ARTESIAN RESOURCES CORP - Annual Report: 2008 (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, 2008
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)
|
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
|
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.
|
o
|
Yes
|
þ
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No
|
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.
|
o
|
Yes
|
þ
|
No
|
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.
|
þ
|
Yes
|
o
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No
|
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)
|
o
|
Yes
|
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, 2008 was $115,025,000
and $11,300,000, 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, 2008. 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, 2008, which trade date was April 2, 2008.
As
of
March 6, 2009, 6,531,736 shares of Class A Non-Voting Common Stock and 881,452
shares of Class B Common Stock were outstanding.
General
Information
Our
principal subsidiary, Artesian Water Company, Inc., is the oldest and largest
investor-owned public water utility on the Delmarva Peninsula, and has been
providing superior water service since 1905. We distribute and sell
water, including water for public and private fire protection, to residential,
commercial, industrial, governmental, municipal and utility customers throughout
the State of Delaware within our 263 square mile franchise area, which has
doubled in the past 10 years. In addition, we design and build water
and wastewater infrastructure and provide contract water and wastewater
services. Our common stock is listed on NASDAQ Global Market and
trades under the symbol "ARTNA."
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,” Artesian Wastewater Maryland, Inc., or “Artesian
Wastewater Maryland,” each a regulated public utility, and three non-regulated
subsidiaries; Artesian Utility Development, Inc., or “Artesian Utility,”
Artesian Development Corporation, or “Artesian Development,” and Artesian
Consulting Engineers, Inc., or “Artesian Consulting,” doing business as Meridian
Architects and Engineers. 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.
Our
Market
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 873,000 at July 1, 2008. According to the US Census
Bureau, Delaware's population increased an estimated 11.4% from 2000 to 2008,
as
compared to the nationwide growth rate of approximately
8.0%. Substantial portions of Delaware, particularly outside of New
Castle County, are not served by a public water or wastewater system and
represent potential opportunities for Artesian Water and Artesian Wastewater
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
addition, we have expanded the provision of our services into
Maryland. Cecil County, Maryland, or 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% 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 for the sale
of water with the towns of Elkton and Chesapeake City,
Maryland. Construction of the transmission main to Elkton is complete
and we anticipate supplying water to the town in the second quarter of
2009. Additional approvals are necessary to construct the
transmission line to Chesapeake City. We have also signed agreements
with Cecil County to purchase specific water and wastewater facilities, which
are discussed below. The existing water and wastewater systems in the
agreements serve approximately 3,400 customers. Closing on the
agreements is expected to occur on or before June 30, 2009.
In
2008,
we added approximately 38 square miles of
franchised water service area and approximately 2 square miles of franchised
wastewater service 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. Artesian Water distributes and sells water to
residential, commercial, industrial, governmental, municipal and utility
customers throughout the State of Delaware. As of December 31, 2008,
we had approximately 75,800 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 2008 was approximately
$50.1 million, which was 89.2% of total operating revenues for the consolidated
group. Our water customer base is diversified among residential,
commercial, industrial, sale for re-sale and bulk sales
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 55% of our total
revenue, 22% is from commercial entities and the remaining 23% is from
industrial and other customers.
Artesian
Water
Maryland
Artesian
Water Maryland began operations in August 2007 following the acquisition
of
Carpenters Point Water Company. It serves a 141 home community in
Cecil County, near the Interstate 95 growth corridor between Philadelphia
and
Baltimore and has sufficient groundwater supply and elevated water storage
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 Maryland Public Service Commission, or
MDPSC. In addition, we are required to provide to the MDPSC any
plans, permits, maps and proof of ownership of easements for our
facilities.
On
August
1, 2008, Artesian Water Maryland completed its acquisition of all the
outstanding membership interests of Mountain Hill Water Company, LLC, or
Mountain Hill, from its sole member, Sunrise Holdings, L.P., or Sunrise,
for a
purchase price of approximately $7.1 million, of which $4.8 million was paid
in
cash and $2.3 million was paid through the granting of a note to Sunrise,
payable in four equal annual installments. The acquisition included a
0.3 million gallon per day, or “mgd,” water treatment facility, four wells with
a capacity of up to 500,000 gallons per day, a 500,000 gallon elevated storage
tank and approximately eight miles of main, all situated within the core
of
Cecil County’s designated growth corridor. The acquisition provides
Artesian Water Maryland the right to serve the entire 8,000 acres owned by
Sunrise or its associates. Mountain Hill serves three commercial
accounts in the Principio Business Park, located within Cecil County’s
designated growth corridor. Mountain Hill will also provide water
service to future customers in the Principio Business Park and will provide
water service to the proposed 660 home residential development of Charlestown
Crossing as well as the surrounding area. Expanded water service is
expected for the 172 residents of Whitaker Woods, a development located in
the
Mountain Hill service area. This expanded franchise area was approved
by the MDPSC in the Mountain Hill acquisition.
On
October 7, 2008, Artesian Water Maryland signed an agreement, or the Water
Asset
Purchase Agreement, to purchase from Cecil County all of Cecil County’s rights,
title and interest in and to the Meadowview, Pine Hills, Harbourview and
the
Route 7 water facilities and the associated parcels of real property, easement
rights and water transmission and distribution systems. Pursuant to
the Water Asset Purchase Agreement, Artesian Water Maryland will pay to Cecil
County a price equal to the net asset value of the purchased assets, which
was
approximately $2.2 million as of June 30, 2008, and assume certain liabilities
at closing. This sum may be paid by Artesian Water Maryland to Cecil
County in cash at closing or, upon mutual agreement, by a note payable to
Cecil
County. Closing on this transaction is expected to occur on or before
June 30, 2009, subject to the satisfaction of customary closing conditions,
including, among other matters, the completion of Artesian Resources’ due
diligence and the approval of the MDPSC. Under the Water Asset
Purchase Agreement, either party may terminate such agreement, subject to
certain exceptions, in the event of uncured breach by the other party, or
if the
closing has not occurred by December 31, 2009.
Artesian
Water
Pennsylvania
Artesian
Water Pennsylvania began operations upon receiving recognition as a regulated
public water utility by the Pennsylvania Public Utility Commission, or PAPUC,
in
2002. It provides water service to a residential community consisting
of 38 customers in Chester County. Artesian Water Pennsylvania filed
an application with the PAPUC to increase our service area in Pennsylvania,
which was approved and a related order was entered on February 4,
2005. This application involved specific developments, in which we
expect modest future growth. Home construction in these developments
has not progressed yet pending resolution of developer related township
approvals.
Artesian
Wastewater
Artesian
Wastewater owns wastewater collection and treatment infrastructure and provides
wastewater services to customers in Delaware as a regulated public wastewater
service company. Artesian Wastewater currently owns and operates five
wastewater treatment facilities, which are capable of treating approximately
750,000 gallons per day and can be expanded to treat approximately 1.6
mgd. Artesian Wastewater has been granted an exclusive franchise for
each of its existing wastewater systems by the Delaware Public Service
Commission, or DEPSC. In Delaware, a Certificate of Public
Convenience and Necessity, or “CPCN”, grants a wastewater company the exclusive
right to serve all existing and new customers within a designated
area. The DEPSC has the authority to regulate non-governmental
wastewater utilities having fifty or more customers in the aggregate and
such
authority includes granting and revoking CPCN’s, setting rates charged for
wastewater service, approval of the issuance of securities and other
matters.
According
to DEPSC rules, regulations and procedures, CPCNs are not transferable, and
a
wastewater utility must obtain the approval of the DEPSC 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 DEPSC 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 DEPSC 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
DEPSC on March 8, 2005, and began providing service to a planned 725 home
residential community in Sussex County, Delaware, or Sussex County, in July
2005. Artesian is now providing wastewater service to eight
communities in Sussex County. As of December 31, 2008, Artesian
Wastewater provided wastewater services to 632 residential
customers.
Artesian
Resources has completed the preliminary engineering and design work on a
regional wastewater treatment and disposal facility that will provide service
for up to 40,000 homes in the northern Sussex County area. This
facility is strategically situated to provide service to the growing population
in the Georgetown, Ellendale and Milton area, as well as to neighboring
municipal systems. This facility was granted conditional use approval
by Sussex County Council to serve the Elizabethtown subdivision of approximately
4,000 homes and 439,000 square feet of proposed commercial space, as well
as
seven additional projects comprising approximately 3,000 residential
units. The facility will also be capable of offering wastewater
services to local municipalities. Artesian Utility signed an
agreement on June 30, 2008 with Northern Sussex Regional Water Recycling
Complex, LLC, or NSRWRC, for the design, construction and operation of this
facility. Once constructed it will be operated by Artesian
Wastewater.
In
July
2008, Artesian Wastewater and the Town of Georgetown, or Georgetown, finalized
a
wastewater service agreement establishing a long term arrangement that will
meet
the future wastewater treatment and disposal needs in Georgetown’s growth and
annexation areas. Artesian Wastewater will provide up to 1 million
gallons per day of wastewater capacity for the town within the next 10
years.
Artesian
Wastewater
Maryland
Artesian
Wastewater Maryland was incorporated on June 3, 2008 to provide regulated
wastewater services in the state of Maryland. On October 7, 2008,
Artesian Wastewater Maryland signed an agreement, or the Meadowview Wastewater
Asset Purchase Agreement, to purchase from Cecil County the wastewater
facilities known as the Meadowview Wastewater Facility and the Highlands
Wastewater Facility and the associated parcels of real property, easement
rights
and wastewater collection systems with respect to each
facility. Pursuant to the Meadowview Wastewater Asset Purchase
Agreement, Artesian Wastewater Maryland will pay to Cecil County a price
equal
to the net asset value of the purchased assets, which was approximately $7.8
million as of June 30, 2008, and assume certain liabilities at
closing. The majority of the purchase price shall be paid by Artesian
Wastewater Maryland’s assumption of the principal amount due by Cecil County
with respect to a tax-exempt Cecil County Sanitary District Bond, Series
2004B,
or the Bond, as payable under the loan agreement dated October 12, 2004 by
and
between Maryland Water Quality Financing Administration and Cecil County,
or the
Bond Indebtedness. The debt associated with the Bond was
approximately $7.2 million. Artesian Wastewater Maryland will pay
down the Bond at such times and in such amounts as Cecil County is required
to
pay the same in accordance with the terms of the Bond. In the event
that the net asset value of the purchased assets as of the closing exceeds
the
Bond Indebtedness to be paid by Artesian Wastewater Maryland, then the positive
difference (if any) shall be paid by Artesian Wastewater Maryland to Cecil
County in cash at closing or, upon mutual agreement, by a note payable to
Cecil
County.
On
October 7, 2008, Artesian Wastewater Maryland signed an agreement, or the
Cherry
Hill Wastewater Asset Purchase Agreement, to purchase from Cecil County the
wastewater facilities known as the Cherry Hill Wastewater Facility and the
Harbourview Wastewater Facility and the associated parcels of real property,
easement rights and wastewater collection systems with respect to each
facility. Pursuant to the Cherry Hill Wastewater Asset Purchase
Agreement, Artesian Wastewater Maryland will pay to Cecil County a sum equal
to
the net asset value of the purchased assets, which was approximately $3.8
million as of June 30, 2008, and assume certain liabilities at closing, and
Cecil County shall immediately upon receipt of such payment, pay to its
creditors an amount sufficient to pay all indebtedness of Cecil County in
respect of the Cherry Hill and Harbourview Wastewater facilities, or the
Indebtedness. If the amount of the purchase price under the Cherry
Hill Wastewater Asset Purchase Agreement shall be less than the Indebtedness,
Cecil County shall pay out of its own funds any amount sufficient to pay
and
discharge in full the Indebtedness in excess of the purchase price;
alternatively, if the purchase price exceeds the amount necessary for Cecil
County to pay the Indebtedness, the portion of the purchase price that
represents such excess may not be required to be paid by Artesian Wastewater
Maryland at the closing, but may be financed through a note payable to Cecil
County.
Closings
on the transactions above are expected to occur on or before June 30, 2009,
subject to the satisfaction of customary closing conditions, including, among
other matters, the completion of Artesian Resources’ due diligence and the
approval of the MDPSC. Under each of the Asset Purchase Agreements,
either party may terminate such agreement, subject to certain exceptions,
in the
event of uncured breach by the other party, or if the closing has not occurred
by December 31, 2009. The existing water and wastewater systems
subject to the Asset Purchase Agreements serve approximately 3,400
customers.
Artesian
Utility
Artesian
Utility, one of our non-regulated subsidiaries, was formed in
1996. It 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 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.
We
currently operate a 2.5 million gallon per day wastewater facility for the
town
of Middletown, in Southern New Castle County, or Middletown, under a 20-year
contract that expires on February 1, 2021. Artesian Utility also
operates an approximately 250,000 gallon per day wastewater facility in
Middletown. In addition, we operate an additional wastewater facility
in Middletown in order to support the 2.5 million gallon per day wastewater
facility described above.
We
currently provide contract water and wastewater operation services to private,
municipal and governmental institutions in the southeastern part of Pennsylvania
as a result of our acquisition of TMH Environmental Services, Inc., or TMH,
in
May 2007.
On
June
30, 2008, Artesian Utility signed an agreement with Northern Sussex Regional
Water Recycling Complex, LLC, or NSRWRC, for the design, construction and
operation of the Northern Sussex Regional Water Recycling Complex, a wastewater
treatment facility to be located in Sussex County, Delaware, or the
Facility. NSRWRC was created for the purpose of developing the
treatment facility site, which once constructed, will be operated by Artesian
Wastewater. Under the terms of the agreement, Artesian Resources acts
as the guarantor of a $10 million construction loan. The loan, from a
financial institution to NSRWRC, is secured by the 75 acre parcel of land,
upon
which the Facility will be constructed, which was purchased by NSRWRC on
July 1,
2008 for approximately $5 million. The interest rate on the
construction loan is variable based on LIBOR Advantage Rate plus 225 basis
points. In the event of default by NSRWRC, Artesian Resources shall
pay NSRWRC's obligations due to the financial institution, or, on demand
of the
financial institution, immediately deposit all amounts due under the
obligation. As of December 31, 2008, approximately $6.7 million has
been drawn on the loan by NSRWRC, which is included in the Lines of Credit
on
our Consolidated Balance Sheet. For reimbursement of NSRWRC’s cost to
acquire the Facility Site, Artesian Utility has agreed to provide NSRWRC
with
ten annual $300,000 payments. In addition to the annual payments,
Artesian Utility will provide certain monthly payments to NSRWRC consisting
of a
portion of fees received from new customers once the Facility is successfully
constructed and operating.
Artesian
Development
Artesian
Development owns an approximately six-acre parcel of land zoned for office
buildings located immediately adjacent to our corporate headquarters and
2
nine-acre parcels of land located in Sussex County.
On
October 8, 2007, Artesian Development purchased approximately eighteen 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. In
January 2008 we received the approved Soils Investigation Report and in July
2008 we received the approved Preliminary Groundwater Impact Assessment and
Groundwater Mounding Analysis from the Delaware Department of Natural Resources
and Environmental Control, or “DNREC.” We are in the process of
completing designs for submittal to DNREC, along with supplying additional
information to increase the number of units approved to be served at the
site
from 400 units to approximately 1,600 units. We have current requests
for service from three local developments. We should complete the
permitting process by the second quarter of 2009.
Artesian
Consulting
Artesian
Consulting provides engineering services to developers for residential and
commercial development. Artesian Resources has routinely employed
engineering firms to design infrastructure for water and wastewater
systems. On June 6, 2008, Artesian Consulting acquired all the assets
of Meridian Architects and Engineers, or Meridian, for a purchase price of
$130,000. The acquisition includes the assignment of certain current
contract agreements to provide engineering services to developers and includes
services to be provided to Artesian Water. Meridian’s thirteen
employees, which include one architect, three licensed professional engineers,
two licensed surveyors and three computer-aided design professionals, have
been
offered and accepted continued employment with Artesian Consulting.
Meridian
is a leading provider of engineering services in Delaware, particularly in
Sussex County. This acquisition provides Artesian Resources with
enhanced design and engineering capabilities that we believe will significantly
decrease our reliance on outside engineering firms for similar
services. In addition, we believe that Meridian’s ability to offer
engineering services to design on-site water and wastewater systems for
developers, as well as offsite wastewater collection systems in Sussex County,
will provide additional revenues that are not weather sensitive, thus making
the
acquisition immediately accretive to Artesian Resources’
earnings. During 2008, Artesian Consulting contributed $332,000 to
our total revenue.
Additional
General
Information
Seasonality
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.
Competition
Our
business in our franchised service areas are substantially free from direct
competition with other public utilities, municipalities and other
entities. However, our ability to provide additional water and
wastewater services is subject to competition from other public utilities,
municipalities and other entities. Even though our regulated utilities have
been
granted an exclusive franchise for each of our existing community water and
wastewater systems, our ability to expand service areas can be affected by
the
DEPSC, the MDPSC or the PAPUC, awarding franchises to other regulated water
or
wastewater utilities with whom we compete for such franchises.
Regulation
A
Certificate of Public Convenience and Necessity, or “CPCN,” grants a water or
wastewater company the exclusive right to serve all existing and new customers
within a designated area. The applicable state Public Service
Commission has the authority to issue and revoke these CPCNs. In this
Form 10-K, we may refer to CPCNs as "franchises" or "service
territories."
For
a
water company, the applicable state Public Service Commission 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 applicable state Public Service
Commission 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 applicable
state
Public Service Commission to abandon a service territory.
For
a
wastewater company, the applicable state Public Service Commission has
jurisdiction over non-governmental wastewater utilities having fifty or more
customers in the aggregate. Wastewater regulations imposed by the
DEPSC and MDPSC include, rates charged for wastewater service, issuance of
securities and other matters. CPCNs are not transferable, and a
wastewater utility must obtain the approval of the DEPSC or MDPSC 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 DEPSC
or
MDPSC 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, along with that
of
Artesian Wastewater Maryland, can be affected by the DEPSC or MDPSC awarding
franchises to other regulated wastewater utilities with whom we compete for
such
franchises.
We
hold
CPCNs for approximately 263 square miles of exclusive water service territory
and approximately 17 square miles of wastewater service territory, most of
which
is in Delaware and some in Maryland. Our largest connected regional
water system, consisting of approximately 98.6 square miles and 67,000
customers, is located in northern Delaware. A significant portion of
our exclusive service territory in Delaware remains undeveloped, and if and
when
development occurs and there is population growth in these areas, along with
the
anticipated population growth in Maryland, we will increase our customer
base by
providing water service to the newly developed areas and new
customers.
