wastewater collection
systems, or cash to reimburse Artesian Water and Artesian Wastewater for costs
to construct water mains, services and hydrants, and wastewater treatment and
disposal plant.
Income
Taxes
Deferred
income taxes are provided in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" on all
differences between the tax basis of assets and liabilities and the amounts
at
which they are carried in the financial statements based on the enacted tax
rates expected to be in effect when such temporary differences are expected
to
reverse.
The
Tax
Reform Act of 1986 mandated that Advances and CIAC received subsequent to
December 31, 1986, generally are taxable income to Artesian
Water. The 1996 Tax Act provided an exclusion from taxable income for
CIAC and Advances received after June 12, 1996 by our utilities except for
certain contributions for large services that are not included in rate base
for
rate-making purposes.
Investment
tax credits were deferred through 1986 and are recognized as a reduction of
deferred income tax expense over the estimated economic useful lives of the
related assets.
Stock
Compensation Plans
On
May
25, 2005, the Company’s stockholders approved a new Equity Compensation Plan,
which authorizes up to 500,000 shares of Class A Non-Voting Common Stock for
issuance. Since May 25, 2005, no additional grants have been made
under the Company’s other stock-based compensation plans that were previously
available. The Company applied APB Opinion No. 25 and related
interpretations in accounting for compensation expense under all its plans
through 2005. Accordingly, the aggregate compensation cost incurred
and charged against income for all plans, including bonuses, was $146,000 for
2005. On January 1, 2006 the Company adopted Statement of Financial
Accounting Standards No. 123R. Compensation costs in the amount of
$215,000 and $499,000 for awards granted in 2007 and 2006 respectively, were
determined based on the fair value at the grant dates and those costs are being
charged to income over the service period associated with the
grants. Of the $499,000 in 2006, $240,000 was associated with stock
awards, $177,000 was associated cash payments for taxes, and $82,000 was the
amount amortized for stock options awarded in 2006 and 2005. Of the
$215,000 in 2007, $47,000 was associated with stock awards, $19,000 was
associated cash payments for taxes, and $149,000 was the amount amortized for
stock options awarded in 2007 and 2006. Had compensation costs for
the Company's plans in 2005 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:
|
In
thousands, except per share data
|
2005
|
|||
|
Net
income applicable to common stock
|
||||
|
As
reported
|
$ | 5,035 | ||
|
Add: compensation
expense included in net income (net of tax)
|
(1 | ) | ||
|
Deduct: compensation
expense using fair value based method (net of tax)
|
(329 | ) | ||
|
Pro-forma
|
$ | 4,705 | ||
|
Basic
net income per common share
|
||||
|
As
reported
|
$ | 0.84 | ||
|
Pro-forma
|
$ | 0.79 | ||
|
Basic
net income per common share
|
||||
|
As
reported
|
$ | 0.81 | ||
|
Pro-forma
|
$ | 0.76 | ||
There
was
no compensation cost capitalized as part of an asset.
The
fair
value of each option grant is estimated using the Black-Scholes-Merton option
pricing model with the following weighted-average assumptions used for grants
issued in 2007, 2006, and 2005 under the 2005 Equity Compensation Plan (as
defined in Note 8 to our Financial Statements). There were no options
issued to employees in 2006 or 2007.
|
2007
|
2006
|
2005
|
||||||||||
|
Dividend
Yield
|
3.3 | % | 2.9 | % | 3.0 | % | ||||||
|
Expected
Volatility
|
.27 | .24 | .32 | |||||||||
|
Director
and Officer Options
|
||||||||||||
|
Risk
Free Interest Rate
|
4.69 | % | 5.03 | % | 3.97 | % | ||||||
|
Expected
Term
|
6.65
years
|
3.26
years
|
3.42
years
|
|||||||||
|
Employee
Options
|
||||||||||||
|
Risk
Free Interest Rate
|
------ | ------ | 2.92 | % | ||||||||
|
Expected
Term
|
------ | ------ |
1
year
|
|||||||||
The
expected dividend yield was based on a 12 month rolling average of the current
dividend yield. The expected volatility is the standard deviation of
the change in the natural logarithm of the stock price (expressed as an annual
rate) for the expected term shown above. The expected life was based
on historic exercise patterns for similar grants. The risk free
interest rate for the Director and Officer Options is the 7-year Treasury
Constant Maturity rate as of the date of the grant for 2007, and 3-year for
2006
and 2005 grants.
Shares
of
Class A Stock have been reserved for future issuance under the 2005 Equity
Compensation Plan.
Revenue
Recognition and Unbilled Revenues
Water
service revenue for financial statement purposes includes amounts billed to
customers on a quarterly or monthly cycle basis, depending on class of customer,
and unbilled amounts based upon estimated usage from the date of the last meter
reading to the end of the accounting period. The Company uses the
percent of completion method of revenue recognition for the long-term wastewater
contracts of designing, building and operating wastewater facilities throughout
Delaware and surrounding areas.
Accounts
Receivable
Accounts
receivable are recorded at the invoiced amounts. The reserve for bad
debts is the Company's best estimate of the amount of probable credit losses
in
our existing accounts receivable, and is determined based on historical
write-off experience. The Company reviews the reserve for bad debts
on a quarterly basis. Account balances are written off against the
reserve when it is probable the receivable will not be recovered.
Cash
and Cash Equivalents
For
purposes of the Consolidated Statement of Cash Flows, Artesian Resources
considers all temporary cash investments with an original maturity of three
months or less to be cash equivalents. Artesian Water, Artesian
Wastewater, and Artesian Utility utilize their bank's zero balance account
disbursement service to reduce the use of their lines of credit by funding
checks as they are presented to the bank for payment rather than at
issuance. If the checks currently outstanding, but not yet funded,
exceed the cash balance on Artesian Water's books, the net liability is recorded
as a current liability on the consolidated balance sheet in the Overdraft
Payable account.
Use
of Estimates in the Preparation of Consolidated Financial
Statements
The
consolidated financial statements were prepared in conformity with generally
accepted accounting principles in the U.S., which require management to make
estimates about the reported amounts of assets and liabilities including
unbilled revenues, reserve for a portion of revenues received under temporary
rates and regulatory asset recovery and contingent assets and liabilities at
the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from management's estimate.
Stock
Split
On
May
12, 2006, the Company completed a three for two stock split on its Class A
Non-Voting Common Stock and Class B Common Stock, which was effected in the
form
of a 50% stock dividend. Shareholders of record on
May 30, 2006 received one additional share of stock for each two
shares held. All share and per share data for all prior periods have
been restated to give effect to this stock split.
Capitalization
of the Costs of Computer Software Developed or Obtained for Internal
Use
The
Company capitalized payroll and related expense associated with our internal
staff’s development and configuration of our new customer information system
programs (the “CIS programs”) and our financial reporting system to be
implemented January 1, 2008. In deciding to capitalize this expense,
the Company used AICPA Statement of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use as its
accounting policy for recording these costs.
Reclassification
Certain
accounts in the prior year financial statements have been reclassified for
comparative purposes to conform with the presentation in the current year
financial statements. These reclassifications had no effect on net
income or stockholders' equity.
NOTE
2
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value.
Current
Assets and Liabilities
For
those
current assets and liabilities that are considered financial instruments, the
carrying amounts approximate fair value because of the short maturity of those
instruments.
Long-term
Financial Liabilities
The
fair
value of Artesian Resources' long-term debt as of December 31, 2007 and
2006, determined by discounting their future cash flows using current market
interest rates on similar instruments with comparable maturities as guided
under
FAS 107, are shown as below :
|
Fair
value of financial
instruments at December 31, comprised:
|
2007
|
2006
|
||||||||||||||
|
Carrying
Amount
|
Estimated
Fair Value
|
Carrying
Amount
|
Estimated
Fair Value
|
|||||||||||||
|
In
thousands
|
||||||||||||||||
|
Long-term
debt
|
$ | 91,757 | $ | 92,600 | $ | 92,073 | $ | 91,410 | ||||||||
The
fair
value of Advances for Construction cannot be reasonably estimated due to the
inability to accurately estimate future refunds expected to be paid over the
life of the contracts. Refund payments are based on the water sales
to new customers in the particular development constructed. Future
refunds expected to be paid would have to be estimated on a per contract basis
using the past history of refund payments. The fair value of Advances
for Construction would be less than the carrying amount because these financial
instruments are non-interest bearing.
INCOME
TAXES
Deferred
income taxes reflect temporary differences between the valuation of assets
and
liabilities for financial and tax reporting.
As
of
December 31, 2007, Artesian Resources has federal net operating loss
carry-forwards aggregating approximately $7.8 million, which will expire if
unused by 2024. As of December 31, 2007, Artesian Resources has
separate company state net operating loss carry-forwards aggregating
approximately $14.5 million. These net operating loss carry-forwards
will expire if unused between 2008 and 2027. Artesian Resources has
recorded a valuation allowance to reflect the estimated amount of deferred
tax
assets that may not be realized due to the expiration of the state net operating
loss carry-forwards. Management believes that it is more likely than
not that the Company will realize the benefits of these net deferred tax
assets. The valuation allowance decreased from approximately $121,000
in 2006 to approximately $88,000 in 2007.
At
December 31, 2007, for federal income tax purposes, there were alternative
minimum tax credit carry forwards aggregating $2.5 million resulting from the
payment of alternative minimum tax in current and prior years. These
alternative minimum tax credit carry-forwards may be carried forward
indefinitely to offset future regular federal income taxes.
In
June
2006, FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes”, an interpretation of FASB Statement No. 109 “Accounting for Income
Taxes”. The Company adopted this statement effective January 1, 2007
and after analyzing Artesian’s various tax positions determined that no further
entry, recognition or derecognition were required. The company would
recognize, if applicable, interest accrued and penalties related to unrecognized
tax benefits in interest expense and in accordance with the regulations of
the
jurisdictions involved. There were no such charges for the period
ended December 31, 2007. Additionally, there were no accruals
relating to interest or penalties as of December 31, 2007. The
Company remains subject to examination by federal authorities for the 2004,
2005, 2006 and 2007 tax years and by state authorities for the tax years 2004
through 2007.
|
Components
of Income Tax Expense
|
||||||||||||
|
In
thousands
|
For
the Year Ended December 31,
|
|||||||||||
|
State
income taxes
|
2007
|
2006
|
2005
|
|||||||||
|
Current
|
$ | --- | $ | 42 | $ | --- | ||||||
|
Deferred
|
866 | 741 | 733 | |||||||||
|
Total
state income tax expense
|
$ | 866 | $ | 783 | $ | 733 | ||||||
|
For
the Year Ended December 31,
|
||||||||||||
|
Federal
income taxes
|
2007
|
2006
|
2005
|
|||||||||
|
Current
|
$ | 608 | $ | 120 | $ | 111 | ||||||
|
Deferred
|
2,660 | 2,984 | 2,503 | |||||||||
|
Total
federal income tax expense
|
$ | 3,268 | $ | 3,104 | $ | 2,614 | ||||||
|
Reconciliation
of effective tax rate:
|
||||||||||||||||||||||||
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||
|
In
thousands
|
2007
|
2007
|
2006
|
2006
|
2005
|
2005
|
||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||
|
Reconciliation
of effective tax rate
|
||||||||||||||||||||||||
|
Income
before federal and state income taxes
|
$ | 10,397 | 100.0 | $ | 9,993 | 100.0 | $ | 8,383 | 100.0 | |||||||||||||||
|
Amount
computed at statutory rate
|
3,535 | 34.0 | 3,398 | 34.0 | 2,850 | 34.0 | ||||||||||||||||||
|
Reconciling
items
|
||||||||||||||||||||||||
|
State
income tax-net of federal tax benefit
|
571 | 5.5 | 466 | 4.7 | 481 | 5.8 | ||||||||||||||||||
|
Other
|
28 | 0.3 | 23 | 0.2 | 16 | 0.1 | ||||||||||||||||||
|
Total
income tax expense and effective rate
|
$ | 4,134 | 39.8 | $ | 3,887 | 38.9 | $ | 3,347 | 39.9 | |||||||||||||||
Deferred
income taxes at December 31, 2007, 2006, and 2005 were comprised of the
following:
|
For
the Year Ended December 31,
|
|
|
|
||||||||||
| In thousands | |||||||||||||
| 2007 | 2006 | 2005 | |||||||||||
|
Deferred
tax assets related to:
|
|||||||||||||
|
Federal
alternative minimum tax credit carry forwards
|
$ | 2,550 | $ | 1,941 | $ | 1,822 | |||||||
|
Federal
and state operating loss carry forwards
|
3,500 | 5,384 | 7,105 | ||||||||||
|
Bad
debt allowance
|
120 | 83 | 70 | ||||||||||
|
Valuation
allowance
|
(88 | ) | (121 | ) | (323 | ) | |||||||
|
Stock
options
|
--- | 145 | 145 | ||||||||||
|
Other
|
234 | 247 | 281 | ||||||||||
|
Total
deferred tax assets
|
$ | 6,316 | $ | 7,679 | $ | 9,100 | |||||||
|
Deferred
tax liabilities related to:
|
|||||||||||||
|
Property
plant and equipment basis differences
|
$ | (31,087 | ) | $ | (28,766 | ) | $ | (26,512 | ) | ||||
|
Expenses
of rate proceedings
|
(56 | ) | (102 | ) | (62 | ) | |||||||
|
Property
taxes
|
(420 | ) | (368 | ) | (338 | ) | |||||||
|
Other
|
(224 | ) | (232 | ) | (241 | ) | |||||||
|
Total
deferred tax liabilities
|
$ | (31,787 | ) | $ | (29,468 | ) | $ | (27,153 | ) | ||||
|
Net
deferred tax liability
|
$ | (25,471 | ) | $ | (21,789 | ) | $ | (18,053 | ) | ||||
|
Deferred
taxes, which are classified into a net current and non-current
balance,
are presented in the balance sheet as follows:
|
||||||||||||
|
Current
deferred tax liability
|
$ | (301 | ) | $ | (284 | ) | $ | (269 | ) | |||
|
Non-current
deferred tax liability
|
(25,170 | ) | (21,505 | ) | (17,784 | ) | ||||||
|
Net
deferred tax liability
|
$ | (25,471 | ) | $ | (21,789 | ) | $ | (18,053 | ) | |||
NOTE
4
PREFERRED
STOCK
As
of
December 31, 2007, Artesian Resources had no preferred stock
outstanding. The Company has 100,000 shares of $1.00 par value Series
Preferred stock authorized but unissued.