Artesian
Water and Artesian Wastewater, as public utilities, are regulated by
the DEPSC 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.
Our
water
and wastewater utilities in Maryland are subject to regulation by the
MDPSC. If we are seeking new franchise areas, we must first seek
approval from the county government and this franchise area must be included
in
that county’s master water and sewer plan. The authority to exercise
these franchise areas must then be obtained from the MDPSC. In
Maryland, if utilities want to construct a new plant, approvals must be obtained
from the Maryland Department of the Environment, the county government and
the
MDPSC. Also, soil and erosion plans must be approved and easement
agreements with affected parties must be obtained. The MDPSC also
approves rates and charges for service, acquisitions, mergers, issuance of
securities and other matters.
We
currently derive our water service revenues from water distribution, upon
which
base rates are applied. In May 2006, Artesian Water filed a petition
with the DEPSC 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 were approved by the DEPSC.
On
December 19, 2006, the DEPSC 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.
On
April
22, 2008, Artesian Water filed a petition with the DEPSC to implement new
rates
to meet a requested increase in revenue of 28.8%, or approximately $14.2
million, on an annualized basis. On July, 11, 2008, pursuant to the DEPSC’s
minimum filing requirements, Artesian filed a supplemental filing with the
DEPSC
to update financial schedules for actual experience through March 31, 2008
and
to reflect additional changes affecting the requested increase. The
overall result was a reduction to the requested increase in revenue of 1.5%,
to
27.3% or approximately $13.5 million, on an annualized basis.
As
permitted by law, on June 21, 2008, we placed temporary rates into effect,
designed to generate an increase in annual operating revenue of approximately
5.0%, or $2.5 million on an annualized basis, until new rates are approved
by
the DEPSC. Also pursuant to law, on December 17, 2008, we placed
temporary rates into effect, designed to generate an additional increase
in
annual operating revenue of approximately 10% or $5.0 million on an annualized
basis, given that the rate case had not been concluded in a seven month
period. Evidentiary hearings were held on December 8-9, 2008 and a
final Commission decision is anticipated in the third quarter of 2009 in
reference to the implementation of our requested rate increase.
In
December 2008, the MDPSC approved an application for Artesian Water Maryland
to
construct a water system from the Delaware state line, interconnecting with
the
Artesian Water system, to the Town of Elkton, as the Town of Elkton desired
an
additional source of water supply.
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 customers
of the Delaware Electric Cooperative, 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 Holdings, Inc. in
April
of 2008. This new pricing is included in our most recent request for
rate relief filed with the DEPSC.
On
March
20, 2007, the DEPSC 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. The DEPSC has indicated that in the March 2009 proceedings they
intend to recommend that a utility provide water service to a new proposed
service territory within five years. These proposed rules have not
been adopted and they may not be adopted or could be modified prior to
adoption. As of December 31, 2008, no final decision had been made by
the DEPSC.
Environment
Our
water
and wastewater operations are subject to federal, state, and local requirements
relating to environmental protection. The United States Environmental
Protection Agency, or the EPA, the Delaware Department of Natural Resources
and
Environmental Control, or DNREC, and the Delaware Division of Public Health
or
the DPH, regulate the water quality of our treatment and distribution systems
in
Delaware, as do the EPA and the Maryland Department of the Environment, or
MDE,
with respect to our operations in Maryland. 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. 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.
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, arsenic removal, nitrate removal
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.
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, Delaware system. The purchased surface water is
blended with our groundwater supply for distribution to our
customers. Nearly 85% of the overall 7.5 billion gallons of water we
distributed in all of our Delaware systems during 2008 came from our
groundwater wells, while the remaining 15% came from interconnections with
other
utilities and municipalities. During 2008, our average rate of water
pumped was approximately 17.9 million gallons per day, or mgd, from our
groundwater wells and approximately 3.0 mgd was supplied from
interconnections. Our peak water supply capacity currently is
approximately 59.0 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
Delaware state laws and regulations, we are required to file applications
with
DNREC, for water allocation permits for each of our operating wells pumping
greater than 50,000 gallons per day. We have 119 operating and 56
observation and monitoring wells in our systems. At December 31,
2008, we had allocation permits for 82 wells, permit applications pending
for 13
wells, and 24 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, and each three years thereafter, that they had sufficient sources
of
self-supply to serve their respective systems. We filed our
certification of self-sufficiency of supply with the DEPSC on March 8,
2005. The review was completed on June 20, 2006, and the DEPSC
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 DEPSC a new certification of self-sufficiency
for
the period through 2009. On July 24, 2007, after completion of their
review the DEPSC accepted our certification of sufficient water supply through
2009. As required, we will file a new certification of
self-sufficiency with the DEPSC by June 30, 2009, for the period through
2012.
As
required by the Safe Drinking Water Act, the EPA has established maximum
contaminant levels for various substances found in drinking water to ensure
that
the water is safe for human consumption. These limits are known as
Maximum Contaminant Levels and Maximum Residual Disinfection
Levels. The EPA also regulates how often public water systems monitor
their water for contaminants and report the monitoring results to the individual
state agencies or the EPA. Generally, the larger the population
served by a water system, the more frequent the monitoring and reporting
requirements. The Safe Water Drinking Act applies to all 50
states.
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.
The
MDE
ensures that water quality and quantity at all public water systems in Maryland
meet the needs of the public and are in compliance with federal and state
regulations. The MDE also ensures that public drinking water systems
provide safe and adequate water to all current and future users in Maryland,
and
that appropriate usage, planning, and conservation policies are implemented
for
Maryland’s water resources. The MDE oversees the development of
Source Water Assessments for water supplies, and issues water appropriation
permits for public drinking water systems. In order to appropriate
water for municipal, commercial, industrial or other non-domestic uses, a
Water
Appropriation Permit must be obtained. Issuance of the permit
involves evaluating the needs of the user and the potential impact of the
withdrawal on neighboring users and the water source in order to maximize
beneficial use of the water of the State of Maryland. Permits for
large appropriations often involve conducting pump tests to measure adequacy
of
an aquifer and safe yield of a well, or reviewing stream flow records to
determine the adequacy of a surface water source. Regulations were
finalized in 1999 that require all new community water systems to have
sufficient technical, managerial and financial capacity to provide safe drinking
water to their consumers prior to being issued a Construction
Permit. Also, in 2007, capacity management guidance was
finalized. Capacity limiting factors can include, source capacity,
treatment capacity and appropriation permit quantity. As of December
31, 2008, we have 5 wells that pump groundwater to 2 separate water treatment
facilities located in Cecil County, Maryland.
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 aesthetically
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.
The
Clean
Water Act has established the foundation for wastewater discharge control
in the
United States. The Clean Water Act established a control program for
ensuring that communities have clean water by regulating the release of
contaminants into waterways. Permits that limit the amounts of
pollutants discharged are required of all wastewater dischargers under the
National Pollutant Discharge Elimination System permit program. The
Clean Water Act also requires that wastewater treatment plant discharges
meet a
minimum of secondary treatment. The secondary treatment process can
remove up to 90% of the organic matter in wastewater. Over 30% of the
nation’s wastewater treatment facilities produce cleaner discharges by providing
even greater levels of treatment. We operate environmentally friendly
wastewater systems that meet or exceed all requirements of federal, state
and
local standards.
Interconnections
and
Storage
Most
of
our New Castle County, Delaware water system is interconnected. In
the remainder of the State of Delaware, 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
19 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, 2008, 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. All of the interconnections provide Artesian Water the
ability to sell water to neighboring water utilities or
municipalities.
As
of
December 31, 2008, we were serving customers through approximately
1,112 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 5,226 hydrants installed throughout our service
territories.
We
have
29 storage tanks, most of which are elevated, providing total system storage
of
42 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 mgd. 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. In Cecil
County we have 2 elevated storage tanks capable of storing
approximately 0.6 million gallons.
Employees
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, 2008, we employed 238 full-time and 7 part-time
employees. Of these employees, 14 were officers and managers; 143
were employed as operations personnel, including engineers, technicians,
draftsman, maintenance and repair persons, meter readers and utility personnel;
and 64 were employed in the accounting, budgeting, information systems, human
resources, customer relations, public relations and conservation
departments. The remaining 11 employees were administrative
personnel. In addition, we hired 13 employees that accepted continued
employment with the Company after the Meridian Architects and Engineers
acquisition in June 2008, which includes one architect, three licensed
professional engineers, two licensed surveyors and three computer-aided design
professionals. We believe that our employee relations are
good.
Available
Information
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.
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 1-800-SEC-0330. The SEC maintains an Internet site,
www.sec.gov, that contains reports, proxy and information statements, and
other
information regarding issuers that file electronically with the
SEC.
We
are
exposed to a variety of risks and uncertainties. Most are general
risks and uncertainties applicable to all water utility
companies. Our financial position and results of operations may be
affected by factors that are either not currently known to us or which we
currently consider immaterial to our business. We describe below some
of the specific known risk factors that could negatively affect our business,
financial condition or results of operations. If one or more of these
or other risks or uncertainties materialize, actual results may vary materially
from our projections. All forward-looking statements made by us in
this Annual Report to the Securities and Exchange Commission on Form 10-K,
in
our Annual Report to Shareholders and in our subsequently filed quarterly
and
current reports to the Securities and Exchange Commission, as well as in
our
press releases and other public communications, are qualified by the risks
described below.
Our
operating revenue is
primarily from water sales. The rates that we charge our customers
are subject to the regulations of the Public Service Commissions in the states
in which we operate. Additionally, our business requires significant
capital expenditures on an annual basis and these expenditures are made for
additions and replacement of property. If a Public Service Commission
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
Public Service Commission, 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 DEPSC, MDPSC or PAPUC, 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 the
event that 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 and
government imposed water use restrictions 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 and wastewater utilities for the acquisition of new exclusive
service territories.
Water
and
wastewater utilities competitively pursue the right to exclusively serve
territories in Delaware and Maryland by entering into agreements with
landowners, developers or municipalities and, under current law, then applying
to the DEPSC or the MDPSC for a CPCN, which grants a water or wastewater
utility
the exclusive right to serve all existing and new customers of a water or
wastewater utility within a designated area. Typically, water and
wastewater 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 or wastewater
utility, generally it may not be suspended or terminated unless the DEPSC
or
MDPSC 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 and wastewater 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 or Maryland, our ability
to expand may be significantly impeded.
We
depend on the
availability of capital for expansion, construction and
maintenance. Weaknesses in capital and credit markets may limit our
access to capital.
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. Current economic conditions
and disruptions have caused substantial volatility in capital markets, including
credit markets and the banking industry and have increased the cost and
significantly reduced the availability of credit from financing sources,
which
may continue or worsen in the future. In the event our lines of
credit are not renewed or we are unable to refinance our first mortgage bonds
when due and the borrowings are called for payment, we will have to seek
alternative financing sources, although there can be no assurance that these
alternative financing sources will be available on terms acceptable to
us. 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.
General
economic conditions
may materially and adversely affect our financial condition and results of
operations.
A
general
economic downturn such as the one the U.S. economy is currently experiencing
may
lead to a number of impacts on our business that may materially and adversely
affect our financial condition and results of operations. Such
impacts may include a reduction in discretionary and recreational water use
by
our residential water customers, particularly during the summer months; a
decline in usage by industrial and commercial customers as a result of decreased
business activity and commerce in our customers’ businesses; an increased
incidence of customers’ inability, bankruptcy or delay in paying their bills
which may lead to higher bad debt expense and reduced cash flow; and a lower
natural customer growth rate may result as compared to what had been experienced
before the economic downturn due to a decline in new housing starts, and
a
possible slight decline in the number of active customers due to housing
vacancies or abandonments.
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 owns approximately 6 acres of land in New Castle County, Delaware
zoned for office development and approximately 18 acres of land in Sussex
County, Delaware for an office facility, water and wastewater treatment
facilities and elevated water storage. On June 30, 2008, Artesian
Utility signed an agreement with NSRWRC, under the terms of the agreement,
Artesian Resources acts as the guarantor of a $10 million construction
loan. The loan, from a financial institution to NSRWRC, is secured by
a 75 acre parcel of land purchased by NSRWRC on July 1, 2008 for approximately
$5 million.
Artesian
Water owns land, transmission and distribution mains, pump facilities, treatment
plants, storage tanks, meters, vehicles, land, easements and related equipment
and 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, 2008.
|
Utility
plant
comprises:
|
||||||||
|
$
In thousands
|
||||||||
|
Estimated
Useful Life
|
||||||||
|
(In
Years)
|
2008
|
|||||||
|
Utility
plant at original cost
|
||||||||
|
Utility
plant in service-Water
|
||||||||
|
Intangible
plant
|
--- | $ | 140 | |||||
|
Source
of supply plant
|
45-85 | 15,785 | ||||||
|
Pumping
and water treatment plant
|
35-62 | 53,205 | ||||||
|
Transmission
and distribution plant
|
||||||||
|
Mains
|
81 | 169,311 | ||||||
|
Services
|
39 | 28,016 | ||||||
|
Storage
tanks
|
76 | 22,214 | ||||||
|
Meters
|
26 | 12,508 | ||||||
|
Hydrants
|
60 | 9,018 | ||||||
|
General
plant
|
3-31 | 41,627 | ||||||
|
Utility
plant in service-Wastewater
|
||||||||
|
Treatment
and Disposal Plant
|
35-62 | 11,308 | ||||||
|
Collection
Mains and Lift Stations
|
81 | 4,059 | ||||||
|
General
plant
|
3-31 | 602 | ||||||
|
Property
held for future use
|
--- | 1,976 | ||||||
|
Construction
work in progress
|
--- | 7,082 | ||||||
| 376,851 | ||||||||
|
Less
– accumulated depreciation
|
58,608 | |||||||
| $ | 318,243 | |||||||
In
aggregate, we own land, rights-of-way and easements totaling approximately
722
acres. 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. As of December 31, 2008, no other utility
plant has been pledged as security for loans.
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 2008.
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 2,
2009, the last closing sale price as reported by the NASDAQ Global Market
was
$13.95 per share. On March 2, 2009, there were 829 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
|
|||||||||||
|
2007
|
|||||||||||||
|
First
Quarter
|
$ | 20.60 | $ | 18.71 | $ | 0.16 | |||||||
|
Second
Quarter
|
20.59 | 18.71 | 0.17 | ||||||||||
|
Third
Quarter
|
19.50 | 18.41 | 0.17 | ||||||||||
|
Fourth
Quarter
|
19.49 | 18.68 | 0.17 | ||||||||||
|
2008
|
|||||||||||||
|
First
Quarter
|
$ | 19.24 | $ | 18.05 | $ | 0.17 | |||||||
|
Second
Quarter
|
19.00 | 18.00 | 0.18 | ||||||||||
|
Third
Quarter
|
18.50 | 16.61 | 0.18 | ||||||||||
|
Fourth
Quarter
|
16.84 | 13.95 | 0.18 | ||||||||||
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 2, 2009, the last reported
trade of the Class B Stock on the OTC Bulletin Board was at a price of $18.75
per share on February 13, 2009. As of March 2, 2009, 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,
2008, 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, 2008
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
(a)
|
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))
|
|||||||||
|
Equity
compensation plans approved by security holders
|
530,921 | $ | 15.16 | 534,000 | ||||||||
|
Equity
compensation plans not approved by security holders
|
----- | ----- | ||||||||||
|
Total
|
530,921 | 534,000 | ||||||||||
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 2003
(assuming a $100 investment on December 31, 2003, and the reinvestment of
any
dividends):
|
INDEXED
RETURNS
|
||||||
|
Base
Period
|
Years
Ending December 31
|
|||||
|
Company
Name / Index
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
|
Artesian
Resources Corporation
|
100
|
103.96
|
112.67
|
115.81
|
115.21
|
100.81
|
|
S&P
500 Index
|
100
|
110.88
|
116.33
|
134.70
|
142.10
|
89.53
|
|
Peer
Group
|
100
|
115.46
|
151.57
|
151.76
|
146.03
|
140.96
|
The
Peer
Group includes American States Water Company, Aqua America, Inc., BIW LTD
(included through January 16, 2008. Acquired by S.C. Connecticut Regional
Water
Authority on January, 17, 2008) 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, 2008 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
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
STATEMENT
OF OPERATIONS DATA
|
||||||||||||||||||||
|
Operating
revenues
|
||||||||||||||||||||
|
Water
sales
|
$ | 50,101 | $ | 48,461 | $ | 44,272 | $ | 41,638 | $ | 37,985 | ||||||||||
|
Other
utility operating revenue
|
2,019 | 1,699 | 1,268 | 1,073 | 867 | |||||||||||||||
|
Non-utility
operating revenue
|
4,065 | 2,364 | 1,725 | 2,574 | 730 | |||||||||||||||
|
Sale
of land
|
--- | --- | 1,322 | --- | --- | |||||||||||||||
|
Total
operating revenues
|
$ | 56,185 | $ | 52,524 | $ | 48,587 | $ | 45,285 | $ | 39,582 | ||||||||||
|
Operating
expenses
|
||||||||||||||||||||
|
Operating
and maintenance
|
$ | 30,871 | $ | 28,594 | $ | 25,733 | $ | 24,543 | $ | 20,700 | ||||||||||
|
Depreciation
and amortization
|
5,782 | 5,162 | 4,610 | 4,365 | 4,046 | |||||||||||||||
|
State
and federal income taxes
|
4,427 | 4,134 | 3,887 | 3,347 | 2,892 | |||||||||||||||
|
Property
and other taxes
|
3,199 | 2,868 | 2,562 | 2,389 | 2,070 | |||||||||||||||
|
Total
operating expenses
|
$ | 44,279 | $ | 40,758 | $ | 36,792 | $ | 34,644 | $ | 29,708 | ||||||||||
|
Operating
income
|
$ | 11,906 | $ | 11,766 | $ | 11,795 | $ | 10,641 | $ | 9,874 | ||||||||||
|
Other
income, net
|
1,125 | 802 | 613 | 515 | 471 | |||||||||||||||
|
Total
income before interest charges
|
$ | 13,031 | $ | 12,568 | $ | 12,408 | $ | 11,156 | $ | 10,345 | ||||||||||
|
Interest
charges
|
$ | 6,613 | $ | 6,305 | $ | 6,337 | $ | 6,121 | $ | 5,943 | ||||||||||
|
Net
income
|
$ | 6,418 | $ | 6,263 | $ | 6,071 | $ | 5,035 | $ | 4,402 | ||||||||||
|
Dividends
on preferred stock
|
0 | 0 | 0 | 0 | 2 | |||||||||||||||
|
Net
income applicable to common stock
|
$ | 6,418 | $ | 6,263 | $ | 6,071 | $ | 5,035 | $ | 4,400 | ||||||||||
|
Net
income per share of common stock:
|
||||||||||||||||||||
|
Basic
|
$ | 0.87 | $ | 0.92 | $ | 1.00 | $ | 0.84 | $ | 0.75 | ||||||||||
|
Diluted
|
$ | 0.86 | $ | 0.90 | $ | 0.97 | $ | 0.81 | $ | 0.72 | ||||||||||
|
Avg.