NOTE
5
COMMON
STOCK AND ADDITIONAL PAID-IN CAPITAL
The
Class
A Non-Voting Common Stock, Class A Stock, of Artesian Resources trades on the
NASDAQ Global Market under the symbol ARTNA. The Class B Common Stock
of Artesian Resources trades on the NASDAQ's OTC Bulletin Board under the symbol
ARTNB.OB. One primary source of liquidity in 2007 was $21.4 million
net proceeds from the issuance of approximately 1,219,000 shares of Class A
Non-Voting Common Stock.
Under
Artesian Resources' dividend reinvestment plan, which allows for reinvestment
of
cash dividends and optional cash payments, stockholders were issued 17,791,
15,388, and 14,921 shares (as adjusted for the June 30, 2006 three for two
stock
split) at fair market value for the investment of $344,000, $335,000, and
$294,000 of their monies in the years 2007, 2006, and 2005,
respectively.
DEBT
Artesian
Water has available two unsecured lines of credit, with no financial covenant
restrictions, totaling $40.0 million at December 31, 2007, which are renewable
annually at each of the bank’s discretion. Borrowings under the lines
of credit bear interest based on the London Interbank Offering Rate, LIBOR,
plus
1.0% for 30, 60, 90, or 180 days or the banks' federal funds rate plus 1.0%,
at
the option of Artesian Water.
At
December 31, 2007 and 2006 Artesian Water had $0.9 million and $7.9 million
outstanding under these lines at average interest rates of 6.2% and 6.4%
respectively. The maximum amount outstanding was $7.4 million and
$9.3 million in 2007 and 2006 respectively. The
twelve-month average amount outstanding was approximately $5.3 million and
$6.1
million at weighted average annual interest rates of 5.9% and 5.4% in 2007
and
2006 respectively.
At
December 31, 2007, Artesian Utility and Artesian Wastewater had lines of credit
with a financial institution for $3.5 million and $10 million, respectively,
to
meet temporary cash requirements. These revolving credit facilities
are unsecured. As of December 31, 2007, we had not borrowed
funds under these lines. The interest rate for borrowings under each
of these lines is the LIBOR plus 1.75%.
As
of
December 31, 2007, 2006 and 2005, substantially all of Artesian Water's
utility plant was pledged as security for the First Mortgage
Bonds. In addition, the trust indentures relating to these First
Mortgage Bonds contain covenants which limit long-term debt, including the
current portion thereof, to 66 2/3% of total capitalization including the
current portion of the long-term debt, and which, in certain circumstances,
could restrict the payment of cash dividends. As of December 31,
2007, however, no dividend restrictions were imposed under these
covenants.
Long-term
debt consists of:
|
December 31,
|
|||||||||
|
In
thousands
|
2007
|
2006
|
|||||||
|
First
mortgage bonds
|
|||||||||
|
Series
O, 8.17%, due December 29, 2020
|
20,000 | 20,000 | |||||||
|
Series
P, 6.58%, due January 31, 2018
|
25,000 | 25,000 | |||||||
|
Series
Q, 4.75%, due December 1, 2043
|
15,400 | 15,400 | |||||||
|
Series
R, 5.96%, due December 31, 2028
|
25,000 | 25,000 | |||||||
| 85,400 | 85,400 | ||||||||
|
State
revolving fund loans
|
|||||||||
|
4.48%,
due August 1, 2021
|
3,387 | 3,558 | |||||||
|
3.57%,
due September 1, 2023
|
1,261 | 1,319 | |||||||
|
3.64%,
due May 1, 2024
|
2,025 | 2,106 | |||||||
| 6,673 | 6,983 | ||||||||
|
Sub-total
|
92,073 | 92,383 | |||||||
|
Less:
current maturities (principal amount)
|
316 | 310 | |||||||
|
Total
long-term debt
|
$ | 91,757 | $ | 92,073 | |||||
|
Payments
of principal due during the next five years and
thereafter:
|
||||||||||||||||||||||||
|
In
thousands
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
||||||||||||||||||
|
First
Mortgage bonds
|
$ | --- | --- | --- | --- | --- | 85,400 | |||||||||||||||||
|
State
revolving fund loan
|
323 | 336 | 350 | 364 | 380 | 4,920 | ||||||||||||||||||
|
Total
payments
|
$ | 323 | 336 | 350 | 364 | 380 | 90,320 | |||||||||||||||||
NOTE
7
NON-UTILITY
OPERATING REVENUE AND EXPENSES
Non-utility
operating revenue consisted of $1,942,000, $1,458,000, and $2,574,000 received
by Artesian Utility in 2007, 2006 and 2005 respectively. In addition,
$422,000 and $267,000 was from Artesian Resource's SLP Plan in 2007 and 2006
respectively. In 2006, an additional $1,322,000 gain on sale of land
by Artesian Development was recorded.
Artesian
Utility is also a one-third participant, along with heavy-construction
contractor George and Lynch and engineering firm D. Preston Lee, Jr., P.E.,
Inc., in a limited liability company called AquaStructure Delaware, L.L.C.,
or "AquaStructure" that is inactive. The purpose of
AquaStructure was to develop and market proposals for design, construction
and
operation of wastewater facilities. In 1999, we began operating a
250,000-gallon per day wastewater facility for the town of Middletown, in
southern New Castle County. In 2002,
AquaStructure completed construction of a 2.5 million gallon per day
wastewater facility for Middletown. Artesian Utility now operates
this facility for Middletown under a 20-year contract that expires on February
1, 2021. This agreement shall be extended for an additional twenty
years unless advance notice is given.
Non-utility
operating expenses are as follows:
|
In
thousands
|
2007
|
2006
|
2005
|
|||||||||
|
Artesian
Utility
|
$ | 1,528 | $ | 1,205 | $ | 2,184 | ||||||
|
Artesian
Resources
|
232 | 211 | 116 | |||||||||
|
Artesian
Development
|
0 | 3 | 10 | |||||||||
|
Total
|
$ | 1,760 | $ | 1,419 | $ | 2,310 | ||||||
NOTE
8
STOCK
COMPENSATION PLANS
In
1992,
the Company instituted the 1992 Non-Qualified Stock Option Plan, or the 1992
Plan, which was subsequently amended in 1998. Under the 1992 Plan,
options to purchase shares of Class A Stock could be granted to employees at
prices not less than 85% of the fair market value on the date of
grant. The number of authorized shares was
375,000. Employees who participated and who were not executive
officers or directors of the Company could receive options to purchase up to
1,000 shares. Each director or officer who participated in any year
could request an option to purchase 4,500 shares of Class A
Stock. The option price for directors and officers of the Company was
90% of the fair market value on the date of grant. Options granted
under this plan to employees who were not executive officers or directors
extended for a period of one year. Options granted to officers and
directors extended for a period of ten years. All options were
exercisable after six months of service from the date of initial grant, and
are
adjusted for stock dividends and splits. Employees, officers and
directors became eligible to exercise options under the 1992 plan after one
year
of service to the Company. Effective May 25, 2005, no additional
grants will be made from this plan.
In
1996,
the Company instituted the Incentive Stock Option Plan, or the ISO Plan, under
which the Company was authorized to grant options up to 150,000 shares of Class
A Stock to its key employees and officers. Options were granted at
the fair market value on the date of grant. The option exercise
period could not exceed ten years from the date of grant and was determined
by
the Stock Option Committee of the Board of Directors for each stock option
granted. Options granted will vest in accordance with the terms and
conditions determined by the Stock Option Committee of the Board of Directors
and are adjusted for stock dividends and splits. The Company
accelerated vesting for certain incentive stock options held by officers and
directors in anticipation of the Company’s adoption of FAS 123(R) effective
January 1, 2006. Effective May 25, 2005, no additional grants will be
made from this plan.
On
May
25, 2005, the Company adopted the 2005 Equity Compensation Plan, or “the
Plan.” The Plan provides that grants may be in any of the following
forms: incentive stock options, nonqualified stock options, stock units, stock
awards, dividend equivalents and other stock-based awards. The Plan
is administered and interpreted by the Compensation Committee of the Board
of
Directors or the “Committee”. The Committee has the authority to
determine the individuals to whom grants will be made under the Plan, determine
the type, size and terms of the grants, determine the time when grants will
be
made and the duration of any applicable exercise or restriction period (subject
to the limitations of the Plan) and deal with any other matters arising under
the Plan. The Committee presently consists of three directors, each
of whom is a non-employee director of the Company. All of the
employees of the Company and its subsidiaries are eligible for grants under
the
Plan. Non-employee directors of the Company are also eligible to
receive grants under the Plan.
The
following summary reflects changes in the shares of Class A Stock under
option:
|
2007
Shares
|
2007
Weighted
Average
Exercise
Price
|
2006
Shares
|
2006
Weighted
Average
Exercise
Price
|
2005
Shares
|
2005
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
|
Plan
options
|
||||||||||||||||||||||||
|
Outstanding
at beginning of year
|
595,699 | $ | 13.832 | 571,686 | $ | 13.294 | 498,432 | $ | 11.266 | |||||||||||||||
|
Granted
|
33,750 | $ | 19.558 | 33,750 | $ | 21.113 | 125,611 | $ | 19.679 | |||||||||||||||
|
Exercised
|
(48,003 | ) | $ | 7.613 | (9,577 | ) | $ | 7.283 | (51,796 | ) | $ | 9.62 | ||||||||||||
|
Canceled
|
(6,750 | ) | $ | 19.558 | (160 | ) | $ | 18.463 | (561 | ) | $ | 13.605 | ||||||||||||
|
Outstanding
at end of year
|
574,696 | $ | 14.621 | 595,699 | $ | 13.832 | 571,686 | $ | 13.294 | |||||||||||||||
|
Options
exercisable at year end
|
547,696 | $ | 14.377 | 561,949 | $ | 13.395 | 569,733 | $ | 13.288 | |||||||||||||||
|
Weighted
average fair value of
|
||||||||||||||||||||||||
|
options
granted during the year
|
$ | 19.558 | $ | 21.113 | $ | 19.679 | ||||||||||||||||||
The
weighted-average grant-date fair value of options granted during 2007, 2006,
and
2005 were $4.847, $3.809, and $4.278, respectively. The total
intrinsic value of options exercised during 2007 was $561,000. There
were no fully vested shares granted during 2007. During 2007, we
received $365,000 in cash from the exercise of options, with a $509,000 tax
benefit realized during the period.
The
following tables summarize information about employee and director stock options
outstanding at December 31, 2007:
|
Options
Outstanding
|
|||
|
Range
of
Exercise
Price
|
Shares
Outstanding
at
December 31, 2007
|
Weighted
Average
Remaining
Life
|
Weighted
Average
Exercise
Price
|
|
$7.613
- $14.849
|
315,946
|
3.22
Years
|
$11.160
|
|
$16.134
- $21.113
|
258,750
|
7.07
Years
|
$18.846
|
|
Options
Exercisable
|
|||
|
Range
of
Exercise
Price
|
Shares
Exercisable
at
December 31, 2007
|
Weighted
Average
Exercise
Price
|
|
|
$7.613
- $14.849
|
315,946
|
$11.160
|
|
|
$16.134
- $21.113
|
231,750
|
$18.763
|
As
of
December 31, 2007, there was $61,229 of total unrecognized expense related
to
nonvested option shares granted under the Plan. That cost will be
recognized over the remaining 0.4 years vesting period of the unvested
options.
NOTE
9
EMPLOYEE
BENEFIT PLANS
401(k)
Plan
Artesian
Resources has a defined contribution 401(k) Salary Deduction Plan, or the
“401(k) Plan,” which covers substantially all employees. Under the
terms of the 401(k) Plan, Artesian Resources contributed 2% of eligible salaries
and wages and matches employee contributions up to 6% of gross pay at a rate
of
50%. Artesian Resources may, at its option, make additional
contributions of up to 3% of eligible salaries and wages. No such
additional contributions were made in 2007, 2006 and 2005. The 401(k)
Plan expenses, which include Company contributions and administrative fees,
for
the years 2007, 2006 and 2005, were approximately $541,000, $527,000, and $486,000,
respectively.
Postretirement
Benefit Plan
Artesian
Water has a Postretirement Benefit Plan, or the “Benefit Plan,” which provides
medical and life insurance benefits to certain retired
employees. Prior to the amendment of the Benefit Plan, substantially
all employees could become eligible for these benefits if they reached
retirement age while still working for Artesian Water.
Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", SFAS 106, requires Artesian Water
to accrue the expected cost of providing postretirement health care and life
insurance benefits as employees render the services necessary to earn the
benefits. Artesian Resources elected to defer recognition and
amortize its transition obligation over twenty years beginning in
1993.
Artesian
Water recognized an offsetting regulatory asset with respect to the SFAS 106
liability. This asset is recorded based on the PSC order, which
permits Artesian Water to continue recovery of postretirement health care and
life insurance expense on a pay-as-you-go basis for the remaining eligible
employees. Artesian Water expects its SFAS 106 obligation and related
expense recovery to cover a period of approximately 20 years(based on the age
and life expectancy of the remaining eligible participants). Further,
expense recovery as a percentage of rates is expected to remain generally
constant over the initial years, and then decline until the obligation is
liquidated. Amounts charged to expense were $59,000, $70,000, and
$72,000 for 2007, 2006 and 2005, respectively.
Supplemental
Pension Plan
Effective
October 1, 1994, Artesian Water established a Supplemental Pension Plan, or
the
“Supplemental Plan,” to provide additional retirement benefits to full-time
employees hired prior to April 26, 1994. The Supplemental Plan is a
defined contribution plan that enables employees to save for future retiree
medical costs, which will be paid by employees. The Supplemental Plan
accomplishes this objective by providing additional cash resources to employees
upon a termination of employment or retirement, to meet the cost of future
medical expenses. Artesian Water has established a contribution based
upon each employee's years of service ranging from 2% to 6% of eligible salaries
and wages. Artesian Water also provides additional benefits to
individuals who were over age 50 as of January 1, 1994. These
individuals are referred to as the "Transition Group." Effective
November 1, 1994, individuals eligible for the Transition Group had the
opportunity to defer compensation to the Supplemental Plan, and to receive
a
transition matching contribution for 5 years. Each one-dollar of
eligible salaries and wages deferred by the Transition Group was matched with
three, four, or five dollars by Artesian Water based on the employee's years
of
service subject to certain limitations under the federal tax
rules. Plan expenses, which include Company contributions and
administrative fees, for the years 2007, 2006 and 2005 were approximately
$288,000, $276,000, and $275,000, respectively.
The
Company uses December 31 as the measurement date to determine the
postretirement benefit obligation. According to our actuarial report,
the
funded status of our defined benefit postretirement plan was calculated
contemplating FAS 158 and the obligation is recorded at that
amount. There was no Other Comprehensive Income impact because we
record a regulatory asset as provided by FAS 71. Additional
disclosures required for our postretirement benefit obligation are presented
below.
|
Benefit
Obligations and Funded Status
|
||||||||
|
In
thousands
|
Year
Ending
|
|||||||
|
December
31
|
||||||||
|
2007
|
2006
|
|||||||
|
Change
in Accumulated Postretirement Benefit Obligation
|
||||||||
|
Accumulated
Postretirement Benefit Obligation at the Beginning of the
Year
|
$ | 862 | $ | 909 | ||||
|
Service
Cost
|
--- | --- | ||||||
|
Interest
Cost
|
49 | 52 | ||||||
|
Actuarial
(Gain) or Loss
|
126 | 4 | ||||||
|
Benefits
Paid
|
(97 | ) | (106 | ) | ||||
|
Plan
Participant's Contributions
|
4 | 3 | ||||||
|
Accumulated
Postretirement Benefit Obligation at the End of the Year
|
944 | 862 | ||||||
|
Change
in Plan Assets
|
||||||||
|
Fair
Value of Plan Assets at the Beginning of the Year
|
--- | --- | ||||||
|
Benefits
Paid
|
(97 | ) | (106 | ) | ||||
|
Employer
Contributions
|
93 | 103 | ||||||
|
Plan
Participant's Contributions
|
4 | 3 | ||||||
|
Fair
Value of Assets at the End of the Year
|
--- | --- | ||||||
|
Net
Amount Recognized
|
||||||||
|
Funded
Status
|
(944 | ) | (862 | ) | ||||
|
Unrecognized
Transition Obligation (Asset)
|
51 | 60 | ||||||
|
Unrecognized
Net (Gain) or Loss
|
(75 | ) | (225 | ) | ||||
|
Net
Amount Recognized:
|
(968 | ) | (1,027 | ) | ||||
|
Amounts
Recognized in the Statement of Financial Position
|
||||||||
|
Accrued
Benefit Liability-Current
|
(100 | ) | (100 | ) | ||||
|
Accrued
Benefit Liability-Noncurrent
|
(868 | ) | (927 | ) | ||||
|
Net
Amount Recognized
|
$ | (968 | ) | $ | (1,027 | ) | ||
|
Weighted
Average Assumptions at the End of the Year
|
||||||||
|
Discount
Rate
|
6.00 | % | 6.00 | % | ||||
|
Assumed
Health Care Cost Trend Rates
|
||||||||
|
Health
Care Cost Trend Rate Assumed for Next Year
|
11.00 | % | 11.00 | % | ||||
|
Ultimate
Rate
|
5.00 | % | 5.00 | % | ||||
|
Year
that the Ultimate Rate is Reached
|
2014
|
2013
|
||||||
|
Net
Periodic Benefit Cost
|
||||||||||||
|
Year
Ending
|
||||||||||||
|
December
31
|
||||||||||||
|
In
thousands
|
2007
|
2006
|
2005
|
|||||||||
|
Interest
Cost
|
$ | 48 | $ | 51 | $ | 54 | ||||||
|
Amortization
of Net (Gain) or Loss
|
(23 | ) | (27 | ) | (34 | ) | ||||||
|
Amortization
of Transition Obligation/(Asset)
|
9 | 9 | 9 | |||||||||
|
Total
Net Periodic Benefit Cost
|
$ | 34 | $ | 33 | $ | 29 | ||||||
|
Weighted
Average Assumptions
|
||||||||||||
|
Discount
Rate
|
6.00 | % | 6.00 | % | 6.00 | % | ||||||
|
Assumed
Health Care Cost Trend Rates
|
||||||||||||
|
Health
Care Cost Trend Rate Assumed for Current Year
|
11.00 | % | 11.00 | % | 11.00 | % | ||||||
|
Ultimate
Rate
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||
|
Year
that the Ultimate Rate is Reached
|
2013
|
2012
|
2011
|
|||||||||
|
Impact
of One-Percentage-Point Change in Assumed Health Care Cost Trend
Rates
|
||||||||
|
Increase
|
Decrease
|
|||||||
|
Effect
on Service Cost & Interest Cost
|
$ | 3 | $ | (2 | ) | |||
|
Effect
on Postretirement Benefit Obligation
|
$ | 47 | $ | (44 | ) | |||
The
impact of Medicare Part D, although insignificant, was included in the
determination of Accumulated Postretirement Benefit Obligation as of December
31, 2004, and Net Periodic Benefit Cost beginning in 2005.
Contributions
Artesian
Water expects to contribute $100,000 to its postretirement benefit plan in
2008.
The
following table represents the benefits expected to be paid:
|
In
thousands
|
Other
Benefits
|
|||
|
2008
|
$ | 100 | ||
|
2009
|
100 | |||
|
2010
|
100 | |||
|
2011
|
100 | |||
|
2012
|
100 | |||
|
2013
through 2017
|
500 | |||
| $ | 1,000 | |||
NOTE
10
COMMITMENTS
AND CONTINGENCIES
In
1997,
Artesian Water entered into a 33-year operating lease for a parcel of land
with
improvements located in South Bethany, a municipality in Sussex County,
Delaware. The annual lease payments increase each year by the most
recent increase in the Consumer Price Index for Urban Workers, CPI-U, as
published by the U.S. Department of Labor, Bureau of Labor
Statistics. Rental payments for 2007, 2006 and 2005 were $11,900,
$11,400, and $11,000, respectively. The future minimum rental payment
as disclosed in the following table is calculated using CPI-U as of December
31,
2007.
During
1996, Artesian Water entered into a 10-year lease commitment for office space
and this lease was further extended for two years ending February 29,
2008. Rent payments for 2007, 2006 and 2005 for the office space were
$72,000, $72,000, and $76,000, respectively. We vacated this property
five months prior to the lease expiration as a result of unacceptable conditions
not addressed by the landlord. During September
2007, Artesian Water entered into a 3-year contract for office space
located in New Castle County, Delaware. This location is used as
general office space while the Artesian Water main office space is being
renovated. Rent payments during 2007 were $25,000.
During
1999, Artesian Water entered into the contract for office space located in
Sussex County, Delaware. This contract was terminated in October
2006. Rent payments for 2006 and 2005 were $24,000 and $28,000,
respectively. We entered into a new 3-year contract for office space
located in Sussex County, Delaware in October 2006. Rent payments
during 2007 and 2006 were $43,000 and $14,000.
During
2003, Artesian Resources, entered into a 40-year easement agreement to acquire
an easement to access, operate, maintain, repair, improve, replace and connect
Artesian’s water system to a well, including a parcel of land around the
well. Easement payments for 2007, 2006 and 2005 were $28,000, $27,000
and $26,000, respectively.
Artesian
Wastewater entered into a perpetual agreement for the use of approximately
460
acres of land in Sussex County, Delaware for wastewater
disposal. Beginning January 2007, Artesian Wastewater is required to
pay a minimum of $40,000 per year for the use of this land. Once
disposal operations begin, the monthly fee will be contingent on the average
number of gallons of wastewater disposed on the properties. The
agreement can be terminated by giving 180-day notice prior to the termination
date.
Future
minimum annual rental payments under the above mentioned lease obligations
for
the years subsequent to 2007 are as follows:
|
In
thousands
|
||||
|
2008
|
$ | 195 | ||
|
2009
|
156 | |||
|
2010
|
96 | |||
|
2011
|
45 | |||
|
2012
|
46 | |||
|
2013
through 2042
|
1,851 | |||
| $ | 2,389 | |||
Artesian
Water has one water service interconnection agreement with a neighboring
utility, Chester Water Authority, which requires minimum annual
purchases. Rates charged under this agreement are subject to
change. Effective August 1, 1997, Artesian Water renegotiated the
contract with the Chester Water Authority to, among other things, reduce the
minimum purchase requirements from 1,459 million gallons to 1,095 million
gallons annually, calculated as 3 mgd times the number of calendar days in
a
year. The agreement is extended through the year 2021. A previous
interconnection agreement with the City of Wilmington expired in December
2006.