shares of common stock outstanding
|
||||||||||||||||||||
|
Basic
|
7,353 | 6,787 | 6,055 | 5,984 | 5,904 | |||||||||||||||
|
Diluted
|
7,427 | 6,936 | 6,235 | 6,182 | 6,099 | |||||||||||||||
|
Cash
dividends per share of common stock
|
$ | 0.71 | $ | 0.66 | $ | 0.61 | $ | 0.58 | $ | 0.55 | ||||||||||
|
BALANCE
SHEET DATA
|
||||||||||||||||||||
|
Utility
plant, at original cost
|
||||||||||||||||||||
|
less
accumulated depreciation
|
$ | 318,243 | $ | 272,396 | $ | 253,182 | $ | 227,566 | $ | 212,152 | ||||||||||
|
Total
assets
|
$ | 348,706 | $ | 294,589 | $ | 269,360 | $ | 243,854 | $ | 227,380 | ||||||||||
|
Lines
of credit
|
$ | 20,286 | $ | 898 | $ | 7,906 | $ | 1,786 | $ | 9,213 | ||||||||||
|
Long-term
obligations and
|
||||||||||||||||||||
|
redeemable
preferred stock,
|
||||||||||||||||||||
|
including
current portions
|
$ | 109,071 | $ | 92,073 | $ | 92,383 | $ | 92,680 | $ | 83,438 | ||||||||||
|
Stockholders’
equity
|
$ | 87,794 | $ | 85,132 | $ | 61,800 | $ | 57,813 | $ | 54,943 | ||||||||||
|
Total
capitalization
|
$ | 195,349 | $ | 176,889 | $ | 153,873 | $ | 150,192 | $ | 137,299 | ||||||||||
|
OPERATING
DATA
|
||||||||||||||||||||
|
Average
water sales per customer
|
$ | 661 | $ | 645 | $ | 600 | $ | 575 | $ | 535 | ||||||||||
|
Water
pumped (millions of gallons)
|
7,526 | 7,755 | 7,608 | 7,468 | 7,166 | |||||||||||||||
|
Number
of metered customers
|
75,800 | 75,149 | 73,814 | 72,383 | 70,993 | |||||||||||||||
|
Miles
of water main
|
1,112 | 1,086 | 1,051 | 1,001 | 977 | |||||||||||||||
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. Gross water sales comprises 89.2% 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 2008 and 2007 by rate increases approved
by the
DEPSC.
Artesian
Water, Artesian Water Maryland and Artesian Water Pennsylvania provide
water
service to residential, commercial, industrial, governmental, municipal
and
utility customers. Our largest operating subsidiary, Artesian Water,
accounted for approximately 92% of our total operating revenues in 2008
and
serves approximately 29% of Delaware’s total population. In October
2008, Artesian Water Maryland signed an agreement with Cecil County to
purchase
four water facilities, with closing expected to occur by June 30,
2009. In December 2008, the MDPSC approved an application for
Artesian Water Maryland to construct a water system from the Delaware state
line, interconnecting with the Artesian Water system, to the Town of
Elkton. The Town of Elkton desired an additional source of water
supply.
Artesian
Wastewater, owns wastewater infrastructure and began providing wastewater
services in Delaware in July 2005. Artesian Wastewater Maryland was
incorporated on June 3, 2008 to provide regulated wastewater services in
the
state of Maryland. In October 2008, Artesian Wastewater Maryland
signed two asset purchase agreements with Cecil County to purchase four
wastewater facilities in Maryland. Closings on these transactions are
expected to occur on or before June 30, 2009. Our wastewater
customers are billed a flat monthly fee, which contributes to providing
a
revenue stream unaffected by weather.
Artesian
Utility provides contract water and wastewater operation services to 23
private,
municipal and governmental institutions in the southeastern part of
Pennsylvania. Artesian Utility currently operates a 2.5 million
gallon per day wastewater facility for Middletown under a 20-year contract
that
expires on February 1, 2021. Artesian Utility also operates an
approximately 250,000 gallon per day wastewater facility in
Middletown. In addition, we operate an additional wastewater facility
in Middletown in order to support the 2.5 million gallon per day wastewater
facility described above.
On
June
30, 2008, Artesian Utility signed an agreement with Northern Sussex Regional
Water Recycling Complex, LLC, or NSRWRC, for the design, construction and
operation of the Northern Sussex Regional Water Recycling Complex, a wastewater
treatment facility to be located in Sussex County, Delaware. NSRWRC
was created for the purpose of developing the treatment facility site,
which
once constructed, will be operated by Artesian Wastewater.
Artesian
Development owns an approximately six-acre parcel of land zoned for office
buildings located immediately adjacent to our corporate
headquarters. In 2007, Artesian Development purchased approximately
eighteen acres of land, in Sussex County, to construct an office facility,
a
water treatment plant and a wastewater facility.
Artesian
Consulting provides engineering services to developers for residential
and
commercial development. The acquisition of Meridian in June 2008
included the assignment of certain current contract agreements to provide
engineering services to developers and includes services to be provided
to
Artesian Water.
In
addition to services discussed above, Artesian Resources initiated a Water
Service Line Protection Plan, or WSLP Plan, in March 2005. The WSLP
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, 2008, approximately 13,100, or 20.5%, of our 64,000 eligible
water customers had signed up for the WSLP Plan. The WSLP Plan was
expanded in the second quarter of 2008 to include maintenance or repair
to
customers’ sewer lines. This plan, Sewer Service Line Protection
Plan, or SSLP Plan, covers all parts, material and labor required to repair
or
replace participants’ leaking or clogged sewer lines up to an annual
limit. As of December 31, 2008, approximately 4,800, or 10.5%, of our
46,000 eligible customers had signed up for the SSLP 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. As a result of the general economic downturn, we my not
be able to increase our contract operations and wastewater services at
the rate
we had previously expected. 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, and
each
three years thereafter, 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 DEPSC. The
review was completed on June 20, 2006, and the DEPSC 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 DEPSC a new certification of self-sufficiency
for
the period through 2009. After completion of their review, on July
24, 2007, the DEPSC accepted our certification of sufficient water supply
through 2009. As required, we will file a new certification of
self-sufficiency with the DEPSC by June 30, 2009, for the period through
2012.
Water
Industry
The
Federal Environmental Protection Agency’s September 2008 report states that the
United States’ water industry is comprised of approximately 52,000 community
water systems, 78% of which serve less than 3,300 customers. There
are currently 13 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 11.4% from 2000 to
2008, as
compared to the nationwide growth rate of approximately 8.0%. General
economic conditions, particularly in the housing market, resulted in a
much
lower rate of new customer additions than experienced in many
years.
Interest
rates for mortgages have fallen from 6.69% on average in December 2001
to 5.51%
through December 2008. 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 6.05% at the end of 2008.
Wastewater
Industry
The
Federal Environmental Protection Agency’s September 2004 report states that over
75% of the United States’ population is served by centralized wastewater
collection and treatment systems, the remaining 25% of the population uses
decentralized wastewater treatment systems, or on-site
systems. Approximately 16,000 municipal wastewater treatment
facilities are in operation in the United States. Approximately
701,000 people are served by publicly owned wastewater treatment facilities
in
Delaware, with an estimated growth to approximately
846,000. Approximately 41,000 people are served by publicly owned
wastewater treatment facilities in Cecil County, Maryland, with an estimated
growth to approximately 52,000.
The
Clean
Water Act has established the foundation for wastewater discharge control
in the
United States. The Clean Water Act established a control program for
ensuring that communities have clean water by regulating the release of
contaminants into waterways. Permits that limit the amounts of
pollutants discharged are required of all wastewater dischargers under
the
National Pollutant Discharge Elimination System permit program. The
Clean Water Act also requires that wastewater treatment plant discharges
meet a
minimum of secondary treatment. The secondary treatment process can
remove up to 90% of the organic matter in wastewater. Over 30% of the
wastewater treatment facilities produce cleaner discharges by providing
even
greater levels of treatment. We operate environmentally friendly
wastewater systems that meet or exceed all requirements of federal, state
and
local standards.
The
Federal Environmental Protection Agency’s September 2004 Clean Watersheds Needs
Survey report estimates that nationwide capital investment needs for wastewater
pollution control in the United States is $134.4 billion for wastewater
treatment and collection systems. The increase in overall national
needs is due to a combination of population growth, more protective water
quality standards, and aging infrastructure. Our capital plan for the
next five years includes projects for wastewater treatment plant improvements,
additions and acquisitions in both Delaware and Maryland. Capital
improvements are planned and budgeted to meet anticipated changes in regulations
and needs for increased capacity related to projected growth. The
DEPSC and MDPSC have generally recognized the operating and capital costs
associated with these improvements in setting wastewater rates for current
customers and capacity charges for new customers.
Strategic
Direction
Our
strategy is to significantly increase customer growth, revenues, earnings
and
dividends by expanding our water and wastewater services across the Delmarva
Peninsula. We remain focused on providing superior service to our
customers and continuously seeking ways to improve our efficiency and
performance. By providing both water and wastewater services, we are
positioned as the primary resource for developers and communities throughout
the
Delmarva Peninsula seeking to fill both needs simultaneously. We have a proven ability
to acquire and
integrate high growth, established utilities, through which we have captured
additional service territories that will serve as a base for future
revenue. We have completed four acquisitions during the past two
years, to include our integration of their operations, infrastructure,
technology and employees. We believe this experience presents a
strong platform for further expansion and that our success to date also
produces
positive relationships and credibility with regulators, municipalities,
developers and customers in both existing and prospective service
areas.
In
our
regulated water division, our strategy is to focus on 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
customers and educating customers on the wise use of water. Our
strategy includes focusing our efforts to expand in new regions added to
our
Delaware service territory over the last 10 years, where growth is strong
and
demand is increasing. In addition, we believe growth will be
developed in the Maryland counties on the Delmarva Peninsula. We plan
to expand our regulated water service area in the Cecil County designated
growth
corridor and to expand our business through the design, construction, operation
and management, as well as acquisition, of additional water
systems. The expansion of our exclusive franchise areas elsewhere in
Maryland and the award of additional contracts will similarly enhance our
operations within the state.
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,
have provided for nearly all of our customer growth in Artesian Water,
providing
approximately 99% of our growth in customers in 2008. We expect
continued growth in these regions. This shift in growth is primarily
the result of the build out of our service area in northern New Castle
County. In 2008, we increased our customer base by 1.0% and increased
our service territory by approximately 18.2 square miles. We have
also 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%
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. Artesian Water Maryland signed an
agreement in October 2008 with Cecil County for the purchase of specific
water
facilities, which is expected to close by June 30, 2009. Once
completed, this will add four water facilities to our service
area. We continue to increase our sources of supply to assure we have
adequate high quality water supply to meet our customer growth expectations
in
all of the states in which we provide water.
In
our
regulated wastewater division, we foresee significant growth opportunities
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, Maryland and the surrounding
areas. Artesian Wastewater completed an agreement with Georgetown,
Delaware in July 2008 to provide wastewater treatment and disposal services
for
Georgetown’s growth and annexation areas. Artesian Wastewater will
provide up to 1 mgd of wastewater capacity for the town within the next
10
years. Artesian Wastewater Maryland signed two agreements in October
2008 with Cecil County for the purchase of specific wastewater facilities,
which
are expected to close by June 30, 2009. Once completed, these
acquisitions will add four wastewater facilities to our service
area.
We
will
continue to seek acquisitions of water and wastewater contract operations
on the
Delmarva Peninsula. The purchase of water and wastewater operations
agreements assists in our expansion efforts in water and wastewater
activity. We will continue to expand our contract design and
construction services of water and wastewater facilities for developers,
municipalities and other utilities and will continue to actively pursue
water
and wastewater operation contracts with municipalities across the Delmarva
Peninsula.
In
our
non-regulated division, we are actively pursuing opportunities to expand
our
contract operations in southern Delaware. Artesian Development
purchased eighteen acres of land, also located in Sussex County, Delaware,
which
will allow for construction of an office facility, water treatment facility
and
wastewater treatment facility. Artesian Consulting continues to
provide engineering services to design on-site and off-site water and wastewater
systems for developers as demand increases. Also, with the expansion
efforts in our water and wastewater divisions, Artesian Consulting will
provide
increased design and engineering services.
Regulatory
Matters and Inflation
Our
water
and wastewater utility operations are subject to regulation by their respective
state regulatory commissions, which have broad administrative power and
authority to regulate rates charged for service, determine franchise areas
and
conditions of service, approve acquisitions, authorize the issuance of
securities and other matters. The profitability of our utility
operations is influenced to a great extent by the timeliness and adequacy
of
rate allowances we are granted by the respective regulatory commissions
or
authorities in the states in which we operate.
We
are
subject to regulation by the following state regulatory
commissions: The DEPSC regulates both Artesian Water and Artesian
Wastewater, Artesian Water Maryland and Artesian Wastewater Maryland are
subject
to the regulatory jurisdiction of the MDPSC, and Artesian Water Pennsylvania
is
subject to the regulatory jurisdiction of the PAPUC.
As
of
December 31, 2008, we had approximately 75,800 metered water customers
and 632
wastewater customers in Delaware, 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 a portion
of the
increase in our operating revenues. Water customers increased by
approximately 700, while wastewater customers increased by approximately
220.
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
DEPSC 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.
As
permitted under Delaware law, an interim increase in rates designed to
increase
annualized revenues by $2.5 million was placed in effect July 10, 2006
pending
conclusion of our filing with the DEPSC for rate relief. On December
19, 2006, the DEPSC approved a Settlement Agreement in this case. The
increase in annual revenue requirement under the Settlement Agreement of
$6
million was 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.
On
January 25, 2008, Artesian Water submitted a notice to the DEPSC of our
intent
to file an application for a rate increase. On April 22, 2008,
Artesian Water filed a petition with the DEPSC to implement new rates to
meet a
requested increase in revenue of 28.8%, or approximately $14.2 million,
on an
annualized basis. On July, 11, 2008, pursuant to the DEPSC’s minimum
filing requirements, Artesian filed a supplemental filing with the DEPSC
to
update financial schedules for actual experience through March 31, 2008
and to
reflect additional changes affecting the requested increase. The
overall result was a reduction to the requested increase in revenue of
1.5%, to
27.3% or approximately $13.5 million, on an annualized basis.
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. In December 2007, Artesian Water filed an
application with the DEPSC for approval to collect a 0.46% increase, effective
January 1, 2008, to recover the costs of eligible non-revenue producing
improvements made since the last rate increase in 2006. The DEPSC
approved the DSIC effective January 1, 2008 subject to audit at a later
date. During 2008, we earned approximately $99,000 in DSIC
revenue. On June 21, 2008, the Company discontinued the collection of
DSIC pursuant to Delaware law which requires the Company to discontinue
a DSIC
when new base rates are put into effect. We did not have DSIC in
effect during 2007.
As
permitted by law, on June 21, 2008, we placed temporary rates into effect,
designed to generate an increase in annual operating revenue of approximately
5.0%, or $2.5 million on an annualized basis, until new rates are approved
by
the DEPSC. Also pursuant to law, on December 17, 2008, we placed
temporary rates into effect, designed to generate an additional increase
in
annual operating revenue of approximately 10% or $5.0 million on an annualized
basis, given that the rate case had not been concluded in a seven month
period. Evidentiary hearings were held on December 8-9, 2008 and a
final Commission decision is anticipated in the third quarter of 2009 in
reference to the implementation of our requested rate increase.
In
2003,
legislation was enacted in Delaware requiring all water utilities serving
within
northern New Castle County, Delaware to certify by July 2006, and each
three
years thereafter, that they have sufficient sources of self-supply to serve
their respective systems. On June 30, 2006, Artesian Water filed our
certification related to the adequacy of our water supply through
2009. After completion of their review, on July 24, 2007, the DEPSC
accepted our certification of sufficient water supply. As required,
we will file a new certification of self-sufficiency with the DEPSC by
June 30,
2009, for the period through 2012.
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. 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 Holdings, Inc. in May of 2006 and another
in April
of 2008. This new pricing is included in our most recent request for
rate relief filed with the DEPSC.
On
April
10, 2006, the DEPSC 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. On April 8, 2008,
the DEPSC reopened this docket to assess the effectiveness of the 2006
rules and
regulations requiring water utilities to collect contributions in aid of
construction. We anticipate this proceeding to continue into
2009.
On
March
20, 2007, the DEPSC 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. The DEPSC has indicated that in the March 2009 proceedings they
intend to recommend that a utility provide water service to a new proposed
service territory within five years. These proposed rules have not
been adopted and they may not be adopted or could be modified prior to
adoption. As of December 31, 2008, no final decision had been made by
the DEPSC.
Our
water
and wastewater utilities in Maryland are subject to regulation by the
MDPSC. If we are seeking new franchise areas, we must first seek
approval from the county government and this franchise area must be included
in
that county’s master sewer and water plan. Final granting of these
franchise areas must then be obtained by the MDPSC. In Maryland, if
utilities want to construct a new plant, approvals must be obtained from
the
Maryland Department of the Environment, the county government and the
MDPSC. Also, soil and erosion plans must be approved and easement
agreements with affected parties must be obtained. The MDPSC also
approves rates and charges for service, acquisitions, mergers, issuance
of
securities and other matters.
In
December 2008, the MDPSC approved an application for Artesian Water Maryland
to
construct a water system from the Delaware state line,
interconnecting with the Artesian Water system, to the Town of
Elkton. The Town of Elkton desired an additional source of water
supply.
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. 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 DEPSC, MDPSC and 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 DEPSC, 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.
Goodwill
is recorded in accordance with Statement of Financial Accounting Standards
No.
142, “Goodwill and Other Intangible Assets,” (“SFAS 142”). We will
test goodwill annually for impairment. Goodwill is approximately
$370,000 as of the year ended December 31, 2008, which is entirely associated
with the acquisition of Mountain Hill in August 2008 and is currently being
amortized on a straight-line basis over a period of fifty years. The
purchase price of Mountain Hill included reimbursement of all carrying
costs
through the date of acquisition, which resulted in the recognition of
goodwill.