The
Chester Water Authority sent us a notice on February 15, 2006 of a rate
increase, effective July 1, 2006. We received a second notice of a
rate increase on February 14, 2007, effective July 1, 2007. The
minimum annual purchase commitments for all interconnection agreements for
2008
through 2012 and the aggregate total for the years 2013 through 2021, calculated
at the noticed rates, are as follows:
|
In
thousands
|
||||
|
2008
|
$ | 2,836 | ||
|
2009
|
2,828 | |||
|
2010
|
2,828 | |||
|
2011
|
2,828 | |||
|
2012
|
2,836 | |||
|
2013
through 2021
|
27,968 | |||
| $ | 42,124 | |||
Expenses
for purchased water were $2,775,000, $3,152,000,and $3,131,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.
In
2005,
Artesian Water entered into a 6-year agreement with Utility Service Co., Inc.
to
clean and paint tanks from 2006 to 2011 for $1,872,000. The tank
painting expense for 2007, 2006 and 2005 was $416,000, $241,000, and
$254,000. The expenditures committed for the years subsequent to 2007
are as follows:
|
In
thousands
|
||||
|
2008
|
$ | 374 | ||
|
2009
|
375 | |||
|
2010
|
375 | |||
|
2011
|
174 | |||
| $ | 1,298 | |||
Budgeted
mandatory utility plant expenditures, due to planned governmental highway
projects, which require the relocation of Artesian Water's water service mains,
expected to be incurred in 2008 through 2012 are as follows:
|
In
thousands
|
||||
|
2008
|
$ | 1,350 | ||
|
2009
|
2,500 | |||
|
2010
|
1,500 | |||
|
2011
|
1,400 | |||
|
2012
|
0 | |||
| $ | 6,750 | |||
The
exact
timing and extent of these relocation projects is controlled primarily by the
Delaware Department of Transportation.
NOTE
11
GEOGRAPHIC
CONCENTRATION OF CUSTOMERS
Artesian
Water, Artesian Water Pennsylvania and Artesian Maryland provide water utility
service to customers within their established service territory in all three
counties of Delaware and in portions of Pennsylvania and Maryland, pursuant
to
rates filed with and approved by the PSC, the PAPUC and the MDPSC. As
of December 31, 2007, Artesian Water was serving 75,100 customers, Artesian
Water Pennsylvania was serving 39 customers and Artesian Maryland was serving
141 customers.
Artesian
Wastewater began providing wastewater services to a community in Sussex County,
Delaware in July 2005. The PSC approved the temporary rates for this
community on July 15, 2005, and on January 24, 2006, approved the rates and
tariff. As of December 31, 2007, Artesian Wastewater was serving 414
customers.
NOTE
12
RATE
PROCEEDINGS
In
May
2006, Artesian Water filed a petition with the PSC to implement new rates to
meet a requested increase in revenue of 23%, or approximately $9.9 million,
on
an annualized basis. This request was primarily due to the Company’s
significant investment in infrastructure, as well as approximately 92% increase
in purchased power expense due to the expiration of price caps imposed in 1999
when deregulation of the electric industry in Delaware was
adopted. As permitted by law, in July 2006 we placed into effect
temporary rates designed to generate an increase in annual operating revenue
of
approximately 5.9%, or $2.5 million on an annual basis, until new rates were
approved by the PSC.
On
December 19, 2006 the PSC approved a Settlement Agreement in this
case. The increase in annual revenue requirement under the Settlement
Agreement of $6 million was recovered in two steps. The first step
was placed in effect January 1, 2007 to recover approximately $4.8 million
in
annual revenue. The second step was placed in effect July 24,
2007. The second step rates were designed to recover approximately
$1.2 million of annual revenue, which reflected the issuance of additional
equity of approximately $20 million.
Delaware
statute 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 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. The DSIC rate applied between base rate filings is capped
at 7.5% of the amount billed to customers under otherwise applicable rates
and
charges, and the DSIC rate increase applied can not exceed 5% within any
12-month period. During 2006 we earned approximately $225,000 in
revenue from the DSIC rate. As required by law, the surcharge for
DSIC was reset to zero upon the implementation of the temporary rate on July
10,
2006, as noted above. We did not have DSIC in effect during
2007. In December 2007, we filed for a new DSIC of 0.46% to be
applied to customers’ total bill, effective January 1, 2008, in order to recover
the cost of non-revenue producing plant put into service between the end of
the
last general rate increase and October 2007. On January 25, 2008,
Artesian Water submitted a notice to the PSC of our intent to file an
application for a rate increase, as is required to be submitted not less than
60
days prior to filing an application.
NOTE
13
SALE
OF LAND
On
September 14, 2006, Artesian Development completed the sale of a parcel of
land
of approximately four acres to The Commonwealth Group, Ltd. The sale
price was $1.4 million and the gain on the sale of the parcel of land after
expenses, but before income taxes, was approximately $1.3 million.
NOTE
14
NET
INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE
Basic
net
income per common share is based on the weighted average number of common shares
outstanding. Diluted net income per common 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 common share:
|
Years
Ended December 31,
|
|||
|
In thousands
|
2007
|
2006
|
2005
|
|
Average common shares outstanding
during
the period
for
Basic computation
|
6,787 | 6,055 | 5,984 |
|
Dilutive effect of employee stock options
|
149
|
180
|
198
|
|
Average
common shares outstanding during the period for Diluted
computation
|
6,936
|
6,235
|
6,182
|
Equity
per common share was $12.54, $10.21, and $9.66 at December 31, 2007, 2006,
and
2005, respectively. These amounts were computed by dividing
stockholders' equity excluding preferred stock by the number of basic shares
of
common stock outstanding at the end of each year, respectively.
NOTE
15
SELECTED
CONSOLIDATED QUARTERLY FINANCIAL DATA
The
following table is derived from quarterly unaudited consolidated statements
of
operations for the years ended December 31, 2007 and 2006. Quarterly
diluted per share amounts do not add to the full year total due to
rounding.
|
In
thousands (except per
share data)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||||||||||||||
|
Operating
revenues
|
$ | 11,604 | $ | 10,489 | $ | 12,913 | $ | 12,014 | $ | 15,046 | $ | 14,194 | $ | 12,961 | $ | 11,891 | ||||||||||||||||
|
Operating
income
|
$ | 2,268 | $ | 2,053 | $ | 2,919 | $ | 2,889 | $ | 4,135 | $ | 4,181 | $ | 2,444 | $ | 2,672 | ||||||||||||||||
|
Net
income applicable to common stock
|
$ | 1,156 | $ | 995 | $ | 1,271 | $ | 1,360 | $ | 2,763 | $ | 2,607 | $ | 1,073 | $ | 1,109 | ||||||||||||||||
|
Income
per common share
|
||||||||||||||||||||||||||||||||
|
Basic
|
$ | 0.19 | $ | 0.17 | $ | 0.20 | $ | 0.22 | $ | 0.38 | $ | 0.43 | $ | 0.15 | $ | 0.18 | ||||||||||||||||
|
Diluted
|
$ | 0.18 | $ | 0.16 | $ | 0.19 | $ | 0.22 | $ | 0.37 | $ | 0.42 | $ | 0.14 | $ | 0.17 | ||||||||||||||||
NOTE
16
IMPACT
OF RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board, FASB, issued Statement
of Financial Accounting Standards No. 160 (SFAS 160), “Noncontrolling Interests
in Consolidated Financial Statements”-An Amendment of ARB No.
51. SFAS 160 establishes new accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of
a
subsidiary. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008. We do not currently expect the adoption of
SFAS 160 to have a material impact on our consolidated financial position,
results of operations and cash flows.
In
December 2007, the Financial Accounting Standards Board, FASB, issued Statement
No. 141 (revised 2007), “Business Combinations.” The objective of
this Statement is to improve the relevance, representational faithfulness,
and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. This
Statement establishes principles and requirements for how the acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. This Statement also establishes requirements for how the
acquirer recognizes and measures goodwill acquired in the business combination
and how the acquirer determines what information to disclose to enable users
of
the financial statements to evaluate the nature and financial effects of the
business combination. This Statement applies to all transactions or
other events in which an entity obtains control of one or more
businesses. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15,
2008. The Company expects to adopt this statement effective January
1, 2009 and any impact will depend on the nature and size or business
combinations the Company consummates after the effective date.
In
February 2007, the Financial Accounting Standards Board, FASB, issued Statement
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB No.115.” This statement permits
entities to choose to measure many financial instruments and certain other
items
at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This Statement
is effective as of the beginning of an entity’s first fiscal year that begins
after November 15, 2007. The Company expects to adopt this
statement effective January 1, 2008 and does not expect it to have a material
effect on the financial statements.
In
September 2006, FASB issued Statement No. 157, “Fair Value
Measurements”. This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This
statement applies under other accounting pronouncements that require or permit
fair value measurements; however, the statement does not require any new fair
value measurements. This statement is effective for fiscal years
beginning after November 15, 2007 and interim periods within those
years. On February 12, 2008, the FASB issued FSP No. FAS 157-2,
"Effective Date of FASB Statement No. 157," which delays the effective date
of
SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements
on at
least an annual basis, until January 1, 2009 for calendar year-end
entities. The Company does not expect it to have a material effect on
the financial statements.
In
June
2006, FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes”, an interpretation of FASB Statement No. 109 “Accounting for Income
Taxes”. This Interpretation clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financials statements in
accordance with FASB Statement No. 109. The Interpretation prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. This interpretation allows an enterprise to recognize
economic benefits resulting from positions taken in income tax returns, as
long
as a more likely than not approach is taken. This interpretation is
effective for fiscal years beginning after December 15, 2006. The
Company adopted this statement effective January 1, 2007 and after its
evaluation determined that there was no material effect on the financial
statements (see Note 3 to our Financial
Statements).
In
March
2006, FASB issued Statement No. 156, “Accounting for Servicing of Financial
Assets”. This statement amends FASB Statement No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,” with respect to the accounting for separately recognized servicing
assets and servicing liabilities. This statement requires an entity
to recognize a servicing asset or servicing liability each time it undertakes
an
obligation to service a financial asset by entering into a servicing contract
in
some situations. It also requires all separately recognized servicing
assets and servicing liabilities to be initially measured at fair value, if
practicable. This statement is effective for fiscal years beginning
after September 15, 2006. The Company adopted this statement
effective January 1, 2007, it did not have a material effect on the financial
statements.
In
February 2006, FASB issued Statement No. 155, “Accounting for Certain Hybrid
Financial Instruments”. This statement amends FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” and No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities”. This statement permits fair value remeasurement for
any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation. This statement is effective for
all financial instruments acquired or issued after the beginning of an entity’s
first fiscal year that begins after September 15, 2006. The Company
adopted this statement effective January 1, 2007, it did not have a material
effect on the financial statements.
Report
of
Independent Registered Public Accounting Firm
Board
of Directors and
Stockholders
Artesian
Resources
Corporation
Newark,
Delaware
We
have audited the accompanying
consolidated balance sheets of Artesian Resources Corporation as of December
31,
2007 and 2006 and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2007. In connection with our audits of the
financial statements, we have also audited the financial statement schedules
listed in the accompanying index. These financial statements and
schedules are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We
conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements and schedules. We believe that our audits
provide a reasonable basis for our opinion.
In
our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of Artesian Resources Corporation at December 31, 2007
and 2006, and the results of its operations and its cash flows for each of
the
three years in the period ended December 31, 2007,in
conformity with accounting principles
generally accepted in the United States of America.
Also,
in our opinion, the financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Artesian Resources Corporation's internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March
12,
2008 expressed an unqualified opinion thereon.
/s/BDO
Seidman, LLP
Bethesda,
Maryland
March
12,
2008
Item
9. – Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures.
None.
Item
9A. - Controls and Procedures.
(a) Evaluation
of Disclosure Controls and Procedures
Our
management carried out an evaluation, under the supervision and with the
participation of the chief executive officer and the chief financial officer,
of
the effectiveness of the design and operation of Artesian Resources
Corporation’s disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act
of 1934) as of December 31, 2007, pursuant to the evaluation of these
controls and procedures required by Rule 13a-15 of the Securities Exchange
Act of 1934. Based upon that evaluation, the chief executive officer
along with the chief financial officer concluded that Artesian Resources
Corporation’s disclosure controls and procedures as of December 31, 2007
were (1) designed to ensure that material information relating to the
Corporation and its subsidiaries is made known to the chief executive officer
and the chief financial officer by others within those entities, and
(2) effective, in that they provide reasonable assurance that information
required to be disclosed by the Corporation in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms. A control system cannot provide absolute assurance, however,
that the objectives of the control 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) Management’s
Annual Report on Internal Control Over Financial Reporting
The
Management of Artesian Resources Corporation is responsible for establishing
and
maintaining adequate internal control over its financial
reporting. Artesian Resources Corporation’s internal control over
financial reporting is a process designed under the supervision of the
Corporation’s chief executive officer and chief financial officer to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Corporation’s financial statements for external reporting
purposes in accordance with U.S. generally accepted accounting
principles.
Artesian
Resources Corporation’s
Management assessed the effectiveness of the Corporation’s internal control over
financial reporting as of December 31, 2007 based on the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in “Internal Control Integrated Framework.” Based on this
assessment, Management determined that at December 31, 2007, the
Corporation’s internal control over financial reporting was
effective.
(c) Attestation
Report of the Registered Public Accounting Firm
The
effectiveness of Artesian’s internal control over financial reporting as of
December 31, 2007 has been audited by BDO Siedman LLP, an independent registered
public accounting firm, as stated in their report, which is included
herein.
(d) Change
in Internal Control over Financial Reporting
No
change in the Corporation’s internal
control over financial reporting occurred during the fiscal quarter ended
December 31, 2007 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
Date:
March
12, 2008
|
CHIEF
EXECUTIVE OFFICER:
|
CHIEF
FINANCIAL OFFICER:
|
||
|
/s/
DIAN C. TAYLOR
|
/s/
DAVID B. SPACHT
|
||
|
Dian
C. Taylor
|
David
B. Spacht
|
Item
9B. – Other Information.
None.
Report
of Independent Registered Public
Accounting Firm
On
Internal Control Over Financial
Reporting
Board
of Directors and
Stockholders
Artesian
Resources
Corporation
Newark,
Delaware
We
have audited Artesian Resources
Corporation’s internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal
Control –
Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). Artesian Resources Corporation’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying “Item 9A, Management’s Annual Report on
Internal Control Over Financial Reporting”. Our responsibility is to
express an opinion on the company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing
and
evaluating the design and operating effectiveness of internal control based
on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A
company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In
our opinion, Artesian Resources
Corporation maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on the COSO
criteria.
We
also have audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Artesian Resources Corporation as of December
31, 2007 and 2006, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2007 and our report dated March 12, 2008 expressed an
unqualified opinion thereon.
/s/BDO
Seidman LLP
Bethesda,
Maryland
March
12,
2008
Item
10. – Directors, Executive Officers and Corporate
Governance.
|
Name
|
Age
|
Position
|
|
Dian
C. Taylor
|
62
|
Director
since 1991 - Chair of the Board since July 1993, and Chief Executive
Officer and President of Artesian Resources Corporation and its
subsidiaries since September 1992. Ms. Taylor has been employed
by the Company since August 1991. She was formerly a consultant
to the Small Business Development Center at the University of Delaware
from February 1991 to August 1991 and Owner and President of Achievement
Resources Inc. from 1977 to 1991. Achievement Resources, Inc.
specialized in strategic planning, marketing, entrepreneurial and
human
resources development consulting. Ms. Taylor was a marketing
director for SMI, Inc. from 1982 to 1985. Ms. Taylor is the
aunt of John R. Eisenbrey, Jr. and Nicholle R. Taylor. She
serves on the Executive and Strategic Planning, Budget and Finance
Committees.
|
|
Kenneth
R. Biederman
|
64
|
Director
since 1991 - Professor of Finance at the College of Business and
Economics
of the University of Delaware, Lerner College of Business and Economics
since May 1996. Interim Dean of the College of Business and
Economics of the University of Delaware from February 1999 to June
2000. Dean of the College of Business and Economics of the
University of Delaware from 1990 to 1996. Currently a Director
of the Mid -Atlantic Farm Credit Association. Director of Chase
Manhattan Bank USA from 1993 to 1996. Formerly a financial and
banking consultant from 1989 to 1990 and President of Gibraltar Bank
from
1987 to 1989. Previously Chief Executive Officer and Chairman
of the Board of West Chester Savings Bank; Economist and former Treasurer
of the State of New Jersey and Staff Economist for the United States
Senate Budget Committee. He serves on the Executive; Audit;
Pricing; Strategic Planning, Budget and Finance; Human Resources
and
Compensation Committees.
|
|
John
R. Eisenbrey, Jr.
|
52
|
Director
since 1993 - Owner and President of Bear Industries, Inc., a privately
held contracting firm, for more than twenty-three years. Mr.
Eisenbrey is also co-owner and President of Peninsula Masonry
Inc. Mr. Eisenbrey is the nephew of Dian C. Taylor and
the cousin of Nicholle R. Taylor. He serves on the Audit;
Pricing; Human Resources Committee; and Compensation
Committees.
|
|
Nicholle
R. Taylor
|
40
|
Director
since 2007 - Vice President of Artesian Resources Corporation
and its Subsidiaries - Ms. Taylor has served as an officer since
May
2004. Ms. Taylor has been employed by the Company since 1991
and has held various management level and operational positions within
the
Company. Ms. Taylor is the niece of Dian C. Taylor and the
cousin of John R. Eisenbrey, Jr.
|
|
William
C. Wyer
|
61
|
Director
since 1991 - Business Consultant with Wyer Group, Inc. since September
2005. Previously, Mr. Wyer served as Managing Director of
Wilmington Renaissance Corporation (formerly Wilmington 2000) from
January
1998 to August 2005. Wilmington Renaissance Corporation is a
private organization seeking to revitalize the City of Wilmington,
Delaware. Mr. Wyer has served as a Director and member of the
Audit Committee of GMAC Bank and its’ successor National Motors Bank, FBS
since August 2001. President of All Nation Life Insurance and
Senior Vice President of Blue Cross/Blue Shield of Delaware from
September
1995 to January 1998. Managing Director of Wilmington 2000 from
May 1993 to September 1995. Formerly President of Wyer Group,
Inc. from 1991 to 1993 and Commerce Enterprise Group from 1989 to
1991,
both of which are management-consulting firms specializing in operations
reviews designed to increase productivity, cut overhead and increase
competitiveness, and President of the Delaware State Chamber of Commerce
from 1978 to 1989. He serves on the Executive; Audit; Pricing;
Strategic Planning, Budget and Finance; Human Resources and Compensation
Committees.
|
|
Joseph
A. DiNunzio
|
45
|
Executive
Vice President and Corporate Secretary of Artesian Resources Corporation
and its subsidiaries since May 2007. Mr. DiNunzio previously
served as Senior Vice President and Corporate Secretary of Artesian
Resources Corporation and its Subsidiaries since March 2000 and as
Vice
President and Secretary of Artesian Resources Corporation and its
Subsidiaries since January 1995. Mr. DiNunzio has been employed
by the Company since 1989 and has held various executive and management
level positions within the Company. Prior to joining Artesian,
Mr. DiNunzio was employed by PriceWaterhouseCoopers LLP from 1984
to
1989.
|
|
Bruce
P. Kraeuter
|
58
|
Senior
Vice President of Engineering and Planning since May 2007. Mr.
Kraeuter previously served as Vice President of Engineering and Planning
since March 1995. He currently serves as an officer of Artesian
Water Company, Inc., Artesian Water Maryland, Inc., Artesian Wastewater
Management, Inc., Artesian Utility Development, Inc. and Artesian
Water
Pennsylvania, Inc. Mr. Kraeuter has been employed by the
Company since July 1989 and has held various executive and operational
positions within the Company. Mr. Kraeuter served as Senior
Engineer with the Water Resources Agency for New Castle County, Delaware
from 1974 to 1989.
|
|
John
J. Schreppler, II
|
51
|
Vice
President, Assistant Secretary and General Counsel of Artesian Resources
Corporation and its subsidiaries since July 2000. Prior to
joining the Company, he practiced law in Wilmington, Delaware as
John J.
Schreppler, II P.A. from February 1999, and before that as a partner
in
The Bayard Firm from 1988 to 1999.
|
|
David
B. Spacht
|
48
|
Chief
Financial Officer and Treasurer of Artesian Resources Corporation
and its
subsidiaries since January 1995. The Company has employed Mr.
Spacht since 1980 and he has held various executive and management
level
positions within the Company.
|
|
John
M. Thaeder
|
50
|
Senior
Vice President of Operations since May 2007. Mr. Thaeder
previous served as Vice President of Operations since February
1998. He currently serves as an officer of Artesian Water
Company, Inc., Artesian Wastewater Management, Inc., Artesian Water
Maryland, Inc., Artesian Water Pennsylvania, Inc. and Artesian Utility
Development, Inc. Prior to joining the Company, Mr. Thaeder was
employed by Hydro Group, Inc. from 1996 to 1998 as Southeastern District
Manager of Sales and Operations from Maryland to
Florida. During 1995 and 1996, Mr. Thaeder was Hydro Group's
Sales Manager of the Northeast Division with sales responsibilities
from
Maine to Florida. From 1988 to 1995, he served as District
Manager of the Layne Well and Pump Division of Hydro
Group.
|
Corporate
Governance
The
executive officers are elected or approved by our Board or our appropriate
subsidiary to serve until his or her successor is appointed or shall have been
qualified or until earlier death, resignation or removal.
In
accordance with the provisions of the Company's By-laws, the Board is divided
into three classes. Members of each class serve for three years and
one class is elected each year to serve a term until his or her successor shall
have been elected and qualified or until earlier resignation or
removal. John R. Eisenbrey, Jr. and Dian C. Taylor have been
nominated for election to the Board of Directors at the shareholders Annual
Meeting to be held May 14, 2008.
Director
Compensation
Directors
receive an annual retainer fee of $12,500 paid in advance. The chair
of the Audit Committee receives an annual retainer of $3,500. The
other members of the Audit Committee receive an annual retainer fee of
$2,500. The chairs of the remaining standing committees receive an
annual retainer of $1,000. Each director receives $1,500 for each
Board meeting attended, $1,000 for each committee meeting attended on the day
of
a regular board meeting and $1,500 for each committee meeting attended on any
other day. The Chair of the Audit Committee receives $1,500 for
each committee meeting attended on the day of a regular board meeting and $2,000
for each committee meeting attended on any other day. Each director
receives $450 per diem for workshops. An ad hoc Pricing Committee was
formed to review and approve the issuance price of the common stock in
2007. The committee chair was paid a retainer of $3,000.
In
2007,
our Directors, other than Dian C. Taylor whose fees as a Director are included
in the Director Summary Compensation Table and Nicholle R. Taylor who did not
receive any fees as a Director in 2007, received the following
compensation:
Director
Compensation Table – 2007
|
Name
|
Fees
Earned or
Paid
in
Cash
($)
|
Option
Awards
($)
(1)
|
Total
($)
|
|
Kenneth
R. Biederman
|
86,600
|
29,767
|
116,367
|
|
John
R. Eisenbrey, Jr.
|
76,350
|
29,767
|
106,117
|
|
Norman
H. Taylor, Jr.
|
50,200
|
29,767
|
79,967
|
|
William
C. Wyer
|
85,600
|
29,767
|
115,367
|
|
(1)
|
On
May 16, 2007 each Director received option grants of 6,750 shares
of Class
A Non-voting Common stock at exercise prices at the fair market value
(last reported sale price on the grant date) or $19.558. All options
are
exercisable one year from the date of grant and with terms of ten
years.
The dollar amount recognized for financial statement reporting purposes
with respect to the fiscal year, computed in accordance with Statement
of
Financial Accounting Standard No. 123R, based upon the assumptions
made in
the valuation as described in Note 1 of the 2007 Financial Statements
is
reflected in the “Option Awards” column in the table above. The
aggregate number of option awards outstanding at December 31, 2007
for
each Director is:
|
|
Option
Shares Outstanding at December 31, 2007
|
|
|
Kenneth
R. Biederman
|
69,000
|
|
John
R. Eisenbrey, Jr.
|
55,639
|
|
The
Estate of Norman H. Taylor, Jr.
|
45,000
|
|
William
C. Wyer
|
69,500
|
Compensation
Committee
Interlocks and Insider Participation
During
the year ended December 31, 2007, the members of our Compensation Committee
were
Kenneth R. Biederman, John R. Eisenbrey, Jr. and William C.