Results
of Operations
2008
Compared to 2007
Operating
Revenues
Revenues
totaled $56.2 million in 2008 and were 7.0% above revenues in 2007 of $52.5
million, which is partially due to an increase of $1.6 million, or 3.4%
in total
water sales revenue. The increase in water sales revenue in Artesian
Water reflects a 1.0% increase in the number of customers served, rate
increases
placed in effect in 2007 and temporary rate increases of 5% and 10% placed
into
effect on June 21, 2008 and December 17, 2008, as permitted under Delaware
law,
until new rates are approved by the DEPSC. We realized 89.2% of our
total revenue in 2008 from the sale of water. During 2007 we realized
92.2% of our total revenue from water sales. Non-utility revenue
totaled $4.1 million in 2008 as compared to $2.4 million in
2007. This increase is attributable to increased contract revenues in
Artesian Utility, primarily due to: increased soil evaluation and testing
services totaling $705,000; design services totaling $284,000 performed
for a
developer in Southern New Castle County, Delaware; additional water and
wastewater operations contract revenue in Pennsylvania of $269,000; and
design
and permitting services totaling $250,000 performed for a developer in
Sussex
County, Delaware. The increase in non-utility revenue also reflects
an increase of $196,000 and $179,000, respectively, in water and wastewater
Service Line Protection Plan revenue earned by Artesian
Resources. The Service Line Protection Plans provide coverage for all
material and labor required to repair or replace participants’ leaking water and
leaking or clogged wastewater service lines up to an annual limit.
|
Percentage
of Operating Revenues
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Water
Sales
|
||||||||||||
|
Residential
|
55.3 | 57.6 | 55.8 | |||||||||
|
Commercial
|
21.4 | 22.3 | 22.2 | |||||||||
|
Industrial
|
0.5 | 0.7 | 0.8 | |||||||||
|
Government
and Other
|
12.0 | 11.7 | 12.3 | |||||||||
|
Other
utility operating revenues
|
3.6 | 3.2 | 2.6 | |||||||||
|
Non-utility
operating revenues
|
7.2 | 4.5 | 3.6 | |||||||||
|
Sale
of land
|
0.0 | 0.0 | 2.7 | |||||||||
|
Total
|
100.0 | 100.0 | 100.0 | |||||||||
Residential
Residential
water service revenues in 2008 amounted to $31.0 million, an increase of
$0.8
million, or 3.0% over the $30.2 million recorded in 2007, primarily due
to rate
increases effective January 1, 2007 and July 24, 2007 and a temporary rate
increase of 5% placed in effect on June 21, 2008. The increase in
2008 follows an increase of $3.1 million, or 11.4%, in 2007. The
volume of water sold to residential customers decreased slightly to 3,935
million gallons in 2008 compared to 3,947 million gallons in
2007. The number of residential customers served increased by 690, or
1.0%, in 2008. However, per capita demand has declined for the year
ended December 31, 2008 in comparison to the year ended December 31, 2007,
thereby reducing the effect of the temporary rate increase.
Commercial
Water
service revenues from commercial customers in 2008 increased by 2.8%, from
$11.7
million in 2007 to $12.0 million in 2008, due to rate increases in 2007
and a
temporary rate increase in 2008. We sold 2,202 million gallons of
water to commercial customers in 2008, a marginal increase as compared
to 2,197
million gallons sold in 2007.
Industrial
Water
service revenues from industrial customers decreased by 30.0%, from $381,000
in
2007 to $266,000 in 2008. The volume of water sold to industrial
customers decreased by 36.0%, from 116 million gallons in 2007 to 74 million
gallons in 2008, primarily as a result of decreased usage by one industrial
customer.
Government
and Other
Government
and other water service revenues in 2008 increased by 10.0%, from $6.1
million
in 2007 to $6.7 million in 2008. This increase in revenue resulted
from increased consumption by irrigation customers, slightly offset by
a
reduction in government agency 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 18.8% in 2008, from $1.7 million in 2007 to $2.0 million in
2008. The increase, approximately $224,000, is primarily the result
of increased service charges derived from proactive policies for delinquent
paying customers, which resulted in increased charges for the restoration
of
shut off service.
Non-Utility
Operating Revenue
Non-utility
operating revenue, derived from non-regulated water and wastewater operations,
increased from $2.4 million in 2007 to $4.1 million in 2008. This
increase is attributable to increased contract revenues in Artesian Utility,
primarily due to: increased soil evaluation and testing services totaling
$705,000; design services totaling $284,000 performed for a developer in
Southern New Castle County, Delaware; additional water and wastewater operations
contract revenue in Pennsylvania of $269,000; and design and permitting
services
totaling $250,000 performed for a developer in Sussex County,
Delaware. This increase in non-utility revenue also reflects an
increase of $196,000 and $179,000, respectively, in water and wastewater
Service
Line Protection Plan revenue earned by Artesian Resources.
Operating
Expenses
Operating
expenses, excluding depreciation and taxes, increased approximately $2.6
million, or 8.3%, to $34.1 million in 2008. Payroll and benefits
increased $1.1 million due to increased staffing, pay increases and increased
medical insurance premiums. Purchased water expense increased
approximately $181,000, primarily due to a 1.1% increase in rates effective
July
2007 and a 7.8% increase in rates effective in July 2008. Non-utility
operating expenses increased approximately $957,000, primarily the result
of
more project activity in Artesian Utility as compared to the same period
in 2007
and the addition of Artesian Consulting, which contributed approximately
$221,000 to the increase.
|
Percentage
of Operating and Maintenance Expenses
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Payroll
and Associated Expenses
|
46.8 | 46.7 | 48.3 | |||||||||
|
Administrative
|
24.1 | 26.1 | 24.2 | |||||||||
|
Purchased
Water
|
9.6 | 9.7 | 12.3 | |||||||||
|
Repair
and Maintenance
|
7.2 | 7.6 | 6.3 | |||||||||
|
Water
Treatment
|
3.4 | 3.7 | 3.4 | |||||||||
|
Non-utility
Operating
|
8.9 | 6.2 | 5.5 | |||||||||
|
Total
|
100.0 | 100.0 | 100.0 | |||||||||
Depreciation
and amortization expense increased $620,000, or 12.0%, due to increases
in our
utility plant in service providing supply, treatment, storage and distribution
of water and the addition of the new office building during
2008. Income tax expense increased $293,000, or 7.1%, due to higher
taxable income in 2008. Our total effective income tax rate, or ETR,
for 2008 and 2007 was 40.6% and 39.8%, respectively.
Other
Income, Net
Our
Allowance for Funds Used During Construction, or AFUDC, increased $435,000,
or
134.2%, as a result of higher long-term construction activity subject to
AFUDC,
of which a large portion is related to the new office building
construction. Miscellaneous Income decreased $112,000, primarily due
to a decrease in the income earned on our temporary investments.
Interest
Charges
Interest
charges increased $308,000 or 4.9%, in 2008, primarily due to higher short
term
debt interest expense as a result of higher borrowing on our lines of credit
in
2008 compared to 2007. The average interest rate on our short term
credit balance decreased from 5.9% in 2007 to 3.4% in 2008, while our average
outstanding balance was $12.7 million in 2008, compared to $5.3 million
in
2007. In December 2008, we issued a First Mortgage Bond, Series S, in
the amount of $15 million at an interest rate of 6.73%.
Net
Income
For
the
year ended December 31, 2008, our net income applicable to common stock
increased $155,000, or 2.5%, compared to 2007. The increase in net
income was primarily due to increases in Artesian Water operating revenues
derived from the 2007 rate increases, a temporary rate increase of 5% in
June
2008, an additional temporary rate increase of 10% in December 2008, revenues
generated by our regulated wastewater operations and increased activity
in
contract operations of Artesian Utility.
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 was 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.
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
Water
service 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 was primarily a result of the
medical industry, which had a decrease of 34 million gallons sold.
Industrial
Water
service 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 the result of decreased usage by one industrial
customer.
Government
and Other
Government
and other water service 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 was primarily the result of a 107% increase in
wastewater customer service revenues, from $385,000 in 2006 to $796,000
in 2007,
which included 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
reflected higher contract revenues associated with wastewater treatment
projects
in southern Delaware. The increase was 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, included contract service revenue
in
Artesian Utility, a result of the TMH acquisition. The increase in
revenue also included an increase in Service Line Protection Plan revenue,
of
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 increased 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.
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%.
Liquidity
and Capital Resources
Overview
Some
primary sources of our liquidity for 2008 were $18.2 million provided by
cash
flow from operating activities, $15.0 million from a new bond issuance
in
December 2008 and $2.7 million in net contributions and advances from
developers. 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. In
2008, we implemented proactive policies for delinquent paying customers
in order
to improve our accounts receivable balance, which helped contribute to
our
liquidity by approximately $1.3 million. 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.
The
Company’s lines of credit have increased by $19.4 million, also contributing to
our liquidity for 2008, primarily as a result of investments made in utility
plant detailed below and the $6.7 million investment made in non-utility
property associated with a new regional wastewater facility in Sussex County,
Delaware. In addition, increases in accounts payable of $1.3 million and
increases in accrued expenses of $0.4 million are also associated with
the
Company’s investment in utility plant.
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 2009
will be approximately $31.9 million. Our total obligations related to
interest and principal payments on indebtedness, rental payments and water
service interconnection agreements for 2009 are anticipated to be approximately
$11.0 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. Current economic
conditions and disruptions have caused substantial volatility in capital
markets, including credit markets and the banking industry and have increased
the cost and significantly reduced the availability of credit from financing
sources. In the event our lines of credit are not renewed, we will
have to seek alternative financing sources, although there can be no assurance
that these alternative financing sources will be available on terms acceptable
to us. We believe that internally generated funds along with existing
credit facilities will be adequate to provide sufficient working capital
to
maintain normal operations and to meet our financing requirements.
Investment
in Plant and Systems
We
invested $45.1 million in capital expenditures during 2008 compared to
$26.7
million invested during the same period in 2007. Investment in
utility plant, excluding advances and contributions in aid of construction
received from real estate developers, was $42.4 million in 2008 compared
to
$20.9 million in 2007. Additionally, developers financed $2.7 million
for the installation of water mains and hydrants in 2008 compared to $6.2
million in 2007. The reduction in developer financing is primarily
the result of slower growth in new homes. 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 $13.4 million in new transmission and distribution
facilities in 2008, including refunds of advances for developer-financed
infrastructure. Of the $13.4 million invested, we invested $9.4
million in new infrastructure and $4.0 million in our rehabilitation program
for
transmission and distribution facilities, replacing aging or deteriorating
mains. Additionally, an investment of $7.7 million was made to
enhance or improve existing treatment facilities, rehabilitate pumping
equipment
and install new wells to increase supply capabilities. We also
invested $11.5 million towards the construction of a new office building
addition to our corporate headquarters in New Castle County in
2008. Another $7.0 million was invested into NSRWRC for land for the
regional wastewater treatment facility. In addition, on August 1,
2008 Artesian Water Maryland invested $4.8 million for the acquisition
of
Mountain Hill.
The
following chart summarizes our investment in plant and systems over the
past
three fiscal years.
|
In
thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Source
of supply
|
$ | 1,665 | $ | 3,173 | $ | 2,224 | ||||||
|
Treatment
and pumping
|
6,094 | 1,196 | 973 | |||||||||
|
Transmission
and distribution
|
13,381 | 8,055 | 12,998 | |||||||||
|
General
plant and equipment
|
13,980 | 6,373 | 2,581 | |||||||||
|
Developer
financed utility plant
|
3,178 | 6,182 | 9,291 | |||||||||
|
Wastewater
facilities
|
490 | 2,081 | 3,111 | |||||||||
|
NSRWRC
|
7,028 | --- | --- | |||||||||
|
Allowance
for Funds Used During Construction, AFUDC
|
(759 | ) | (324 | ) | (288 | ) | ||||||
|
Total
|
$ | 45,057 | $ | 26,736 | $ | 30,890 | ||||||
|
Mountain
Hill
|
4,772 | --- | --- | |||||||||
We
have
planned to invest approximately $31.9 million in utility plant in
2009. Developers are expected to finance an additional $8.3 million
in utility plant construction. Of the $31.9 million we expect to
invest in 2009, approximately $7.6 million will be invested in transmission
and
distribution facilities. Approximately $1.0 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. We also plan to invest $1.7 million in order to
provide an additional 21,000 feet of main to increase supply and offer
additional fire protection in the Middletown/Townsend Area of New Castle
County,
Delaware. The remaining $4.9 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. In addition, we plan to invest another $2.0 million 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. Also, included in the total investments
above is approximately $1.1 million we plan to invest for a booster station
and
4,000 feet of main for our Delaware water utility to provide water to our
Maryland water utility in order to supply water service to the Cecil County
growth corridor.
An
additional expenditure of approximately $1.8 million is anticipated to
complete
the renovation of our existing office building in New Castle County in
2009. An additional $2.9 million will be spent on wastewater projects
in Sussex County, Delaware. We plan to continue our investment in the
growth corridor in Cecil County, Maryland, investing $3.9 million to upgrade
the
Artesian Water Maryland water system following the purchase of water assets
from
Cecil County in 2009. Additionally, $11.7 million is planned to be
invested in Artesian Wastewater Maryland following the purchase of wastewater
assets from the Cecil County in 2009. Our projected capital
expenditures and other investments are subject to periodic review and revision
to reflect changes in economic conditions and other factors.
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 $31.9 million will be financed by our operations and external
sources, including a combination of capital investment as well as short-term
borrowings under our revolving credit agreements discussed
below. Developers are expected to finance, through contributions in
aid of construction, an additional $8.3 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 DEPSC.
At
December 31, 2008, Artesian Water and Artesian Water Maryland had two shared
lines of credit of $20 million each to meet temporary cash
requirements. These revolving credit facilities are
unsecured. As of December 31, 2008, we had $32.2 million of available
funds under these lines. The interest rate for borrowings under one
of these lines is the London Interbank Offering Rate, or “LIBOR,” plus 0.75% or,
at our discretion, the bank’s federal funds rate plus 1.00%. The
interest rate for borrowings under the other line of credit is the LIBOR
plus
1.00% or, at our discretion, the bank’s federal funds rate plus
1.00%. Each bank reviews all of their facilities annually for
renewal.
At
December 31, 2008, 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, 2008, Artesian
Wastewater had $4.2 million of available funds while Artesian Utility had
not
borrowed funds under its line of credit. The interest rate for borrowings
under
each of these lines is the LIBOR plus 1.75%. The bank reviews its
facilities annually for renewal.
Although
we believe we will continue to be able to renew these facilities, there
is no
assurance that they will be renewed, or what the terms of any such renewal
will
be. Current economic conditions and disruptions have caused
substantial volatility in capital markets, including credit markets and
the
banking industry. We believe that internally generated funds along
with existing credit facilities will be adequate to provide sufficient
working
capital to maintain normal operations and to meet our financing
requirements.
On
June
30, 2008, Artesian Utility signed an agreement with Northern Sussex Regional
Water Recycling Complex, LLC, or NSRWRC. Under the terms of the
agreement, Artesian Resources acts as the guarantor of NSRWRC’s $10 million
construction loan secured by land. As of December 31, 2008 NSRWRC had
$3.3 million of available funds under the construction loan. The
interest rate on this guaranteed debt is variable based on LIBOR Advantage
Rate
plus 225 basis points. In the event of a default by NSRWRC, Artesian
Resources shall pay the bank the amount due of the obligations or, on demand
of
the bank, immediately deposit all amounts due under the obligation.
|
Line
of Credit Commitments
|
Commitment
Due by Period
|
|||||||||||||||
|
In
thousands
|
Less
than
1
Year
|
1-3
Years
|
4-5
Years
|
Over
5 Years
|
||||||||||||
|
Lines
of Credit (in thousands)
|
$ | 20,286 | $ | ----- | $ | ----- | $ | ----- | ||||||||
On
August
1, 2008, Artesian Water Maryland executed a promissory note in the amount
of
approximately $2.3 million to Sunrise, that bears interest at a variable
interest rate based upon the London Interbank Offering Rate plus 150 basis
points. The Note is payable in four equal installments, commencing on
the first anniversary of the closing date. The Note is secured by a
first lien security interest in all of Mountain Hill’s assets in favor of
Sunrise and is guaranteed by Artesian Resources.
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. However,
due to current economic conditions and disruptions in the financial markets,
which have increased the cost and significantly reduced the availability
of debt
and equity financing, there is a higher than usual risk that we may be
unable to
raise additional funds on acceptable terms or at all. 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 ⅔% of total capitalization. Our debt to total capitalization,
including the short-term portion thereof, was 55.8% at December 31,
2008.
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, 2008, the interest rate was
0.1%.
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
Obligations
|
Payments
Due by Period
|
|||||||||||||||||||
|
In
thousands
|
Less
than
1 Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
Total
|
|||||||||||||||
|
First
Mortgage Bonds (Principal and Interest)
|
$ | 6,568 | $ | 13,135 | $ | 13,144 | $ | 185,413 | $ | 218,260 | ||||||||||
|
State
revolving fund loans
|
590 | 1,180 | 1,180 | 5,479 | 8,429 | |||||||||||||||
|
Note
Payable (Principal and Interest)
|
660 | 1,240 | 580 | --- | 2,480 | |||||||||||||||
|
Operating
leases
|
177 | 142 | 94 | 1,802 | 2,215 | |||||||||||||||
|
Unconditional
purchase obligations
|
3,050 | 6,100 | 6,109 | 24,412 | 39,671 | |||||||||||||||
|
Tank
painting contractual obligation
|
374 | 562 | --- | --- | 936 | |||||||||||||||
|
Total
contractual cash obligations
|
$ | 11,419 | $ | 22,360 | $ | 21,107 | $ | 217,106 | $ | 271,992 | ||||||||||
Long-term
debt obligations reflect the maturities of certain series of our first
mortgage
bonds, which we intend to refinance when due. Current economic
conditions and disruptions have caused substantial volatility in capital
markets, including credit markets and the banking industry and have increased
the cost and significantly reduced the availability of credit from financing
sources, which may continue or worsen in the future. In the event we
are unable to refinance our first mortgage bonds when due and the borrowings
are
called for payment, we will have to seek alternative financing sources,
although
there can be no assurance that these alternative financing sources will
be
available on terms acceptable to us. 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. 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.
On
December 1, 2008, Artesian Water Company and CoBank, ACB, or CoBank, entered
into a Bond Purchase Agreement, or the Agreement, relating to the issue
and sale
by the Company to CoBank of a $15 million principal amount First Mortgage
Bond,
or the Bond, Series S, due December 31, 2033, or the Maturity
Date. The Bond was issued pursuant to the Company’s Indenture of
Mortgage dated as of July 1, 1961, as amended and supplemented by supplemental
indentures, including the Twentieth Supplemental Indenture, dated as of
December
1, 2008 or the Supplemental Indenture, from the Company to Wilmington Trust
Company, as Trustee, or the Indenture. The Indenture is a first
mortgage lien against substantially all of the Company’s utility
plant. Proceeds of the sale of the Bond were used to repay short-term
indebtedness which was used to finance the expansion of the Company’s
headquarters building in New Castle County, Delaware. The issuance of
the Bond was approved by the Delaware Public Service Commission on November
21,
2008.
The
Bond
carries an annual interest rate of 6.73% through March 1, 2016, or the
Initial
Period. After March 16, 2016, the Company can request that the annual
interest rate be fixed by CoBank in its sole and absolute discretion for
a
period through the Maturity Date or for such shorter periods as mutually
agreed
by the Company and CoBank. Interest is payable on the first business
day of January, April, July and October in each year, beginning with the
first
business day of January 2009, until the Company’s obligation with respect to the
payment of such principal and interest shall be discharged. In
addition, the Bond is subject to redemption in a principal amount equal
to
$150,000 per calendar quarter, payable on the first business day of January,
April, July and October in each year, beginning with the first business
day of
January 2009, with all remaining principal due and payable on December
31,
2033. Overdue payments of such principal and interest shall bear
interest as provided in the Supplemental Indenture.
The
Agreement contains customary default provisions where the Bond will become
due
and payable no less than 30 days from notice received by CoBank, referred
to as
“Events of Redemption.” In the event that any Event of Redemption
should occur and be continuing, CoBank shall have the right to require
the
Company, and the Company shall be obligated, to redeem all bonds then held
by
CoBank. The bonds shall be redeemed at a price equal to the sum of
(i) the aggregate principal amount to be redeemed, (ii) the interest accrued
thereon through the date of redemption and (iii) a make-whole amount as
described in the Supplemental Indenture. The Bond was issued in a
private placement in reliance on exemptions from registration under the
Securities Act of 1933, pursuant to the terms of the Bond Purchase
Agreement.
Off-Balance
Sheet Arrangements
In
connection with the purchase of the treatment facility site, as of June
30,
2008, Artesian Utility agreed to commit $3.0 million, payable over 10 years,
to
NSRWRC. The net present value of this obligation as of December 31,
2008 is approximately $2.2 million.
IMPACT
OF RECENT ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board, 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 of assets and liabilities. 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
January 1, 2008, we adopted the provisions of SFAS 157, except as it applies
to
non-financial assets and non-financial liabilities for which the effective
date
has been delayed by one year as described below. The adoption of SFAS
157 did not have a material effect on our financial position or results
of
operations.
SFAS
157
defines fair value as the exchange price that would be received for an
asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction
between
market participants on the measurement date. SFAS 157 also
establishes a fair value hierarchy which requires an entity to maximize
the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be
used to measure fair value:
Level
1 -
Quoted prices in active markets for identical assets or
liabilities.
Level
2 -
Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or
other
inputs that are observable or can be corroborated by observable market
data for
substantially the full term of the assets or liabilities.
Level
3 -
Unobservable inputs that are supported by little or no market activity
and that
are significant to the fair value of the assets or liabilities.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which
replaces SFAS No. 141. SFAS No. 141(R) establishes
principles for recognizing assets and liabilities acquired in a business
combination, contractual contingencies and certain acquired contingencies
to be
measured at their fair values at the acquisition date. This statement
requires that acquisition-related costs and restructuring costs be recognized
separately from the business combination. SFAS No. 141(R) is
effective for fiscal years beginning January 1, 2009. The Company
expects to adopt this statement effective January 1, 2009 and does not
expect it
to have a material effect on the financial statements.
In
December 2007, the FASB issued SFAS No.160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51.” This
statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary, the amount of consolidated net income attributable
to
the parent and to the noncontrolling interest, changes in a parent’s ownership
interest and the valuation of retained noncontrolling equity investments
when a
subsidiary is deconsolidated. This statement requires expanded
disclosures in the consolidated financial statements that clearly identify
and
distinguish between the interest of the parent and the interest of the
noncontrolling owners. SFAS No. 160 is effective for fiscal years
beginning January 1, 2009. The adoption of this statement will not have
a
material impact on the Company’s results of operations or financial
position.
On
February 12, 2008, the FASB issued FSP No. SFAS 157-2, "Effective Date
of FASB
Statement No. 157," which delays the effective date of SFAS 157 for all
non-financial assets and non-financial 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
March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – Including an amendment of FASB
No.133.” This statement changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required
to provide enhanced disclosures about (a) how and why a company used derivative
instruments, (b) how derivative instruments and related hedge items are
accounted for under Statement 133 and its related interpretations and (c)
how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flow. This Statement is effective
for
financial statements issued for fiscal years and interim periods beginning
after
November 15, 2008. The Company expects to adopt this statement
effective January 1, 2009 and does not expect it to have a material effect
on
the financial statements.
In
May of
2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This statement identifies the sources of
accounting principles and the framework for selecting the principles to
be used
in the preparation of financial statements of nongovernmental entities
that are
presented in conformity with GAAP in the United States (the GAAP
hierarchy). This statement is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to
AU
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles”. The Company does not expect this
Statement will have a material impact 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 future
contributions 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 exposure to interest rate risk related to existing fixed rate,
long-term debt is due 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. We are also exposed to market risk associated
with
changes in commodity prices. Our risks associated with price increases
in
chemicals, electricity and other commodities are mitigated by our ability
to
recover our costs through rate increases to our customers. We have also
sought
to mitigate future significant electric price increases by signing a two
year
supply contract, at a fixed price.
Item
8. - Financial Statements and Supplementary
Data.
|
In
thousands
|
||||||||
|
ASSETS
|
December
31, 2008
|
December
31, 2007
|
||||||
|
Utility
plant, at original cost less accumulated depreciation
|
$ | 318,243 | $ | 272,396 | ||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
2,894 | 2,520 | ||||||
|
Accounts
receivable (less reserve for bad debts 2008 - $106;
2007-$283)
|
4,224 | 5,499 | ||||||
|
Unbilled
operating revenues
|
3,597 | 3,198 | ||||||
|
Materials
and supplies (at cost on FIFO basis)
|
1,147 | 1,192 | ||||||
|
Prepaid
property taxes
|
1,119 | 1,058 | ||||||
|
Prepaid
expenses and other
|
491 | 857 | ||||||
|
Total
current assets
|
13,472 | 14,324 | ||||||
|
Other
assets
|
||||||||
|
Non-utility
property (less accumulated depreciation 2008-$179;
2007-$177)
|
9,436 | 2,032 | ||||||
|
Other
deferred assets
|
4,992 | 4,156 | ||||||
|
Total
other assets
|
14,428 | 6,188 | ||||||
|
Regulatory
assets, net
|
2,563 | 1,681 | ||||||
| $ | 348,706 | $ | 294,589 | |||||
|
LIABILITIES
AND STOCKHOLDERS'
EQUITY
|
||||||||
|
Stockholders'
equity
|
||||||||
|
Common
stock
|
$ | 7,401 | $ | 7,300 | ||||
|
Preferred
stock
|
--- | --- | ||||||
|
Additional
paid-in capital
|
66,699 | 65,363 | ||||||
|
Retained
earnings
|
13,694 | 12,469 | ||||||
|
Total
stockholders' equity
|
87,794 | 85,132 | ||||||
|
Long-term
debt, net of current portion
|
107,555 | 91,757 | ||||||
| 195,349 | 176,889 | |||||||
|
Current
liabilities
|
||||||||
|
Lines
of credit
|
20,286 | 898 | ||||||
|
Current
portion of long-term debt
|
1,516 | 316 | ||||||
|
Accounts
payable
|
4,556 | 3,225 | ||||||
|
Accrued
expenses
|
2,868 | 2,483 | ||||||
|
Overdraft
payable
|
784 | 1,672 | ||||||
|
Deferred
income taxes
|
363 | 301 | ||||||
|
Interest
accrued
|
1,251 | 326 | ||||||
|
Customer
deposits
|
556 | 746 | ||||||
|
Other
|
2,197 | 1,877 | ||||||
|
Total
current liabilities
|
34,377 | 11,844 | ||||||
|
Commitments
and contingencies (Note 10)
|
||||||||
|
Deferred
credits and other liabilities
|
||||||||
|
Net
advances for construction
|
21,089 | 23,840 | ||||||
|
Postretirement
benefit obligation
|
812 | 868 | ||||||
|
Deferred
investment tax credits
|
715 | 740 | ||||||
|
Deferred
income taxes
|
29,523 | 25,170 | ||||||
|
Total
deferred credits and other liabilities
|
52,139 | 50,618 | ||||||
|
Net
contributions in aid of construction
|
66,841 | 55,238 | ||||||
| $ | 348,706 | $ | 294,589 | |||||
The
notes are an integral part of
the consolidated financial statements.
|
In
thousands, except per share amounts
|
||||||||||||
|
For
the Year Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Operating
revenues
|
||||||||||||
|
Water
sales
|
$ | 50,101 | $ | 48,461 | $ | 44,272 | ||||||
|
Other
utility operating revenue
|
2,019 | 1,699 | 1,268 | |||||||||
|
Non-utility
operating revenue
|
4,065 | 2,364 | 1,725 | |||||||||
|
Sale
of land
|
--- | --- | 1,322 | |||||||||
| 56,185 | 52,524 | 48,587 | ||||||||||
|
Operating
expenses
|
||||||||||||
|
Utility
operating expenses
|
28,154 | 26,834 | 24,314 | |||||||||
|
Non-utility
operating expenses
|
2,717 | 1,760 | 1,419 | |||||||||
|
Depreciation
and amortization
|
5,782 | 5,162 | 4,610 | |||||||||
|
Taxes
|
||||||||||||
|
State
and federal income
|
||||||||||||
|
Current
|
74 | 608 | 162 | |||||||||
|
Deferred
|
4,353 | 3,526 | 3,725 | |||||||||
|
Property
and other
|
3,199 | 2,868 | 2,562 | |||||||||
| 44,279 | 40,758 | 36,792 | ||||||||||
|
Operating
income
|
11,906 | 11,766 | 11,795 | |||||||||
|
Other
income, net
|
||||||||||||
|
Allowance
for funds used during construction
|
759 | 324 | 288 | |||||||||
|
Miscellaneous
|
366 | 478 | 325 | |||||||||
| 1,125 | 802 | 613 | ||||||||||
|
Income
before interest charges
|
13,031 | 12,568 | 12,408 | |||||||||
|
Interest
charges
|
6,613 | 6,305 | 6,337 | |||||||||
|
Net
income
|
6,418 | 6,263 | 6,071 | |||||||||
|
Net
income applicable to common stock
|
$ | 6,418 | $ | 6,263 | $ | 6,071 | ||||||
|
Income
per common share:
|
||||||||||||
|
Basic
|
$ | 0.87 | $ | 0.92 | $ | 1.00 | ||||||
|
Diluted
|
$ | 0.86 | $ | 0.90 | $ | 0.97 | ||||||
|
Weighted
average common shares outstanding:
|
||||||||||||
|
Basic
|
7,353 | 6,787 | 6,055 | |||||||||
|
Diluted
|
7,427 | 6,936 | 6,235 | |||||||||
|
Cash
dividends per share of common stock
|
$ | 0.71 | $ | 0.67 | $ | 0.61 | ||||||
The
notes are an integral part of the consolidated financial
statements.
|
In
thousands
|
For
the Year Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income
|
$ | 6,418 | $ | 6,263 | $ | 6,071 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
5,782 | 5,162 | 4,609 | |||||||||
|
Deferred
income taxes, net
|
4,390 | 3,657 | 3,711 | |||||||||
|
Stock
compensation
|
122 | 196 | 322 | |||||||||
|
Allowance
for funds used during construction
|
(759 | ) | (324 | ) | (288 | ) | ||||||
|
Sale
of land
|
--- | --- | (1,322 | ) | ||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Accounts
receivable, net of reserve for bad debts
|
1,275 | (2,083 | ) | 865 | ||||||||
|
Unbilled
operating revenues
|
(399 | ) | (543 | ) | (281 | ) | ||||||
|
Materials
and supplies
|
45 | (138 | ) | (46 | ) | |||||||
|
Income
tax receivable
|
--- | --- | --- | |||||||||
|
Prepaid
property taxes
|
(61 | ) | (134 | ) | (73 | ) | ||||||
|
Prepaid
expenses and other
|
366 | (101 | ) | (221 | ) | |||||||
|
Other
deferred assets
|
(836 | ) | (495 | ) | (78 | ) | ||||||
|
Regulatory
assets
|
(882 | ) | 200 | (7 | ) | |||||||
|
Accounts
payable
|
1,331 | 435 | --- | |||||||||
|
Accrued
expenses
|
385 | (804 | ) | 1,339 | ||||||||
|
State
and federal income taxes
|
--- | --- | (113 | ) | ||||||||
|
Interest
accrued
|
925 | (34 | ) | 7 | ||||||||
|
Customer
deposits and other, net
|
129 | 428 | (1,602 | ) | ||||||||
|
Postretirement
benefit obligation
|
(56 | ) | (59 | ) | (170 | ) | ||||||
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
18,175 | 11,626 | 12,723 | |||||||||
|
CASH
FLOWS USED IN INVESTING ACTIVITIES
|
||||||||||||
|
Capital
expenditures (net of AFUDC)
|
(45,057 | ) | (26,736 | ) | (30,890 | ) | ||||||
|
Investments
in acquisitions
|
(4,772 | ) | --- | --- | ||||||||
|
Proceeds
from sale of assets
|
62 | 27 | 33 | |||||||||
|
Proceeds
from sale of land
|
--- | --- | 1,330 | |||||||||
|
Investments
from unconsolidated affiliates
|
--- | 2 | 37 | |||||||||
|
NET
CASH USED IN INVESTING ACTIVITIES
|
(49,767 | ) | (26,707 | ) | (29,490 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Net
borrowings (repayments) under lines of credit agreements
|
19,388 | (7,008 | ) | 6,120 | ||||||||
|
(Decrease)
increase in overdraft payable
|
(888 | ) | (318 | ) | 573 | |||||||
|
Net
advances and contributions in aid of construction
|
2,667 | 6,839 | 12,334 | |||||||||
|
Increase
in deferred debt issuance costs
|
1 | 110 | 41 | |||||||||
|
Net
proceeds from issuance of common stock
|
1,314 | 21,329 | 1,766 | |||||||||
|
Dividends
|
(5,193 | ) | (4,455 | ) | (3,714 | ) | ||||||
|
Issuance
of long-term debt
|
15,000 | --- | --- | |||||||||
|
Principal
repayments of long-term debt
|
(323 | ) | (310 | ) | (298 | ) | ||||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
31,966 | 16,187 | 16,822 | |||||||||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
374 | 1,106 | 55 | |||||||||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
2,520 | 1,414 | 1,359 | |||||||||
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
$ | 2,894 | $ | 2,520 | $ | 1,414 | ||||||
|
Supplemental
Disclosures of Cash Flow Information:
|
||||||||||||
|
Utility
plant received as construction advances and contributions
|
$ | 7,101 | $ | --- | $ | --- | ||||||
|
Artesian
Water Maryland, Inc. acquired all the outstanding
|
||||||||||||
|
membership
interests of Mountain Hill Water Company, LLC
|
||||||||||||
|
for
approximately $7.1 million. In conjunction with
the
|
||||||||||||
|
acquisition,
liabilities were assumed as follows:
|
||||||||||||
|
Fair
value of assets acquired
|
$ | 7,093 | $ | --- | $ | --- | ||||||
|
Cash
paid for membership interests
|
(4,772 | ) | --- | --- | ||||||||
|
Liabilities
assumed
|
$ | 2,321 | $ | --- | $ | --- | ||||||
|
Supplemental
Disclosures of Cash Flow Information:
|
||||||||||||
|
Interest
paid
|
$ | 5,576 | $ | 6,230 | $ | 6,228 | ||||||
|
Income
taxes paid
|
$ | --- | $ | 725 | $ | 261 | ||||||
The
notes are an integral part of the consolidated financial
statements.
In
thousands
|
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)
|
||||||||||||||||||||||
|
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 | ||||||||||||||||||||
|
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 | ||||||||||||||||
|
Net
income
|
--- | --- | --- | --- | --- | 6,418 | 6,418 | |||||||||||||||||||||
|
Cash
dividends declared
|
||||||||||||||||||||||||||||
|
Common
stock
|
--- | --- | --- | --- | --- | (5,193 | ) | (5,193 | ) | |||||||||||||||||||
|
Issuance
of common stock
|
||||||||||||||||||||||||||||
|
Dividend
reinvestment plan
|
18 | --- | 18 | --- | 299 | --- | 317 | |||||||||||||||||||||
|
Employee
stock options and awards
|
60 | --- | 60 | --- | 674 | --- | 734 | |||||||||||||||||||||
|
Employee
Retirement Plan(3)
|
23 | --- | 23 | --- | 363 | --- | 386 | |||||||||||||||||||||
|
Balance
as of December 31, 2008
|
6,519 | 882 | $ | 6,519 | $ | 882 | $ | 66,699 | $ | 13,694 | $ | 87,794 | ||||||||||||||||
|
(1)
|
At
December 31, 2008, 2007, and 2006, Class A Non-Voting Common
Stock had
15,000,000 shares authorized. For the same periods, shares
issued were 6,543,606, 6,442,805 and 5,228,284,
respectively.
|
|
(2)
|
At
December 31, 2008, 2007, and 2006, 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.
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
Corporation, or Artesian Resources, and its wholly owned subsidiaries,
including
its principal operating company, Artesian Water Company, Inc., or Artesian
Water. In the opinion of the Company, the accompanying consolidated
financial statements reflect all normal recurring adjustments necessary
to
present fairly the Company's balance sheet position as of December 31,
2008 and
the results of operations for the twelve month periods ended December 31,
2008,
2007 and 2006 and cash flows for the twelve month periods ended December
31,
2008, 2007 and 2006. In addition, in accordance with Financial
Accounting Standards Board Interpretation No. 46(R), “Consolidation of Variable
Interest Entities, an interpretation of ARB No, 51,” or FIN 46(R), the Company
consolidates variable interest entities for which it is deemed to be the
primary
beneficiary. All inter-company transactions and balances have been
eliminated in consolidation (refer to Note 11 “Northern Sussex Regional Water
Recycling Complex, LLC”).