Wyer. None of our executive officers serves as a member of the
Compensation Committee, or any other committee serving an equivalent function,
of any entity that has one or more of its executive officers serving as members
of our Compensation Committee. No member of our Compensation
Committee has ever been our employee.
Independence
In
2007,
the Board of Directors determined that a majority of the Board of Directors
met
the independence requirements prescribed by the listing standards of the Nasdaq
Global Market.
Audit
Committee
The
Audit
Committee reviews the procedures and policies relating to the internal
accounting procedures and controls of the Company, and provides general
oversight with respect to the accounting principles employed in the Company’s
financial reporting. As part of its activities, the Audit Committee
meets with representatives of the Company’s management and independent
accountants. The Audit Committee has considered the extent and scope
of non-audit services provided to the Company by its outside accountants and
has
determined that such services are compatible with maintaining the independence
of the outside accountants. The Audit Committee appoints and retains the
Company’s independent accountants. The Audit Committee has a charter
delineating its purpose and functions. The Audit Committee consists
of Kenneth R. Biederman, John R. Eisenbrey, Jr. and William C.
Wyer. The Board of Directors has also determined that each member of
the Audit Committee meets the independence requirements prescribed by the
listing standards of the Nasdaq Global Market and the rules and regulations
of
the Securities and Exchange Commission. The Board of Directors has
further determined that Mr. Biederman, a member of the Audit Committee, is
an "audit committee financial expert" as such term is defined in Item
407(d)(5)(ii) of Regulation S-K promulgated by the SEC. During 2007,
the Audit Committee met seven times.
Compensation
Committee
The
Compensation Committee reviews the compensation and benefits provided to key
management employees, officers and directors and makes recommendations as
appropriate to the Board. The Committee also determines whether and
what amounts should be granted under the Equity Compensation Plan and may make
recommendations for amendments to the Plan. The Compensation
Committee has a charter delineating its purpose and functions. The
Compensation Committee is comprised of Kenneth R. Biederman, John R. Eisenbrey,
Jr. and William C. Wyer, three independent directors. During 2007,
the Compensation Committee met four times.
Consideration
of Director
Candidates
Given
the
size of the current Board and the ability for the independent directors to
act
within existing committees on director nominations, the Company has not deemed
it appropriate or necessary to appoint a standing Nominating
Committee. The Board, however, has adopted a resolution to document
and formalize the Company’s nominating procedures. As part of the
formalized nominating procedures, director nominees are recommended to the
full
Board by a majority of independent directors. Director candidates
nominated by stockholders are considered in the same manner, provided the
nominations are submitted on a timely basis and in accordance with the Company’s
by-laws. Nominations for the election of directors for the 2008
Annual Stockholders’ Meeting were approved by the Compensation Committee, which
consists entirely of independent directors.
Code
of
Ethics
The
Company adopted a code of ethics applicable to its chief executive officer,
chief financial officer, controller or principal accounting officer, and any
person who performs a similar function, which is a "code of ethics" as defined
by applicable rules of the Securities and Exchange Commission. This
code is publicly available on the Company's website at
www.artesianwater.com. If the Company makes any amendments to this
code other than technical, administrative, or other non-substantive amendments,
or grants any waivers, including implicit waivers, from a provision of this
code
to the Company's chief executive officer, chief financial officer, controller
or
principal accounting officer, and any person who performs a similar function,
the Company will disclose the nature of the amendment or waiver, its effective
date and to whom it applies on its website. The information on the
website listed above is not and should not be considered part of this Annual
Report on Form 10-K and is intended to be an inactive textual reference
only.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under
Section 16(a) of the Securities Exchange Act of 1934, as amended, directors,
officers and certain beneficial owners of the Company’s equity securities are
required to file reports of their transactions in the Company’s equity
securities with the Securities and Exchange Commission on specified due
dates. With respect to the fiscal year 2007, reports of transactions
by all directors, officers and such beneficial holders were timely
filed. In making this statement, the Company has relied on the
written representations of its directors, officers and holders of more than
ten
percent (10%) of either class of our outstanding common stock ten percent (10%)
stockholders and copies of the reports that they filed with the Securities
and
Exchange Commission.
Item
11. – Executive Compensation.
Compensation
Discussion and Analysis
The
objective of the Company’s compensation program is to provide competitive levels
of total compensation to attract and retain qualified executive
officers. The program rewards overall qualitative contributions and
performance of each individual towards company goals and objectives for
financial performance and shareholder returns; superior customer service;
increases in utility franchised service territory and development of our
wastewater and contract operation business lines; and employee professional
development. In determining competitive levels of compensation, the
Compensation Committee considers publicly available information regarding the
compensation of executive officers of other U.S. investor-owned water utilities
and information available from studies periodically performed by compensation
consultants for the Company. The Compensation Committee also
considers recommendations made by the Chief Executive Officer regarding
compensation for other executive officers.
Compensation
elements include a base cash level of compensation, possible cash bonus awards,
and discretionary amounts of equity compensation as may be awarded by the Board
of Directors under the 2005 Equity Compensation Plan. In recent
years, with the exception of 2007, most performance-based compensation was
awarded in equity rather than in cash. The 2005 Equity Compensation
Plan provides for the grants of stock options, stock units, stock awards,
dividend equivalents and other stock-based awards to encourage recipients of
such grants to contribute materially to the growth of the Company, for the
benefit of the Company’s shareholders, and to align the economic interests of
the recipients with those of shareholders.
Compensation
paid to each executive officer, including cash bonuses in 2007 and stock bonuses
in 2006, was based on the Compensation Committee’s review and consideration of
aggregate levels of compensation paid to executives of comparable companies
and
the individual qualitative contributions and performance of each executive
officer. The stock bonus portion of the compensation awarded in 2006
also served beneficially to further align the interests of the executive
officers with that of shareholders. No grants of stock options were
made to any other executive officer in 2007 or 2006, except that Ms. Dian C.
Taylor, in her capacity as a Director, received stock grants as described
below.
Generally,
each May, the Compensation Committee of the Board of Directors considers the
grant of stock options for Directors, including Ms. Dian C.
Taylor. Consistent with the grant made to all Directors, on May 16,
2007 and May 12, 2006, Ms. Dian C. Taylor received grants of 6,750 shares of
Class A Non-voting Common stock, as adjusted for the June 30, 2006 three for
two
stock split, at an exercise price at the fair market value (last reported sale
price on that date), exercisable one year from the date of grant and with terms
of ten years from the date of grant.
Ms.
Dian
C. Taylor also receives compensation for her service as a Director, which
compensation is equivalent to that provided to all other Directors for retainers
and Board meeting fees. See “Director Compensation.”
There
are
no severance or other post-termination agreements with the executive officers
of
the Company. The executive officers do not receive any
post-retirement benefits other than those generally available to all employees
through participation in the Company’s 401(k) retirement plan, the
Postretirement Benefit Plan and the Supplemental Pension Plan. The
Company does not provide any defined benefit pension plan benefits, any
supplemental executive retirement plan benefits, or any non-qualified deferred
compensation. There are no contracts, agreements, plans or
arrangements that provide for a payment to any executive officer at or following
the termination of employment of the executive officer for any reason, including
change in control of the Company.
Compensation
Committee
Report
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis with management and, based on the review and discussions, the
Compensation Committee recommended to the Board of Directors that the
Compensation Discussion and Analysis be included in the Company’s Annual Report
on Form 10-K.
William
C. Wyer, Chairman
Kenneth
R. Biederman
John
R.
Eisenbrey, Jr.
The
following table sets forth a summary of the compensation earned by the Chief
Executive Officer, Chief Financial Officer and the next three highest paid
executive officers whose annual salaries and bonuses exceeded $100,000 for
the
fiscal year 2007.
Summary
Compensation Table
for 2007:
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)(1)
|
Option
Awards ($)(2)
|
All
Other Compensation ($)(1),(3),(4),(5)
|
Total
($)
|
|
Dian
C. Taylor, Chair, CEO & President
|
2007
|
353,076
|
81,450
|
N/A
|
29,767
|
75,044
|
539,337
|
|
2006
|
320,369
|
1,330
|
47,400
|
16,412
|
118,127
|
503,638
|
|
|
David
B. Spacht, Chief Financial Officer & Treasurer
|
2007
|
211,999
|
36,450
|
N/A
|
N/A
|
25,492
|
273,941
|
|
2006
|
178,308
|
4,150
|
23,700
|
N/A
|
41,310
|
247,468
|
|
|
Joseph
A. DiNunzio, Executive Vice President & Secretary
|
2007
|
249,629
|
35,700
|
N/A
|
N/A
|
23,015
|
308,344
|
|
2006
|
231,631
|
700
|
23,700
|
N/A
|
41,541
|
297,571
|
|
|
Bruce
P. Kraeuter, Senior Vice President of Engineering &
Planning
|
2007
|
214,460
|
36,450
|
N/A
|
N/A
|
22,917
|
273,827
|
|
2006
|
185,385
|
1,330
|
23,700
|
N/A
|
38,842
|
249,257
|
|
|
John
M. Thaeder, Senior Vice President of Operations
|
2007
|
227,922
|
35,700
|
N/A
|
N/A
|
13,524
|
277,146
|
|
2006
|
192,308
|
700
|
23,700
|
N/A
|
33,970
|
250,678
|
|
(1)
|
On
April 26, 2006, the Compensation Committee awarded stock bonuses
to
executive officers under the 2005 Equity Compensation Plan as reflected
in
the “Stock Awards” column above, along with a cash payment to reimburse
for the payment of taxes resulting from the stock bonus, which cash
payment is included in the “All Other Compensation” column
above. The shares awarded were valued at the closing share
price on the date of award. The number of Class A Non-voting
Common stock shares, as adjusted for a three for two stock split
on June
30, 2006, and cash awarded were:
|
|
Shares
|
Reimbursement
for Tax
|
|
|
Dian
C. Taylor
|
2,250
|
$33,065
|
|
David
B. Spacht
|
1,125
|
$18,457
|
|
Joseph
A. DiNunzio
|
1,125
|
$17,238
|
|
Bruce
P. Kraeuter
|
1,125
|
$18,418
|
|
John
M. Thaeder
|
1,125
|
$18,377
|
|
(2)
|
On
May 16, 2007 and May 12, 2006, Ms. Dian C. Taylor received option
grants
of 6,750 shares of Class A Non-voting Common stock at exercise prices
at
fair market value (last reported sale price on the date of grant),
exercisable one year from the date of grant and with a term of ten
years. The dollar amount recognized for financial statement
reporting purposes with respect to the fiscal year, computed in accordance
with Statement of Financial Accounting Standard No. 123, based upon
the
assumptions made in the valuation as described in Note 1 of the 2007
Financial Statements is reflected in the “Option Awards” column in the
table above.
|
|
(3)
|
Under
the defined contribution
401(k) Plan, the Company contributes two percent of an eligible employee's
gross earnings. The Company also matches fifty percent of the
first six percent of the employee's gross earnings that the employee
contributes to the 401(k) Plan. In addition, all employees
hired before April 26, 1994 and under the age of sixty at that date
are
eligible for additional contributions to the 401(k)
Plan. Employees over the age of sixty at that date receive
Company paid medical, dental and life insurance benefitsupon retirement. The
Company will not provide such benefits to any other current or future
employees. In 2007, Company contributions to the 401(k) Plan
under terms available to all other employees based upon their years
of
service and plan eligibility were made in the amounts
of:
|
|
Dian
C.
Taylor
|
$ | 22,500 | ||
|
David
B.
Spacht
|
$ | 23,320 | ||
|
Joseph
A.
DiNunzio
|
$ | 22,500 | ||
|
Bruce
P.
Kraeuter
|
$ | 21,446 | ||
|
John
M.
Thaeder
|
$ | 11,250 |
|
(4)
|
Executive
officers are reimbursed for eligible medical expenses not otherwise
covered by the Company’s medical insurance plan under the Officer’s
Medical Reimbursement Plan. Amounts reimbursed are included in
the “All Other Compensation” column in the table above. Ms.