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.
Utility
Subsidiary Accounting
The
accounting records of Artesian Water and Artesian Wastewater Management,
Inc, or
Artesian Wastewater, are maintained in accordance with the uniform system
of
accounts as prescribed by the Delaware Public Service Commission or the
DEPSC. The accounting records of Artesian Water Pennsylvania, Inc.,
or 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,
Inc., or Artesian Water Maryland, and Artesian Wastewater Maryland, Inc.,
or
Artesian Wastewater Maryland, are maintained in accordance with the uniform
system of accounts as prescribed by the Maryland Public Service Commission
or
the MDPSC. All five 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 DEPSC, 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 DEPSC. The rate used to capitalize AFUDC in 2008,
2007, and 2006 was 7.9%, 8.1%, and 7.8%, respectively.
|
Utility
plant
comprises:
|
||||||||||||
|
In
thousands
|
December
31,
|
|||||||||||
|
Estimated
Useful Life In Years
|
2008
|
2007
|
||||||||||
|
Utility
plant at original cost
|
||||||||||||
|
Utility
plant in service-Water
|
||||||||||||
|
Intangible
plant
|
--- | $ | 140 | $ | 140 | |||||||
|
Source
of supply plant
|
45-85 | 15,785 | 15,231 | |||||||||
|
Pumping
and water treatment plant
|
35-62 | 53,205 | 46,808 | |||||||||
|
Transmission
and distribution plant
|
||||||||||||
|
Mains
|
81 | 169,311 | 155,927 | |||||||||
|
Services
|
39 | 28,016 | 26,162 | |||||||||
|
Storage
tanks
|
76 | 22,214 | 17,376 | |||||||||
|
Meters
|
26 | 12,508 | 10,728 | |||||||||
|
Hydrants
|
60 | 9,018 | 8,359 | |||||||||
|
General
plant
|
3-31 | 41,627 | 26,727 | |||||||||
|
Utility
plant in service-Wastewater
|
||||||||||||
|
Treatment
and Disposal Plant
|
35-62 | 11,308 | 7,563 | |||||||||
|
Collection
Mains & Lift Stations
|
81 | 4,059 | 83 | |||||||||
|
General
plant
|
3-31 | 602 | 244 | |||||||||
|
Property
held for future use
|
--- | 1,976 | 5,618 | |||||||||
|
Construction
work in progress
|
--- | 7,082 | 4,325 | |||||||||
| 376,851 | 325,291 | |||||||||||
|
Less
– accumulated depreciation
|
58,608 | 52,895 | ||||||||||
| $ | 318,243 | $ | 272,396 | |||||||||
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 2.24%,
2.12% and 2.12% for 2008, 2007 and 2006, respectively. In a rate
order issued by the DEPSC, the Company was directed effective January 1,
1998 to
begin using revised depreciation rates for utility plant. In rate
orders issued by the DEPSC, 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
In
accordance with SFAS No. 71, certain expenses are recoverable through rates
charged to our customers, without a return on investment, and are deferred
and
amortized during future periods using various methods as permitted by the
DEPSC,
the MDPSC, and the PAPUC. Expenses related to rate proceedings and
applications to increase rates are amortized on a straight-line basis over
a
period of two years. The postretirement benefit obligation (see Note
9 “Employee Benefit Plans”), which is being amortized over twenty years, is
adjusted for the difference between the net periodic postretirement benefit
costs and the cash payments. The deferred income taxes will be
amortized over future years as the tax effects of temporary differences
previously flowed through to the customers reverse. Goodwill is the
result of the Mountain Hill acquisition, as described in Note 13, and is
currently being amortized on a straight-line basis over a period of fifty
years
in accordance with SFAS No. 71. SFAS No.71 stipulates generally
accepted accounting principles for companies whose rates are established
by or
are subject to approval by a third-party regulatory agency. Deferred
acquisition costs are the result of due diligence costs related to the
proposed
purchase agreements for water and wastewater facilities in Cecil County,
Maryland, which are expected to close on or before June 30, 2009.
Regulatory
assets at December 31, net of amortization, comprise:
|
In
thousands
|
2008
|
2007
|
||||||
|
Postretirement
benefit obligation
|
$ | 924 | $ | 968 | ||||
|
Deferred
income taxes recoverable in future rates
|
552 | 567 | ||||||
|
Goodwill
|
370 | --- | ||||||
|
Deferred
acquisition costs
|
341 | --- | ||||||
|
Expense
of rate proceedings
|
376 | 141 | ||||||
|
Other
|
--- | 5 | ||||||
| $ | 2,563 | $ | 1,681 | |||||
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, which range
from
10 to 30 years. The investment in Co-Bank, which is a cooperative
bank, is related to certain outstanding First Mortgage Bonds and is a required
investment in the bank based on the underlying long term debt
agreements. Other deferred assets increased by approximately $0.6
million, primarily in relation to the Mountain Hill acquisition.
Other
deferred assets at December 31, net of amortization, comprise:
|
In
thousands
|
2008
|
2007
|
||||||
|
Debt
issuance cost
|
$ | 2,471 | $ | 2,472 | ||||
|
Investment
in Co-Bank
|
1,660 | 1,411 | ||||||
|
Other
|
861 | 273 | ||||||
| $ | 4,992 | $ | 4,156 | |||||
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 treatment
facilities and collection systems, or cash to reimburse our water and wastewater
divisions 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 Company adopted FASB Interpretation No. 48 “Accounting
for Uncertainty in Income Taxes”, an interpretation of FASB Statement No. 109
“Accounting for Income Taxes” effective January 1, 2007 and after analyzing our
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.
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, referred to as the 2005 Equity Compensation Plan. Since May
25, 2005, no additional grants have been made under the Company’s other
stock-based compensation plans that were previously available. On
January 1, 2006 the Company adopted Statement of Financial Accounting Standards
No. 123R “Share-Based Payment.” Compensation costs in the amount of
$127,000, $215,000 and $499,000 for awards and options granted in 2008,
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. Of the
$127,000 in 2008, $8,000 was associated with stock awards, $5,000 was associated
cash payments for taxes, and $114,000 was the amount amortized for stock
options
awarded in 2008 and 2007.
There
was
no stock 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 2008, 2007 and 2006 under the 2005 Equity Compensation Plan (See
Note
8 “Stock Compensation Plans”).
|
2008
|
2007
|
2006
|
||||||||||
|
Dividend
Yield
|
3.6 | % | 3.3 | % | 2.9 | % | ||||||
|
Expected
Volatility
|
.25 | .27 | .24 | |||||||||
|
Risk
Free Interest Rate
|
3.45 | % | 4.69 | % | 5.03 | % | ||||||
|
Expected
Term
|
6.93
years
|
6.65
years
|
3.26
years
|
|||||||||
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 is the 7-year Treasury Constant Maturity rate as of the date
of
the grant for 2008 and 2007, and 3-year for 2006 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.
Non-utility
operating revenue is primarily derived from the design, construction and
operation of contract water and wastewater projects. The Company
recognizes non-utility operating revenue ratably over the service period
with
markup for overhead and profit. The Company records contract monthly
fees for non-utility operating revenue when billed to the customer.
Other
operating revenue includes wastewater service revenue derived from monthly
fixed
fees billed to customers, and which is recorded when billed. Service
line protection plan revenues are billed quarterly and the revenue recognized
when billed.
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. 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. The allowance for doubtful accounts was $0.1 million at
December 31, 2008 and $0.3 million at December 31, 2007. The
corresponding expense is for the year ended December 31, 2008 and 2007
was $0.2
million and $0.3 million, respectively. The following table
summarizes the changes in the Company’s accounts receivable
balance:
|
December
31,
|
||||||||
|
In
thousands
|
2008
|
2007
|
||||||
|
Customer
Accounts Receivable – Water
|
$ | 2,637 | $ | 4,437 | ||||
|
Other
|
1,693 | 1,345 | ||||||
| 4,330 | 5,782 | |||||||
|
Less
allowance for doubtful accounts
|
106 | 283 | ||||||
|
Net
accounts receivable
|
$ | 4,224 | $ | 5,499 | ||||
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 our books, the net liability is recorded as
a current
liability on the consolidated balance sheet in the Overdraft Payable
account.
Concentration
s of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of
credit
risk consist principally of operating cash in excess of FDIC insured
limits and
temporary cash investments.
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.
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, 2008 and
2007, determined by discounting their future cash flows using current market
interest rates on similar instruments with comparable maturities as guided
under
SFAS 107, are shown as below:
|
In
thousands
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
Carrying
amount
|
$ | 107,555 | $ | 91,757 | ||||
|
Estimated
fair value
|
113,214 | 92,600 | ||||||
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. The fair
value of Advances for Construction would be less than the carrying amount
because these financial instruments are non-interest bearing.
NOTE
3
INCOME
TAXES
Deferred
income taxes reflect temporary differences between the valuation of assets
and
liabilities for financial and tax reporting.
As
of
December 31, 2008, Artesian Resources has federal net operating loss
carry-forwards aggregating approximately $12.4 million, which will expire
if
unused by 2028. As of December 31, 2008, Artesian Resources has
separate company state net operating loss carry-forwards aggregating
approximately $19.9 million. These net operating loss carry-forwards
will expire if unused between 2009 and 2028. 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 $88,000
in 2007 to approximately $71,000 in 2008.
At
December 31, 2008, 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 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, 2008. Additionally, there were no accruals
relating to interest or penalties as of December 31, 2008. The
Company remains subject to examination by federal and state authorities
for tax
years 2005 through 2008.
|
Components
of Income Tax Expense
|
|||||||||||||
|
In
thousands
|
For
the Year Ended December 31,
|
||||||||||||
|
State
income taxes
|
2008
|
2007
|
2006
|
||||||||||
|
Current
|
$ | 74 | $ | --- | $ | 42 | |||||||
|
Deferred
|
887 | 866 | 741 | ||||||||||
|
Total
state income tax expense
|
$ | 961 | $ | 866 | $ | 783 | |||||||
|
For
the Year Ended December 31,
|
|||||||||||||
|
Federal
income taxes
|
2008
|
2007
|
2006
|
||||||||||
|
Current
|
$ | --- | $ | 608 | $ | 120 | |||||||
|
Deferred
|
3,466 | 2,660 | 2,984 | ||||||||||
|
Total
federal income tax expense
|
$ | 3,466 | $ | 3,268 |
$
|
$ | 3,104 | ||||||
|
Reconciliation
of effective tax rate:
|
||||||||||||||||||||||||
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||
|
In
thousands
|
2008
|
2008
|
2007
|
2007
|
2006
|
2006
|
||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||
|
Reconciliation
of effective tax rate
|
||||||||||||||||||||||||
|
Income
before federal and state income taxes
|
$ | 10,899 | 100.0 | $ | 10,397 | 100.0 | $ | 9,993 | 100.0 | |||||||||||||||
|
Amount
computed at statutory rate
|
3,706 | 34.0 | 3,535 | 34.0 | 3,398 | 34.0 | ||||||||||||||||||
|
Reconciling
items
|
||||||||||||||||||||||||
|
State
income tax-net of federal tax benefit
|
678 | 6.2 | 571 | 5.5 | 466 | 4.7 | ||||||||||||||||||
|
Other
|
43 | 0.4 | 28 | 0.3 | 23 | 0.2 | ||||||||||||||||||
|
Total
income tax expense and effective rate
|
$ | 4,427 | 40.6 | $ | 4,134 | 39.8 | $ | 3,887 | 38.9 | |||||||||||||||
Deferred
income taxes at December 31, 2008, 2007, and 2006 were comprised of the
following:
|
For
the Year Ended December 31,
|
||||||||||||
|
In
thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Deferred
tax assets related to:
|
||||||||||||
|
Federal
alternative minimum tax credit carry-forwards
|
$ | 2,495 | $ | 2,550 | $ | 1,941 | ||||||
|
Federal
and state operating loss carry-forwards
|
5,330 | 3,500 | 5,384 | |||||||||
|
Bad
debt allowance
|
83 | 120 | 83 | |||||||||
|
Valuation
allowance
|
(71 | ) | (88 | ) | (121 | ) | ||||||
|
Stock
options
|
--- | --- | 145 | |||||||||
|
Other
|
242 | 234 | 247 | |||||||||
|
Total
deferred tax assets
|
$ | 8,079 | $ | 6,316 | $ | 7,679 | ||||||
|
Deferred
tax liabilities related to:
|
||||||||||||
|
Property
plant and equipment basis differences
|
$ | (37,151 | ) | $ | (31,087 | ) | $ | (28,766 | ) | |||
|
Expenses
of rate proceedings
|
(149 | ) | (56 | ) | (102 | ) | ||||||
|
Property
taxes
|
(445 | ) | (420 | ) | (368 | ) | ||||||
|
Other
|
(220 | ) | (224 | ) | (232 | ) | ||||||
|
Total
deferred tax liabilities
|
$ | (37,965 | ) | $ | (31,787 | ) | $ | (29,468 | ) | |||
|
Net
deferred tax liability
|
$ | (29,886 | ) | $ | (25,471 | ) | $ | (21,789 | ) | |||
|
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
|
$ | (363 | ) | $ | (301 | ) | $ | (284 | ) | |||
|
Non-current
deferred tax liability
|
(29,523 | ) | (25,170 | ) | (21,505 | ) | ||||||
|
Net
deferred tax liability
|
$ | (29,886 | ) | $ | (25,471 | ) | $ | (21,789 | ) | |||
NOTE
4
PREFERRED
STOCK
As
of
December 31, 2008 and 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 $20.4 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 18,209,
17,791 and 15,388 shares (as adjusted for the June 30, 2006 three for two
stock
split) at fair market value for the investment of $317,000, $344,000, and
$335,000 of their monies in the years 2008, 2007, and 2006,
respectively.
NOTE
6
DEBT
Artesian
Water and Artesian Water Maryland have available two shared unsecured lines
of
credit, with no financial covenant restrictions, totaling $40.0 million
at
December 31, 2008, which are renewable annually at each of the bank’s
discretion. The interest rate for borrowings under one of these lines
is the London Interbank Offering Rate, or “LIBOR,” plus 0.75% or, at our
discretion, the bank’s federal funds rate plus 1.00%. The interest
rate for borrowings under the other line of credit is the LIBOR plus 1.00%
or,
at our discretion, the bank’s federal funds rate plus 1.00%. Each
bank reviews all of their facilities annually for renewal.
At
December 31, 2008 and 2007 we had $7.0 million and $0.9 million outstanding
under these lines at average interest rates of 2.0% and 6.2%,
respectively. The maximum amount outstanding was $18.0 million and
$7.4 million in 2008 and 2007, respectively. The twelve-month average
amount outstanding was approximately $12.7 million and $5.3 million at
weighted
average annual interest rates of 3.4% and 5.9% in 2008 and 2007,
respectively.
At
December 31, 2008, 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, 2008, Artesian
Wastewater had $4.2 million of available funds while Artesian Utility had
not
borrowed funds under its line of credit. The interest rate for borrowings
under
each of these lines is the LIBOR plus 1.75%. The bank reviews its
facilities annually for renewal.
On
June
30, 2008, Artesian Utility signed an agreement with Northern Sussex Regional
Water Recycling Complex, LLC, or NSRWRC. Under the terms of the
agreement, Artesian Resources acts as the guarantor of NSRWRC’s $10 million
construction loan secured by land. As of December 31, 2008 NSRWRC had
$3.3 million of available funds under the construction loan. The
interest rate on the guarantee is variable based on LIBOR Advantage Rate
plus
225 basis points. In the event of a default by NSRWRC, Artesian
Resources shall pay the bank the amount due of the obligations or, on demand
of
the bank, immediately deposit all amounts due under the obligation.
On
August
1, 2008, Artesian Water Maryland executed a promissory note, the Note,
in the
amount of approximately $2.3 million to Sunrise, that bears interest at
a
variable interest rate based upon the London Interbank Offering Rate plus
150
basis points. The Note is payable in four equal installments,
commencing on the first anniversary of the closing date. The Note is
secured by a first lien security interest in all of Mountain Hill’s assets in
favor of Sunrise and is guaranteed by Artesian Resources.
On
December 1, 2008, Artesian Water Company and CoBank, ACB, entered into
a Bond
Purchase Agreement, or the Agreement, relating to the issue and sale by
the
Company to CoBank of a $15 million principal amount First Mortgage Bond,
or the
Bond, Series S, due December 31, 2033, or the Maturity Date. The Bond
was issued pursuant to the Company’s Indenture of Mortgage dated as of July 1,
1961, as amended and supplemented by supplemental indentures, including
the
Twentieth Supplemental Indenture, dated as of December 1, 2008 or the
Supplemental Indenture, from the Company to Wilmington Trust Company, as
Trustee, or the Indenture. The Indenture is a first mortgage lien
against substantially all of the Company’s utility plant. Proceeds of
the sale of the Bond were used to repay short-term indebtedness which was
used
to finance the expansion of the Company’s headquarters building in New Castle
County, Delaware. The issuance of the Bond was approved by the
Delaware Public Service Commission on November 21, 2008.
The
Bond
carries an annual interest rate of 6.73% through March 1, 2016, or the
Initial
Period. After March 16, 2016, the Company can request that the annual
interest rate be fixed by CoBank in its sole and absolute discretion for
a
period through the Maturity Date or for such shorter periods as mutually
agreed
by the Company and CoBank. Interest is payable on the first business
day of January, April, July and October in each year, beginning with the
first
business day of January, 2009, until the Company’s obligation with respect to
the payment of such principal and interest shall be discharged. In
addition, the Bond is subject to redemption in a principal amount equal
to
$150,000 per calendar quarter, payable on the first business day of January,
April, July and October in each year, beginning with the first business
day of
January, 2009, with all remaining principal due and payable on December
31,
2033. Overdue payments of such principal and interest shall bear
interest as provided in the Supplemental Indenture.
The
Agreement contains customary default provisions where the Bond will become
due
and payable no less than 30 days from notice received by CoBank, referred
to as
“Events of Redemption.” In the event that any Event of Redemption
should occur and be continuing, CoBank shall have the right to require
the
Company, and the Company shall be obligated, to redeem all bonds then held
by
CoBank. The bonds shall be redeemed at a price equal to the sum of
(i) the aggregate principal amount to be redeemed, (ii) the interest accrued
thereon through the date of redemption and (iii) a make-whole amount as
described in the Supplemental Indenture. The Bond was issued in a
private placement in reliance on exemptions from registration under the
Securities Act of 1933, pursuant to the terms of the Bond Purchase
Agreement.
As
of
December 31, 2008, 2007 and 2006, 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
66⅔% 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, 2008, however, no dividend restrictions
were imposed under these covenants.
Long-term
debt consists of:
|
December
31,
|
||||||||
|
In
thousands
|
2008
|
2007
|
||||||
|
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 | ||||||
|
Series
S, 6.73%, due December 31, 2033
|
15,000 | --- | ||||||
| 100,400 | 85,400 | |||||||
|
State
revolving fund loans
|
||||||||
|
4.48%,
due August 1, 2021
|
3,209 | 3,387 | ||||||
|
3.57%,
due September 1, 2023
|
1,201 | 1,261 | ||||||
|
3.64%,
due May 1, 2024
|
1,940 | 2,025 | ||||||
| 6,350 | 6,673 | |||||||
|
Notes
Payable
|
||||||||
|
Promissory
Note, variable interest, due August 1, 2012
|
2,321 | --- | ||||||
| 2,321 | --- | |||||||
|
Sub-total
|
109,071 | 92,073 | ||||||
|
Less:
current maturities (principal amount)
|
1,516 | 316 | ||||||
|
Total
long-term debt
|
$ | 107,555 | $ | 91,757 | ||||
|
Payments
of principal due during the next five years and
thereafter:
|
||||||||||||||||||||||||
|
In
thousands
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
||||||||||||||||||
|
First
Mortgage bonds
|
$ | 600 | 600 | 600 | 600 | 600 | 97,400 | |||||||||||||||||
|
State
revolving fund loans
|
336 | 350 | 364 | 380 | 395 | 4,526 | ||||||||||||||||||
|
Notes
Payable
|
580 | 580 | 580 | 580 | --- | --- | ||||||||||||||||||
|
Total
payments
|
$ | 1,516 | 1,530 | 1,544 | 1,560 | 995 | 101,926 | |||||||||||||||||
NOTE
7
NON-UTILITY
OPERATING REVENUE AND EXPENSES
Non-utility
operating revenue consisted of $2,937,000, $1,942,000, and $1,458,000 recognized
by Artesian Utility in 2008, 2007 and 2006, respectively. In
addition, $796,000 and $422,000 was from Artesian Resource's water and
wastewater Service Line Protection Plans in 2008 and 2007
respectively. The Service Line Protection Plans provide coverage for
all material and labor required to repair or replace participants’ leaking water
and leaking or clogged wastewater service lines up to an annual
limit. An additional $332,000 in revenue was recognized in 2008 from
Artesian Consulting for design and engineering services to developers for
residential and commercial development
Artesian
Utility was formerly a one-third participant in a limited liability company
called AquaStructure Delaware, L.L.C., or AquaStructure, that was dissolved
on
May 30, 2008. 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
|
2008
|
2007
|
2006
|
|||||||||
|
Artesian
Utility
|
$ | 1,934 | $ | 1,528 | $ | 1,205 | ||||||
|
Artesian
Resources
|
562 | 232 | 211 | |||||||||
|
Artesian
Consulting
|
221 | --- | --- | |||||||||
|
Artesian
Development
|
--- | --- | 3 | |||||||||
|
Total
|
$ | 2,717 | $ | 1,760 | $ | 1,419 | ||||||
NOTE
8
STOCK
COMPENSATION PLANS
In
1992,
the Company instituted the 1992 Non-Qualified Stock Option Plan, which
was
subsequently amended in 1998. The number of authorized shares was
375,000. Options to purchase shares of Class A Stock were granted to
employees and directors of the Company. Employees who were not
executive officers or directors were eligible to receive options priced
at not
less than 85% of the fair market value on the date of grant, option prices
for
directors and officers of the Company was 90% of the fair market
value. Effective May 25, 2005, no additional grants will be made from
this plan.
In
1996,
the Company instituted the Incentive Stock Option 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 Company accelerated vesting for certain
incentive stock options held by officers and directors in anticipation
of the
Company’s adoption of SFAS 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:
|
2008
Shares
|
2008
Weighted
Average
Exercise
Price
|
2007
Shares
|
2007
Weighted
Average
Exercise
Price
|
2006
Shares
|
2006
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
|
Plan
options
|
||||||||||||||||||||||||
|
Outstanding
at beginning of year
|
574,696 | $ | 14.62 | 595,699 | $ | 13.83 | 571,686 | $ | 13.29 | |||||||||||||||
|
Granted
|
33,750 | $ | 18.43 | 33,750 | $ | 19.56 | 33,750 | $ | 21.11 | |||||||||||||||
|
Exercised
|
(59,525 | ) | $ | 10.46 | (48,003 | ) | $ | 7.61 | (9,577 | ) | $ | 7.28 | ||||||||||||
|
Canceled
|
(18,000 | ) | $ | 20.23 | (6,750 | ) | $ | 19.56 | (160 | ) | $ | 18.46 | ||||||||||||
|
Outstanding
at end of year
|
530,921 | $ | 15.14 | 574,696 | $ | 14.62 | 595,699 | $ | 13.83 | |||||||||||||||
|
Options
exercisable at year end
|
497,171 | $ | 14.92 | 547,696 | $ | 14.38 | 561,949 | $ | 13.40 | |||||||||||||||
|
Weighted
average fair value of
|
||||||||||||||||||||||||
|
options
granted during the year
|
$ | 18.43 | $ | 19.56 | $ | 21.11 | ||||||||||||||||||
The
weighted-average grant-date fair value of options granted during 2008,
2007, and
2006 were $3.60, $4.85, and $3.81 respectively. The total intrinsic
value of options exercised during 2008 was $432,000. There were no
fully vested shares granted during 2008. During 2008, we received
$622,000 in cash from the exercise of options, with a $418,000 tax benefit
realized during the period.
The
following tables summarize information about employee and director stock
options
outstanding at December 31, 2008:
|
Options
Outstanding
|
|||
|
Range
of
Exercise
Price
|
Shares
Outstanding
at
December 31, 2008
|
Weighted
Average
Remaining
Life
|
Weighted
Average
Exercise
Price
|
|
$8.50
- $16.13
|
330,671
|
3.25
Years
|
$12.40
|
|
$18.43
- $21.11
|
200,250
|
7.62
Years
|
$19.66
|
|
Options
Exercisable
|
|||
|
Range
of
Exercise
Price
|
Shares
Exercisable
at
December 31, 2008
|
Weighted
Average
Exercise
Price
|
|
|
$8.50
- $16.13
|
330,671
|
$12.40
|
|
|
$18.43
- $21.11
|
166,500
|
$19.91
|
As
of
December 31, 2008, there was $44,604 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 2008, 2007 and 2006. The 401(k)
Plan expenses, which include Company contributions and administrative fees,
for
the years 2008, 2007 and 2006, were approximately $617,000, $541,000, and $527,000,
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 DEPSC 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 $44,000, $59,000, and
$70,000 for 2008, 2007 and 2006, 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 2008, 2007 and 2006 were approximately
$276,000, $288,000, and $276,000, 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 SFAS 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 SFAS 71. Additional
disclosures required for our postretirement benefit obligation are presented
below.
|
Benefit
Obligations and Funded Status
|
||||||||
|
In
thousands
|
Year
Ending
|
|||||||
|
December
31
|
||||||||
|
2008
|
2007
|
|||||||
|
Change
in Accumulated Postretirement Benefit Obligation
|
||||||||
|
Accumulated
Postretirement Benefit Obligation at the Beginning of the
Year
|
$ | 944 | $ | 862 | ||||
|
Service
Cost
|
--- | --- | ||||||
|
Interest
Cost
|
53 | 49 | ||||||
|
Actuarial
(Gain) or Loss
|
(91 | ) | 126 | |||||
|
Benefits
Paid
|
(109 | ) | (97 | ) | ||||
|
Plan
Participant's Contributions
|
4 | 4 | ||||||
|
Accumulated
Postretirement Benefit Obligation at the End of the Year
|
801 | 944 | ||||||
|
Change
in Plan Assets
|
||||||||
|
Fair
Value of Plan Assets at the Beginning of the Year
|
--- | --- | ||||||
|
Benefits
Paid
|
(109 | ) | (97 | ) | ||||
|
Employer
Contributions
|
105 | 93 | ||||||
|
Plan
Participant's Contributions
|
4 | 4 | ||||||
|
Fair
Value of Assets at the End of the Year
|
--- | --- | ||||||
|
Net
Amount Recognized
|
||||||||
|
Funded
Status
|
(801 | ) | (944 | ) | ||||
|
Unrecognized
Transition Obligation (Asset)
|
43 | 51 | ||||||
|
Unrecognized
Net (Gain) or Loss
|
(166 | ) | (75 | ) | ||||
|
Net
Amount Recognized:
|
(924 | ) | (968 | ) | ||||
|
Amounts
Recognized in the Statement of Financial Position
|
||||||||
|
Accrued
Benefit Liability-Current
|
(112 | ) | (100 | ) | ||||
|
Accrued
Benefit Liability-Noncurrent
|
(812 | ) | (868 | ) | ||||
|
Net
Amount Recognized
|
$ | (924 | ) | $ | (968 | ) | ||
|
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
|
2015
|
2014
|
||||||
|
Net
Periodic Benefit Cost
|
||||||||||||
|
Year
Ending
|
||||||||||||
|
December
31
|
||||||||||||
|
In
thousands
|
2008
|
2007
|
2006
|
|||||||||
|
Interest
Cost
|
$ | 53 | $ | 48 | $ | 51 | ||||||
|
Amortization
of Net (Gain) or Loss
|
--- | (23 | ) | (27 | ) | |||||||
|
Amortization
of Transition Obligation/(Asset)
|
9 | 9 | 9 | |||||||||
|
Total
Net Periodic Benefit Cost
|
$ | 62 | $ | 34 | $ | 33 | ||||||
|
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
|
2015
|
2014
|
2013
|
|||||||||
|
Impact
of One-Percentage-Point Change in Assumed Health Care Cost Trend
Rates
|
||||||||
|
Increase
|
Decrease
|
|||||||
|
Effect
on Service Cost & Interest Cost
|
$ | 3 | $ | (3 | ) | |||
|
Effect
on Postretirement Benefit Obligation
|
$ | 35 | $ | (33 | ) | |||
Contributions
Artesian
Water expects to contribute $112,000 to its postretirement benefit plan
in
2009.
The
following table represents the benefits expected to be paid:
|
In
thousands
|
Other
Benefits
|
|||
|
2009
|
$ | 112 | ||
|
2010
|
112 | |||
|
2011
|
112 | |||
|
2012
|
112 | |||
|
2013
|
112 | |||
|
2014
through 2018
|
500 | |||
| $ | 1,060 | |||
NOTE
10
COMMITMENTS
AND CONTINGENCIES
Leases
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 2008 and 2007 were $77,000 and $25,000, respectively.
In
October 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 2008, 2007 and 2006 were $12,600,
$11,900, and $11,400, respectively. The future minimum rental payment
as disclosed in the following table is calculated using CPI-U as of October
31,
2008.
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 2008, 2007 and 2006 were $29,000, $28,000
and $27,000, respectively.
During
2006, Artesian Water entered into a 3-year contract for office space located
in
Sussex County, Delaware. Rent payments for 2008 and 2007 were $46,000
and $43,000, 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. Payments
for 2008 and 2007 were $40,000 each year. 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 2008 are as follows:
|
In
thousands
|
||||
|
2009
|
$ | 177 | ||
|
2010
|
97 | |||
|
2011
|
45 | |||
|
2012
|
47 | |||
|
2013
|
47 | |||
|
2014
through 2042
|
1,802 | |||
| $ | 2,215 | |||
Interconnections
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.
The
Chester Water Authority sent us a notice on February 14, 2007 of a rate
increase, effective July 1, 2007. We received a second notice of a
rate increase on February 19, 2008, effective July 1, 2008. The
minimum annual purchase commitments for all interconnection agreements
for 2009
through 2013 and the aggregate total for the years 2014 through 2021, calculated
at the noticed rates, are as follows:
|
In
thousands
|
||||
|
2009
|
$ | 3,050 | ||
|
2010
|
3,050 | |||
|
2011
|
3,050 | |||
|
2012
|
3,059 | |||
|
2013
|
3,050 | |||
|
2014
through 2021
|
24,412 | |||
| $ | 39,671 | |||
Expenses
for purchased water were $2,960,000, $2,775,000, and $3,152,000 for the
years
ended December 31, 2008, 2007 and 2006, respectively.
Other
Commitments
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 2008, 2007 and 2006 was $425,000, $416,000, and
$241,000. The expenditures committed for the years subsequent to 2008
are as follows:
|
In
thousands
|
||||
|
2009
|
$ | 375 | ||
|
2010
|
375 | |||
|
2011
|
174 | |||
| $ | 924 | |||
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 2009 through 2013 are as follows:
|
In
thousands
|
||||
|
2009
|
$ | 564 | ||
|
2010
|
2,410 | |||
|
2011
|
1,250 | |||
|
2012
|
1,225 | |||
|
2013
|
1,000 | |||
| $ | 6,449 | |||
The
exact
timing and extent of these relocation projects is controlled primarily
by the
Delaware Department of Transportation.
NOTE
11
NORTHERN
SUSSEX REGIONAL WATER RECYCLING COMPLEX, LLC
On
June
30, 2008, Artesian Utility signed an agreement with Northern Sussex Regional
Water Recycling Complex, LLC, or NSRWRC, for the design, construction and
operation of the Northern Sussex Regional Water Recycling Complex, a wastewater
treatment facility to be located in Sussex County, Delaware. NSRWRC
was created for the sole purpose of developing the treatment facility site,
which once constructed, will be operated by the Company. The Company
has determined that NSRWRC constitutes a variable interest entity, or VIE,
as
defined by Financial Accounting Standards Board Interpretation No. 46(R)
“Consolidation of Variable Interest Entities,” or FIN 46(R). The
Company is the primary beneficiary of NSRWRC by contract and, accordingly,
consolidates the results of NSRWRC in its financial statements as required
under
FIN 46(R). All inter-company balances and transactions related to the
VIE have been eliminated in consolidations in accordance with the guidance
set
forth in Accounting Research Bulletin No. 51 “Consolidated Financial
Statements,” or ARB 51.
The
Company, by contract, has control over the design and construction of the
treatment facility. NSRWRC is financially responsible for designing
and building the treatment facility. Under the terms of the
agreement, Artesian Resources acts as the guarantor of a $10 million
construction loan, secured by a 75 acre parcel purchased by NSRWRC on July
1,
2008 for approximately $5 million. The interest rate on the
construction loan is variable based on LIBOR Advantage Rate plus 225 basis
points. The line of credit includes provisions that require Artesian
Resources to assume the debt and all liabilities arising from that debt
under
certain circumstances, including the bankruptcy of NSRWRC. In the
event of default by NSRWRC, Artesian Resources shall pay NSRWRC's obligations
due to the financial institution; or on demand of the financial institution
immediately deposit all amounts due under the obligation. As of
December 31, 2008, approximately $6.7 million has been drawn on the loan,
which
is included in the Lines of Credit on our Consolidated Balance
Sheet. As of December 31, 2008, approximately $6.8 million is
included in non-utility property and was comprised of the land and construction
in progress of the facility. The entire capitalization of NSRWRC is
comprised of the amounts borrowed against the $10 million construction
loan. In connection with the purchase of the treatment facility site,
as of June 30, 2008, Artesian Utility agreed to commit $3.0 million, payable
over 10 years, to NSRWRC. The net present value of this obligation as
of December 31, 2008 is approximately $2.2 million. There has been a
nominal investment in NSRWRC by the owner of NWRWRC. The treatment
facility will be owned by NSRWRC until the initial loan to the treatment
facility is repaid. At that time, the treatment facility will be
transferred to the Company for nominal value as contributed
property. Immediately following the transfer of the treatment
facility and extinguishment of debt, NSRWRC will be dissolved.
NOTE
12
RELATED
PARTY TRANSACTIONS
The
Company has entered into transactions in the normal course of business
with
related parties. The owner of NSRWRC is the sole owner of Meridian
Architects and Engineers, LLC, or Meridian Architects, and Meridian Enterprises,
LLC, or Meridian Enterprises. The Company has utilized Meridian
Architects and Meridian Enterprises for various consulting services during
the
year ended December 31, 2008. As of December 31, 2008, approximately
$450,000 was paid to Meridian Architects and approximately $488,000 was
paid to
Meridian Enterprises in connection with these consulting
services. Approximately $35,000 was paid to Meridian Enterprises as
of December 31, 2008 for office space rental. Also, as of December
31, 2008, the Company had accounts receivable balances for engineering
services
due from the following entities, all of which are owned by the owner of
NSRWRC: Meridian Architects of approximately $51,000, Landlock, LLC
of approximately $109,000, and Peninsula Square, LLC of approximately
$9,000. All services were provided in the ordinary course of business
at fees and on terms and conditions that the Company believes are the same
as
those that would result from arm’s-length negotiations between unrelated
parties.
NOTE
13
ACQUISITION
OF MOUNTAIN HILL WATER COMPANY
On
August
1, 2008, Artesian Water Maryland completed its acquisition of all the
outstanding membership interests of Mountain Hill, from its sole member,
Sunrise, for a purchase price of approximately $7.1 million. The
purchase price included reimbursement of all carrying costs through the
date of
acquisition, which resulted in the recognition of goodwill. The
acquisition included a 0.3 million gallon per day water treatment facility,
four
wells with a capacity of up to 500,000 gallons per day, a 500,000 gallon
elevated storage tank and approximately eight miles of main, all situated
within
the core of Cecil County, Maryland’s designated growth corridor. The
acquisition provides Artesian Water Maryland the right to serve the entire
8,000
acres owned by Sunrise or its associates. Mountain Hill serves two
commercial accounts in the Principio Business Park, located within Cecil
County’s designated growth corridor. Mountain Hill will also provide
water service to future customers in the Principio Business Park and will
provide water service to the proposed 660 home residential development
of
Charlestown Crossing as well as the surrounding area.