Dian C. Taylor received reimbursements of $9,540 in 2007.
|
|
(5)
|
Also
included in the “All Other Compensation” column in the table above are
amounts received by Ms. Dian C. Taylor as compensation for attendance
at
meetings of the Board and its committees in 2007 totaling $39,100,
security provided at her personal residence and personal use of a
company-owned vehicle.
|
Grants
of
Plan-Based Awards Table – 2007
|
Name
|
Grant
Date
|
All
Other Stock Awards: Number of Shares of Stock or Units (#)
|
All
Other Option Awards: Number of Securities Underlying Options
(#)
|
Exercise
or Base Price of Option Awards ($/share)
|
Grant
Date Fair Value of Stock & Option Awards ($)
|
|
Dian
C. Taylor
|
May
16, 2007
|
N/A
|
6,750
|
19.558
|
32,715
|
Ms.
Dian
C. Taylor was granted an option award on May 16, 2007 as noted in the table
above. The Class A Non-voting Common stock shares available under the
grant become exercisable one year after the date of grant, are for a term of
ten
years from the date of grant, and automatically terminate upon the first
occurrence of:
|
(i)
|
The
expiration of the 90-day period after Ms. Dian C. Taylor ceases to
provide
service to the Company, if the termination of service is for any
reason
other than Disability, death or Cause (as defined in the
award);
|
|
(ii)
|
The
expiration of the one-year period after Ms. Dian C. Taylor ceases
to
provide service to the Company on account of her
Disability;
|
|
(iii)
|
The
expiration of the one-year period after Ms. Dian C. Taylor ceases
to
provide service to the Company, if she dies while providing service
to the
Company or within 90 days after the she ceases to provide such services
on
account of a termination described in (i) above;
or
|
|
(iv)
|
The
date on which Ms. Dian C. Taylor ceases to provide service to the
Company
for Cause. In addition, notwithstanding the prior provisions,
if Ms. Dian C. Taylor engages in conduct that constitutes Cause after
her
employment or service terminates, the Option shall immediately
terminate.
|
Outstanding
Equity Awards at Fiscal Year-End Table – 2007
|
Option
Awards
|
||||
|
Name
|
Number
of Securities Underlying Unexercised
Options(#) Exercisable
|
Number
of Securities Underlying Unexercised Options
(#) Unexercisable
|
Option
Exercise Price($)
|
Option
Expiration Date
|
|
Dian
C. Taylor
|
3,750
|
0
|
7.613
|
5/27/2008
|
|
6,750
|
0
|
8.500
|
5/18/2009
|
|
|
6,750
|
0
|
9.275
|
5/31/2010
|
|
|
6,750
|
0
|
9.760
|
5/30/2011
|
|
|
6,750
|
0
|
12.400
|
6/5/2012
|
|
|
6,750
|
0
|
13.300
|
5/21/2013
|
|
|
6,750
|
0
|
16.134
|
5/26/2014
|
|
|
11,250
|
0
|
19.700
|
12/20/2015
|
|
|
6,750
|
0
|
21.113
|
5/12/2016
|
|
|
6,750(1)
|
19.588
|
5/16/2017
|
||
|
David
B. Spacht
|
5,425
|
0
|
9.333
|
5/18/2009
|
|
6,750
|
0
|
10.278
|
5/31/2010
|
|
|
6,750
|
0
|
10.845
|
5/30/2011
|
|
|
6,750
|
0
|
12.400
|
6/5/2012
|
|
|
6,750
|
0
|
14.849
|
5/21/2013
|
|
|
6,750
|
0
|
16.134
|
5/26/2014
|
|
|
11,250
|
0
|
19.700
|
12/20/2015
|
|
|
Joseph
A. DiNunzio
|
5,625
|
0
|
9.333
|
5/18/2009
|
|
6,750
|
0
|
10.278
|
5/31/2010
|
|
|
11,250
|
0
|
10.845
|
5/30/2011
|
|
|
6,750
|
0
|
12.400
|
6/5/2012
|
|
|
6,750
|
0
|
14.849
|
5/21/2013
|
|
|
6,750
|
0
|
16.134
|
5/26/2014
|
|
|
11,250
|
0
|
19.700
|
12/20/2015
|
|
|
Bruce
P. Kraeuter
|
3,950
|
0
|
7.613
|
5/27/2008
|
|
3,750
|
0
|
9.333
|
5/18/2009
|
|
|
6,750
|
0
|
10.278
|
5/31/2010
|
|
|
6,750
|
0
|
10.845
|
5/30/2011
|
|
|
6,750
|
0
|
12.400
|
6/5/2012
|
|
|
6,750
|
0
|
14.849
|
5/21/2013
|
|
|
6,750
|
0
|
16.134
|
5/26/2014
|
|
|
11,250
|
0
|
19.700
|
12/20/2015
|
|
|
John
M. Thaeder
|
4,207
|
0
|
10.278
|
5/31/2010
|
|
6,750
|
0
|
10.845
|
5/30/2011
|
|
|
6,750
|
0
|
12.400
|
6/5/2012
|
|
|
6,750
|
0
|
14.849
|
5/21/2013
|
|
|
6,750
|
0
|
16.134
|
5/26/2014
|
|
|
11,250
|
0
|
19.700
|
12/20/2015
|
|
(1)
The option grant for 6,750 will vest on May 16, 2008.
Option
Exercises and Stock Vested Table – 2007
|
Option
Awards
|
Stock
Awards
|
||||
|
Name
|
Number
of Shares Acquired on Exercise (#)
|
Value
Realized on Exercise ($)
|
Number
of Shares Acquired on Vesting (#)
|
Value
Realized on Vesting ($)
|
|
|
Dian
C. Taylor
|
9,750
|
121,308
|
N/A
|
N/A
|
|
|
David
B. Spacht
|
1,741
|
20,831
|
N/A
|
N/A
|
|
|
Joseph
A. DiNunzio
|
6,750
|
77,912
|
N/A
|
N/A
|
|
|
Bruce
P. Kraeuter
|
2,800
|
33,441
|
N/A
|
N/A
|
|
|
John
M. Thaeder
|
9,712
|
100,097
|
N/A
|
N/A
|
|
Item
12. – Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters.
The
following table sets forth the beneficial ownership of the equity securities
of
the Company, as of February 29, 2008 for each director, each executive
officer named in the Summary Compensation Table, each beneficial owner of more
than five percent (5%) of the outstanding shares of any class of the Company's
voting securities and all directors and executive officers as a group, based
in
each case on information furnished to the Company. Addresses are
provided for each beneficial owner of more than five percent (5%) of the
Company’s voting securities.
|
Class
A Non-Voting
Common
Stock(1)
|
Class
B Common
Stock(1)
|
||||
|
Shares
|
Percent(2)
|
Shares
|
Percent(2)
|
||
|
Dian
C. Taylor
(3)
664
Churchmans Road
Newark,
Delaware 19702
|
142,940
|
2.2
|
157,722
|
17.9
|
|
|
Kenneth
R. Biederman (3)(4)
|
76,125
|
1.2
|
|||
|
John
R. Eisenbrey, Jr. (3)(5)(6)
15
Albe Drive
Newark,
Delaware 19702
|
94,640
|
1.5
|
45,707
|
5.2
|
|
|
Nicholle
R. Taylor (3)
|
26,626
|
6,391
|
|||
|
The
Estate of
Norman
H. Taylor, Jr. (3)
1597
Porter Road
Bear,
Delaware 19701
|
82,956
|
1.3
|
273,085
|
31.0
|
|
|
William
C. Wyer (3)
|
72,250
|
1.1
|
|||
|
Joseph
A. DiNunzio (3)
(8)
|
69,959
|
1.1
|
103
|
||
|
Bruce
P. Kraeuter (3)
|
73,669
|
1.1
|
|||
|
David
B. Spacht (3)
|
58,642
|
189
|
|||
|
John
M. Thaeder (3)
|
63,536
|
1.0
|
1,350
|
||
|
Louisa
Taylor Welcher
(9)
219
Laurel Avenue
Newark,
DE 19711
|
52,052
|
136,006
|
15.4
|
||
|
Directors
and Executive Officers as a Group (10 Individuals)(3)
|
724,684
|
10.4
|
211,462
|
24.0
|
|
(1)
|
The
nature of ownership consists of sole voting and investment power
unless
otherwise indicated. The amount also includes all shares
issuable to such person or group upon the exercise of options held
by such
person or group to the extent such options are exercisable within
60 days
after February 29, 2008.
|
|
(2)
|
The
percentage of the total number of shares of the class outstanding
is shown
where that percentage is one percent or greater. Percentages
for each person are based on the aggregate number of shares of the
applicable class outstanding as of February 29, 2008, and all shares
issuable to such person upon the exercise of options held by such
person,
to the extent such options are exercisable within 60 days of that
date.
|
|
(3)
|
Includes
options to purchase shares of the Company’s Class A Stock, as follows: Ms.
D. Taylor (62,250 shares); Mr. Biederman (62,250 shares);
Mr. Eisenbrey (48,889 shares); Ms. N. Taylor (20,625); The Estate of
Norman Taylor (45,000 shares); Mr. Wyer (58,750 shares); Mr. DiNunzio
(55,125 shares); Mr. Kraeuter (50,100 shares); Mr. Spacht (50,425
shares);
and Mr. Thaeder (42,457 shares).
|
|
(4)
|
16,875
shares were pledged as collateral for Mr. Biederman’s margin
account.
|
|
(5)
|
39,611
shares were pledged by Mr. Eisenbrey, Jr. as collateral for a
loan.
|
|
(6)
|
Includes
780 shares of the Class B Stock owned by a trust, of which Mr. Eisenbrey,
Jr. is a trustee and has a beneficial ownership interest, and 1,555
shares
of the Class B Stock held in custodial accounts for Mr. Eisenbrey,
Jr.’s
daughters.
|
|
(7)
|
Includes
30 shares of the Class A Stock held in custodial accounts for Mr.
DiNunzio’s sons.
|
|
(8)
|
Includes
144 shares of the Class B Stock held jointly by Ms. Welcher’s husband and
son, and 371 shares of the Class A Stock held by Ms. Welcher’s husband for
which Ms. Welcher disclaims beneficial ownership.
|
Item
13. – Certain Relationships and Related Transactions, and
Director Independence.
We
have
three directors who are considered independent under the NASDAQ listing
standards: Kenneth R. Biederman, William C. Wyer, and John R.
Eisenbrey, Jr.
Item
14. – Principal
Accountant Fees and Services.
Fees
Billed by Independent
Registered Public Accounting Firm
The
following table sets forth the
aggregate fees billed to the Company for the fiscal year 2007 and 2006 by the
independent registered public accounting firm, BDO Seidman
LLP:
|
(In
thousands)
|
2007
|
2006
|
||||||
|
Audit
Fees
|
$ | 548 | $ | 370 | ||||
|
Audit-Related
Fees
|
--- | --- | ||||||
|
Tax
Fees
|
--- | --- | ||||||
|
All
Other
Fees
|
---- | ---- | ||||||
|
Total
Fees
|
$ | 548 | $ | 370 | ||||
Approximately
60% of the total hours
spent on audit and audit-related services for the Company for the year ended
December 31, 2007 was spent by McBride, Shopa and Company, one of the members
of
the BDO Alliance network of firms. Such members are not full time,
permanent employees of BDO. McBride, Shopa and Company was, however,
directly engaged to perform the Company’s 401(k) Plan audit for the fiscal years
ended 2007 and 2006. The fees billed to the Company for the 401(k)
Plan’s audit was $16,000 and $14,000 for 2007 and 2006
respectively.
Audit
Fees:consist primarily of
fees for year-end audit including audit of the Company’s internal control over
financial reporting and
the review of the financial
statements included in the registrant’s Form 10-Qs.
Audit-Related
Fees: consist primarily of
fees billed for assurance, compliance with Section 404 of the Sarbanes-Oxley
Act
of 2002 and related services that are reasonably related to the performance
of
the audit or review of the registrant’s financial
statements.
Tax
Fees:consist of fees for
professional services for tax compliance, tax advice and tax
planning. These services include assistance regarding federal and
state tax compliance, return preparation and tax audits.
All
Other Fees:
consist of fees for
services other than described above. The independent registered
public accounting firm did not provide any other services to the Company in
2007
and 2006.
Pursuant
to policy, the Audit Committee
pre-approves audit and tax services for the year as well as non-audit services
to be provided by the independent registered public accounting
firm. Any changes in the amounts quoted are also subject to
pre-approval by the committee. All of the tax fees paid in 2007 and
2006 were pre-approved by the committee.
The
Audit Committee of the Company’s
Board of Directors has considered whether BDO’s provision of the services
described above for the fiscal year ended December 31, 2007, is compatible
with
maintaining its independence. In addition, the Audit Committee also
considered services performed by McBride, Shopa and Company to determine its
compatibility with maintaining independence.
Item
15. – Exhibits and Financial Statement
Schedules.
|
The
following documents are filed as part of this report:
|
Page(s)*
|
|
|
(1)
|
Financial
Statements:
|
|
|
57
|
||
|
33
|
||
|
34
|
||
|
35
|
||
|
36
|
||
|
37
– 56
|
||
|
(2)
|
Financial
Statement Schedule:
|
|
|
81
|
||
|
(3)
|
Exhibits: see
the exhibit list below
|
76
– 77
|
|
*
Page number shown refers to page number in this Report on Form
10-K
|
ARTESIAN
RESOURCES CORPORATION
FORM
10-K
ANNUAL REPORT
YEAR
ENDED DECEMBER 31, 2007
|
EXHIBIT
LIST
|
|
|
Exhibit
Number
|
Description
|
|
3.1
|
Restated
Certificate of Incorporation of the Company effective April 28, 2004
incorporated
by
reference to Exhibit 3.1 filed with the Company’s Form 10-Q for the
quarterly period ended
March
31, 2004.
|
|
3.2
|
By-laws
of the Company effective March 26, 2004 incorporated by reference
to
Exhibit 3.3 filed with
the
Company’s Form 10-Q for the quarterly period ended March 31,
2004.
|
|
4.1
|
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.
|
|
4.2
|
Seventeenth
supplemental Indenture dated as of December 1, 2003 between
Artesian Water Company, Inc., subsidiary of the Company, and the
Wilmington Trust Company, as Trustee.
Incorporated
by reference to Exhibit 4.1 filed with the Company’s Annual Report on Form
10-K for the year ended December 31, 2003.
|
|
4.3
|
Sixteenth
supplemental Indenture dated as of January 31, 2003 between Artesian
Water
Company, Inc.,
subsidiary
of the Company, and the Wilmington Trust Company, as Trustee.
Incorporated
by reference to Exhibit 4.2 filed with the Company’s Annual Report on Form
10-K for the year ended December 31, 2003.
|
|
4.4
|
Fifteenth
supplemental Indenture dated as of December 1, 2000 between Artesian
Water
Company, Inc.,
subsidiary
of the Company, and the Wilmington Trust Company, as Trustee.
Incorporated
by reference to Exhibit 4.1 filed with the Company's Form 10-Q for
the
quarterly period ended March 31, 2002.
|
|
4.5
|
Thirteenth
and Fourteenth Indentures dated as of June 17, 1997 between Artesian
Water
Company,
Inc., subsidiary of the Company, and the Wilmington Trust Company,
as
Trustee.
Incorporated
by reference to Exhibit 4 filed with the Company's Form 10-Q for
the
quarterly period
ended
June 30, 1997.
|
|
4.6
|
Twelfth
Supplemental Indenture dated as of December 5, 1995 between Artesian
Water
Company,
Inc. subsidiary of the Company and Wilmington Trust Company, as
Trustee.
Incorporated
by reference to Exhibit 4(a) filed with the Company's Annual
Report
on
Form 10-K for the year ended December 31, 1995.
|
|
4.7
|
Eleventh
Supplemental Indenture dated as of February 16, 1993 between Artesian
Water
Company,
Inc., subsidiary of the Company and Principal Mutual Life Insurance
Company.
Incorporated
by reference to Exhibit 4(a) filed with the Company's Annual Report
on
Form
10-K
for the year ended December 31, 1992.
|
|
4.8
|
Tenth
Supplemental Indenture dated as of April 1, 1989 between Artesian
Water
Company,
Inc.,
subsidiary of the Company, and Wilmington Trust Company, as
Trustee. Incorporated
by
reference to Exhibit 4 (a) filed with the Company's Registration
Statement
on Form 10
filed
April 30, 1990 and as amended by Form 8-K filed on June 19,
1990.
|
|
10.1
|
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.
|
|
10.2
|
Artesian
Resources Corporation 2005 Equity Compensation
Plan. Incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
**
|
|
10.3
|
Amended
and Restated Artesian Resources Corporation 1992 Non-Qualified Stock
Option Plan, as amended. Incorporated by reference to Exhibit
10.4 filed with the Company’s Form 10-Q for the quarterly period ended
June 30, 2003.**
|
|
10.4
|
Artesian
Resources Corporation Cash and Stock Bonus Compensation Plan for
Officers
incorporated by reference to Exhibit 10(d) filed with the Company’s Annual
Report on Form 10-K for the year ended December 31,
1993.**
|
|
10.5
|
Artesian
Resources Corporation Incentive Stock Option Plan. Incorporated
by reference to Exhibit 10(e) filed with the Company's Annual Report
on
Form 10-K for the year ended December 31, 1995.**
|
|
10.6
|
Officer's
Medical Reimbursement Plan dated May 27, 1992. Incorporated by
reference to Exhibit 10.6 filed with the Company’s Annual Report on Form
10-K/A for the year ended December 31, 2001.**
|
|
21
|
Subsidiaries
of the Company as of December 31, 2007.
|
|
23.1
|
Consent
of BDO Seidman LLP
|
|
24.1
|
Power
of Attorney (included on signature page).
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
**
|
Compensation
plan or arrangement required to be filed or incorporated as an
exhibit.
|
ARTESIAN
RESOURCES CORPORATION
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
Date: March
12, 2008
|
By:
/s/ DAVID B. SPACHT
|
|
|
David
B. Spacht, Vice President, Chief
|
||
|
Financial
Officer and Treasurer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
Principal
Executive Officer:
|
||
|
/s/
DIAN C. TAYLOR
|
||
|
Dian
C. Taylor
|
President
and Chief Executive Officer
|
March
12, 2008
|
|
Principal
Financial and Accounting Officer:
|
||
|
/s/
DAVID B. SPACHT
|
||
|
David
B. Spacht
|
Vice
President, Chief Financial Officer and Treasurer
|
March
12, 2008
|
|
Directors:
|
||
|
/s/
DIAN C. TAYLOR
|
||
|
Dian
C. Taylor
|
Director
|
March
12, 2008
|
|
/s/
KENNETH R. BIEDERMAN
|
||
|
Kenneth
R. Biederman
|
Director
|
March
12, 2008
|
|
/s/
WILLIAM C. WYER
|
||
|
William
C. Wyer
|
Director
|
March
12, 2008
|
|
/s/
JOHN R. EISENBREY, JR.
|
||
|
John
R. Eisenbrey, Jr.
|
Director
|
March
12, 2008
|
|
/s/
NICHOLLE R. TAYLOR
|
||
|
Nicholle
R. Taylor
|
Director
|
March
12, 2008
|
ARTESIAN
RESOURCES CORPORATION
FORM
10-K
ANNUAL REPORT
YEAR
ENDED DECEMBER 31, 2007
|
INDEX
TO EXHIBITS
|
|
|
Exhibit
Number
|
Description
|
|
3.1
|
Restated
Certificate of Incorporation of the Company effective April 28, 2004
incorporated
by
reference to Exhibit 3.1 filed with the Company’s Form 10-Q for the
quarterly period ended
March
31, 2004.
|
|
3.2
|
By-laws
of the Company effective March 26, 2004 incorporated by reference
to
Exhibit 3.3 filed with
the
Company’s Form 10-Q for the quarterly period ended March 31,
2004.
|
|
4.1
|
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.
|
|
4.2
|
Seventeenth
supplemental Indenture dated as of December 1, 2003 between
Artesian Water Company, Inc., subsidiary of the Company, and the
Wilmington Trust Company, as Trustee.
Incorporated
by reference to Exhibit 4.1 filed with the Company’s Annual Report on Form
10-K for the year ended December 31, 2003.
|
|
4.3
|
Sixteenth
supplemental Indenture dated as of January 31, 2003 between Artesian
Water
Company, Inc.,
subsidiary
of the Company, and the Wilmington Trust Company, as Trustee.
Incorporated
by reference to Exhibit 4.2 filed with the Company’s Annual Report on Form
10-K for the year ended December 31, 2003.
|
|
4.4
|
Fifteenth
supplemental Indenture dated as of December 1, 2000 between Artesian
Water
Company, Inc.,
subsidiary
of the Company, and the Wilmington Trust Company, as Trustee.
Incorporated
by reference to Exhibit 4.1 filed with the Company's Form 10-Q for
the
quarterly period ended March 31, 2002.
|
|
4.5
|
Thirteenth
and Fourteenth Indentures dated as of June 17, 1997 between Artesian
Water
Company,
Inc., subsidiary of the Company, and the Wilmington Trust Company,
as
Trustee.
Incorporated
by reference to Exhibit 4 filed with the Company's Form 10-Q for
the
quarterly period
ended
June 30, 1997.
|
|
4.6
|
Twelfth
Supplemental Indenture dated as of December 5, 1995 between Artesian
Water
Company,
Inc. subsidiary of the Company and Wilmington Trust Company, as
Trustee.
Incorporated
by reference to Exhibit 4(a) filed with the Company's Annual
Report
on
Form 10-K for the year ended December 31, 1995.
|
|
4.7
|
Eleventh
Supplemental Indenture dated as of February 16, 1993 between Artesian
Water
Company,
Inc., subsidiary of the Company and Principal Mutual Life Insurance
Company.
Incorporated
by reference to Exhibit 4(a) filed with the Company's Annual Report
on
Form
10-K
for the year ended December 31, 1992.
|
|
4.8
|
Tenth
Supplemental Indenture dated as of April 1, 1989 between Artesian
Water
Company,
Inc.,
subsidiary of the Company, and Wilmington Trust Company, as
Trustee. Incorporated
by
reference to Exhibit 4 (a) filed with the Company's Registration
Statement
on Form 10
filed
April 30, 1990 and as amended by Form 8-K filed on June 19,
1990.
|
|
10.1
|
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.
|
|
10.2
|
Artesian
Resources Corporation 2005 Equity Compensation
Plan. Incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
**
|
|
10.3
|
Amended
and Restated Artesian Resources Corporation 1992 Non-Qualified Stock
Option Plan, as amended. Incorporated by reference to Exhibit
10.4 filed with the Company’s Form 10-Q for the quarterly period ended
June 30, 2003.**
|
|
10.4
|
Artesian
Resources Corporation Cash and Stock Bonus Compensation Plan for
Officers
incorporated by reference to Exhibit 10(d) filed with the Company’s Annual
Report on Form 10-K for the year ended December 31,
1993.**
|
|
10.5
|
Artesian
Resources Corporation Incentive Stock Option Plan. Incorporated
by reference to Exhibit 10(e) filed with the Company's Annual Report
on
Form 10-K for the year ended December 31, 1995.**
|
|
10.6
|
Officer's
Medical Reimbursement Plan dated May 27, 1992. Incorporated by
reference to Exhibit 10.6 filed with the Company’s Annual Report on Form
10-K/A for the year ended December 31, 2001.**
|
|
21
|
Subsidiaries
of the Company as of December 31, 2007.
|
|
23.1
|
Consent
of BDO Seidman LLP
|
|
24.1
|
Power
of Attorney (included on signature page).
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
**
|
Compensation
plan or arrangement required to be filed or incorporated as an
exhibit.
|
80
ARTESIAN
RESOURCES CORPORATION
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
|
Additions
|
Balance
at Beginning Of Period
|
Charged
to Costs and Expenses
|
Charged
to Other Accounts
|
Deductions
|
Balance
at End of Period
|
|
Classification
|
|||||
|
For
the Year Ended December 31, 2007
Valuation
allowance for deferred tax assets
|
$121,000
|
---
|
---
|
$33,000
|
$88,000
|
|
For
the Year Ended December 31, 2006
Valuation
allowance for deferred tax assets
|
$323,000
|
---
|
---
|
$202,000
|
$121,000
|
|
For
the Year Ended December 31, 2005
Valuation
allowance for deferred tax assets
|
$482,000
|
---
|
---
|
$159,000
|
$323,000
|
81