Approximately
$4.8 million of the total purchase price was paid at closing. The
$4.8 million is comprised of a down payment of $0.6 million, payment of
the
closing debt of $4.0 million and an easement payment of $0.2
million. The cash used at closing came from the Company’s available
line of credit. In addition, on the closing date, Artesian Water
Maryland executed a promissory note in the amount of approximately $2.3
million
to Sunrise, or the Note, that bears interest at a variable interest rate
based
upon the London Interbank Offering Rate plus 150 basis points. The
Note is payable in four equal installments, commencing on the first anniversary
of the closing date. The Note is secured by a first lien security
interest in all of Mountain Hill’s assets in favor of Sunrise and is guaranteed
by Artesian Resources.
Assets
acquired and liabilities assumed are recorded in the accompanying consolidated
balance sheet at their estimated fair values as of August 1, 2008. A
summary of the allocation of purchase price to the assets acquired and payments
made as of August 1, 2008 is presented in the table below.
|
(In
thousands)
|
August
1, 2008
|
|||
|
Current
assets
|
$ | 10 | ||
|
Property,
plant and equipment
|
6,507 | |||
|
Intangible
assets
|
204 | |||
|
Goodwill
|
372 | |||
|
Purchase
Price
|
$ | 7,093 | ||
|
Down
payment
|
$ | (580 | ) | |
|
Closing
debt payment
|
(3,992 | ) | ||
|
Easement
Payment
|
(200 | ) | ||
|
Promissory
Note
|
(2,321 | ) | ||
|
Total
Payments
|
$ | (7,093 | ) | |
NOTE
14
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 DEPSC, the PAPUC and the
MDPSC. As of December 31, 2008, Artesian Water was serving 75,800
customers, Artesian Water Pennsylvania was serving 38 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 DEPSC 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, 2008, Artesian Wastewater was serving 632
customers.
NOTE
15
RATE
PROCEEDINGS
Our
water
and wastewater utilities generate operating revenue from customers based
on
rates that are established by state Public Service Commissions through
a rate
setting process that may include public hearings, evidentiary hearings
and the
submission of evidence and testimony in support of the requested level
of rates
by our company.
In
May
2006, Artesian Water filed a petition with the DEPSC 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 DEPSC.
On
December 19, 2006, the DEPSC 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.
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. In December 2007, we filed for a 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. During 2008, we earned
approximately $99,000 in DSIC revenue. On June 21, 2008, the Company
discontinued the collection of DSIC pursuant to Delaware law which requires
the
Company to discontinue a DSIC when new base rates are put into
effect. We did not have DSIC in effect during 2007.
On
January 25, 2008, Artesian Water submitted a notice to the DEPSC of our
intent
to file an application for a rate increase, as is required to be submitted
prior
to filing an application. On April 22, 2008, Artesian Water filed a
petition with the DEPSC to implement new rates to meet a requested increase
in
revenue of 28.8%, or approximately $14.2 million, on an annualized
basis. On July, 11, 2008, pursuant to the DEPSC’s minimum filing
requirements, Artesian filed a supplemental filing with the DEPSC to update
financial schedules for actual experience through March 31, 2008 and to
reflect
additional changes affecting the requested increase. The overall
result was a reduction to the requested increase in revenue of 1.5%, to
27.3% or
approximately $13.5 million, on an annualized basis. This request was
primarily due to the Company’s significant investment in infrastructure to
improve and ensure water quality and service reliability. This
includes capital expenditures for additional supply, storage, water main
replacements, hydraulic improvements, installation of automated meter reading
equipment in the service territory south of the Chesapeake & Delaware canal,
or C&D Canal, and additional space to house our critical operations and
office support functions. The rate request was also filed due to
increases in various operating and maintenance costs, including increased
costs
associated with depreciation, purchased power, purchased water, additional
building space and postage. Additional reasons for this request
include expenses related to new water system additions, the implementation
of
monthly billing to customers below the C&D Canal and creation of new water
consumption blocks to provide the company an opportunity to achieve a fair
rate
of return.
As
permitted by law, on June 21, 2008, we placed temporary rates into effect,
designed to generate an increase in annual operating revenue of approximately
5.0%, or $2.5 million on an annualized basis, until new rates are approved
by
the DEPSC. Also, pursuant to law, on December 17, 2008, we placed
temporary rates into effect, designed to generate an additional increase
in
annual operating revenue of approximately 10% or $5.0 million on an annualized
basis, given that the rate case had not been concluded in a seven month
period. Evidentiary hearings were held on December 8-9, 2008 and a
final Commission decision is anticipated in the third quarter of 2009 in
reference to the implementation of our requested rate increase.
In
December 2008, the MDPSC approved an application for Artesian Water Maryland
to
construct a water system from the Delaware state line, interconnecting
with the
Artesian Water system, to the Town of Elkton. The Town of Elkton
desired an additional source of water supply.
Price
caps instituted by electric restructuring legislation in Delaware in 1999
were
lifted in 2005 for customers of the Delaware Electric Cooperative, 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 Holdings, Inc. in April of 2008. This new pricing is
included in our most recent request for rate relief filed with the
DEPSC.
NOTE
16
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
|
2008
|
2007
|
2006
|
|||||||||
|
Average
common shares outstanding during the
|
||||||||||||
|
period
for Basic computation
|
7,353 | 6,787 | 6,055 | |||||||||
|
Dilutive
effect of employee stock options
|
74 | 149 | 180 | |||||||||
|
Average
common shares outstanding during the
|
||||||||||||
|
period
for Diluted computation
|
7,427 | 6,936 | 6,235 | |||||||||
Equity
per common share was $11.94, $12.54, and $10.21 at December 31, 2008, 2007,
and
2006, 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
17
SELECTED
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
The
following table is derived from quarterly unaudited consolidated statements
of
operations for the years ended December 31, 2008 and 2007. Quarterly
basic per share amounts do not add to the full year total due to
rounding.
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||||||||||||||||||
|
In
thousands (except per share data)
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
||||||||||||||||||||||||
|
Operating
revenues
|
$ | 12,270 | $ | 11,604 | $ | 13,903 | $ | 12,913 | $ | 15,656 | $ | 15,046 | $ | 14,356 | $ | 12,961 | ||||||||||||||||
|
Operating
income
|
$ | 1,936 | $ | 2,268 | $ | 2,917 | $ | 2,919 | $ | 4,030 | $ | 4,135 | $ | 3,023 | $ | 2,444 | ||||||||||||||||
|
Net
income applicable to common stock
|
$ | 999 | $ | 1,156 | $ | 1,529 | $ | 1,271 | $ | 2,593 | $ | 2,763 | $ | 1,297 | $ | 1,073 | ||||||||||||||||
|
Income
per common share
|
||||||||||||||||||||||||||||||||
|
Basic
|
$ | 0.14 | $ | 0.19 | $ | 0.21 | $ | 0.20 | $ | 0.35 | $ | 0.38 | $ | 0.18 | $ | 0.15 | ||||||||||||||||
|
Diluted
|
$ | 0.13 | $ | 0.18 | $ | 0.21 | $ | 0.19 | $ | 0.35 | $ | 0.37 | $ | 0.17 | $ | 0.14 | ||||||||||||||||
NOTE
18
IMPACT
OF RECENT ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board, 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 of assets and liabilities. 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
January 1, 2008, we adopted the provisions of SFAS 157, except as it applies
to
non-financial assets and non-financial liabilities for which the effective
date
has been delayed by one year as described below. The adoption of SFAS
157 did not have a material effect on our financial position or results
of
operations.
SFAS
157
defines fair value as the exchange price that would be received for an
asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction
between
market participants on the measurement date. SFAS 157 also
establishes a fair value hierarchy which requires an entity to maximize
the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be
used to measure fair value:
Level
1 -
Quoted prices in active markets for identical assets or
liabilities.
Level
2 -
Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or
other
inputs that are observable or can be corroborated by observable market
data for
substantially the full term of the assets or liabilities.
Level
3 -
Unobservable inputs that are supported by little or no market activity
and that
are significant to the fair value of the assets or liabilities.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which
replaces SFAS No. 141. SFAS No. 141(R) establishes principles
for recognizing assets and liabilities acquired in a business combination,
contractual contingencies and certain acquired contingencies to be measured
at
their fair values at the acquisition date. This statement requires
that acquisition-related costs and restructuring costs be recognized separately
from the business combination. SFAS No. 141(R) is effective for
fiscal years beginning January 1, 2009. The Company expects to adopt
this statement effective January 1, 2009 and does not expect it to have
a
material effect on the financial statements.
In
December 2007, the FASB issued SFAS No.160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51.” This
statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary, the amount of consolidated net income attributable
to
the parent and to the noncontrolling interest, changes in a parent’s ownership
interest and the valuation of retained noncontrolling equity investments
when a
subsidiary is deconsolidated. This statement requires expanded
disclosures in the consolidated financial statements that clearly identify
and
distinguish between the interest of the parent and the interest of the
noncontrolling owners. SFAS No. 160 is effective for fiscal years
beginning January 1, 2009. The adoption of this statement will not have
a
material impact on the Company’s results of operations or financial
position.
On
February 12, 2008, the FASB issued FSP No. SFAS 157-2, "Effective Date
of FASB
Statement No. 157," which delays the effective date of SFAS 157 for all
non-financial assets and non-financial 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
March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – Including an amendment of FASB
No.133.” This statement changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required
to provide enhanced disclosures about (a) how and why a company used derivative
instruments, (b) how derivative instruments and related hedge items are
accounted for under Statement 133 and its related interpretations and (c)
how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flow. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning
after
November 15, 2008. The Company expects to adopt this statement
effective January 1, 2009 and does not expect it to have a material effect
on
the financial statements.
In
May of
2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This statement identifies the sources of
accounting principles and the framework for selecting the principles to
be used
in the preparation of financial statements of nongovernmental entities
that are
presented in conformity with GAAP in the United States (the GAAP
hierarchy). This statement is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to
AU
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles”. The Company does not expect this
Statement will have a material impact 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, (“the Company”)
as of December 31, 2008 and 2007 and the related consolidated statements
of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2008. In connection with our audits of
the consolidated financial statements, we have also audited the financial
statement schedule listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated 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 also 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
consolidated financial statements and schedule. 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, 2008
and 2007, and the results of its operations and its cash flows for each
of the
three years in the period ended December 31, 2008,in
conformity with accounting principles
generally accepted in the United States of America.
Also,
in our opinion, the financial
statement schedule, 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, 2008, 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,
2009 expressed an unqualified opinion thereon.
/s/BDO
Seidman, LLP
Bethesda,
Maryland
March
12,
2009
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, 2008, 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, 2008
were (1) designed to ensure that material information relating to the
Company 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 Company 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 Company’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 Company’s internal control over
financial reporting as of December 31, 2008 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, 2008, 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, 2008 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 Company’s internal
control over financial reporting, occurred during the fiscal quarter ended
December 31, 2008 that has materially affected, or is reasonably likely
to
materially affect, the Company’s internal control over financial
reporting.
Date:
March
12, 2009
|
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 (“the Company”) internal control over financial reporting as of
December 31, 2008, 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, 2008, 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, 2008 and 2007, and the related
consolidated statements of operations, changes in stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2008
and our
report dated
March 12, 2009 expressed an
unqualified
opinion thereon.
/s/BDO
Seidman LLP
Bethesda,
Maryland
March
12,
2009
Item
10. – Directors, Executive Officers and Corporate
Governance.
|
Name
|
Age
|
Position
|
|
Dian
C. Taylor
|
63
|
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
|
65
|
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;
Strategic Planning, Budget and Finance; Governance and Nominating;
and
Compensation Committees.
|
|
John
R. Eisenbrey, Jr.
|
53
|
Director
since 1993 - Owner and President of Bear Industries, Inc., a
privately
held contracting firm, for more than twenty-four 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;
Governance and Nominating; and Compensation
Committees.
|
|
Nicholle
R. Taylor
|
41
|
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
|
62
|
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; Strategic
Planning, Budget and Finance; Governance and Nominating; and
Compensation
Committees.
|
|
Joseph
A. DiNunzio
|
46
|
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
|
59
|
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
|
52
|
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
|
49
|
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
|
51
|
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. Kenneth R. Biederman has been nominated for election to the
Board of Directors at the shareholders Annual Meeting to be held May 19,
2009.
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 $450 per diem for workshops.
In
2008,
our Directors, other than Dian C. Taylor and Nicholle R. Taylor, whose
fees as
Directors are included in the Summary Compensation Table, received the
following
compensation:
Director
Compensation Table – 2008
|
Name
|
Fees
Earned or
Paid
in
Cash
($)
|
Option
Awards
($)
(1)
|
All
other Compensation
($)
|
Total
($)
|
||||||||||||
|
Kenneth
R. Biederman
|
67,450 | 27,624 | --- | 95,074 | ||||||||||||
|
John
R. Eisenbrey, Jr.
|
60,450 | 27,624 | --- | 88,074 | ||||||||||||
|
William
C. Wyer
|
64,950 | 27,624 | --- | 92,574 | ||||||||||||
|
(1)
|
On
May 14, 2008 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 $18.430. On May
16, 2007,
all Directors, other than Nicholle R. Taylor, also received option
grants
of 6,750 shares of Class A Non-voting Common stock at exercise
prices at
the fair market value 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 SFAS No. 123R, based
upon the
assumptions made in the valuations as described in Note 1 of
the 2008
Financial Statements is reflected in the “Option Awards” column in the
table above. The aggregate number of option awards outstanding
at December 31, 2008 for each Director is:
|
|
Option
Shares Outstanding at December 31, 2008
|
|
|
Kenneth
R. Biederman
|
72,000
|
|
John
R. Eisenbrey, Jr.
|
62,389
|
|
William
C. Wyer
|
72,000
|
Compensation
Committee
Interlocks and Insider Participation
During
the year ended December 31, 2008, 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
2008,
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 2008,
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 2008,
the Compensation Committee met five times.
Consideration
of Director
Candidates
The
Governance and Nominating Committee is comprised of three independent directors.
As part of the formalized nominating procedures, the committee makes
recommendations for Director Nominations to the full Board. Director
candidates nominated by stockholders are considered in the same manner,
provided
the nominations are submitted to the Chairman of the committee on a timely
basis
and in accordance with the Company’s by-laws. Nominations for the
election of directors for the 2009 Annual Stockholders’ Meeting were approved by
the Governance and Nominating Committee.
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 2008, 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 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. In their analysis, the Company’s
consultants, Astron Solutions, used salary survey data from water utility
companies of a similar revenue size, customer base and corporate structure
to
make recommendations for appropriate salary ranges for the executive
officers. In addition, salary survey data for all organizations of a
similar size in the Company’s immediate geographical area was
used. The Committee used the ranges provided by the consultants as a
guide in determining the individual compensation levels of the executive
officers, as well as the overall contributions made by executive towards
the
Company’s major objectives. The Compensation Committee also considers
recommendations made by the Chief Executive Officer regarding compensation
for
other executive officers. The Chief Executive Officer also considers
individual contributions made toward the Company’s objectives when making
compensation recommendations. The compensation levels of all
executive officers fall within the recommended salary ranges as determined
by
the consultant.
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. Prior to 2007,
most performance-based bonus 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 2008 and 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 2008,
2007
or 2006, except that Dian C. Taylor and Nicholle R. Taylor, in their capacity
as
Directors, received stock options as described below. Ms. Nicholle R.
Taylor was appointed to the Board of Directors in December 2007.
Generally,
each May, the Compensation Committee of the Board of Directors considers
the
grant of stock options for Directors. Consistent with the grant made
to all Directors, Ms. Dian C. Taylor and Ms. Nicholle R. Taylor on May
14, 2008
received grants of 6,750 shares of Class A Non-voting stock 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 received grants of 6,750 shares of
Class A Non-voting Common stock on May 16, 2007 and May 12, 2006 under
the same
terms as the 2008 options.
Both
Ms.
Dian C. Taylor and Ms. Nicholle R. Taylor receive compensation for their
services as Directors, 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 $100,000
for the
fiscal year 2008.
Summary
Compensation Table
for 2008:
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)(1)
|
Option
Awards ($)(2)
|
All
Other Compensation ($)(1),(3),(4),(5)
|
Total
($)
|
|
Dian
C. Taylor, Chair, CEO & President
|
2008
|
380,801
|
72,300
|
N/A
|
27,624
|
97,149
|
577,874
|
|
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, Vice President, Chief Financial Officer &
Treasurer
|
2008
|
232,356
|
37,300
|
N/A
|
N/A
|
28,019
|
297,675
|
|
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
|
2008
|
265,004
|
35,700
|
N/A
|
N/A
|
26,606
|
327,309
|
|
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
|
|
|
John
M. Thaeder, Senior Vice President of Operations
|
2008
|
249,415
|
35,700
|
N/A
|
N/A
|
18,508
|
303,624
|
|
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
|
|
|
Nicholle
R. Taylor, Vice President
|
2008
|
185,885
|
35,700
|
N/A
|
15,378
|
50,161
|
287,125
|
|
(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
|
|
John
M. Thaeder
|
1,125
|
$18,377
|
|
(2)
|
On
May 14, 2008 Dian C. Taylor and Nicholle R.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. On May 16, 2007 and May 12, 2006, Dian C. Taylor
received option grants of 6,750 shares of Class A Non-voting
Common stock
under the same terms as the 2008 options. The dollar amount
recognized for financial statement reporting purposes with respect
to the
fiscal year, computed in accordance with SFAS 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.
|
|
(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
benefits upon
retirement. The Company will not provide such benefits to any
other current or future employees. In 2008, 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
|
$23,000
|
|
David
B.
Spacht
|
$25,300
|
|
Joseph
A.
DiNunzio
|
$23,000
|
|
John
M.
Thaeder
|
$11,500
|
|
Nicholle
R.
Taylor
|
$18,588
|
|
(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 $17,822 in 2008.
|
|
(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 2008 totaling $30,450,
security provided at her personal residence and personal use
of a
company-owned vehicle.
|
Also
included in the “All Other Compensation” column in the table above, Nicholle R.
Taylor received $29,500 in compensation for attendance at meetings of the
Board.
Grants
of
Plan-Based Awards Table – 2008
|
Name
|
Grant
Date
|
All
Other Stock Awards: Number of Shares of Stock or Units (#)
|
All
Other Option Awards: Number of Securities Underlying Options
(#)
|
Exercise
or Base Price of Option Awards ($/share)
|
Grant
Date Fair Value of Stock & Option Awards ($)
|
|
Dian
C. Taylor
|
May
14, 2008
|
N/A
|
6,750
|
18.43
|
24,299
|
|
Nicholle
R. Taylor
|
May
14, 2008
|
N/A
|
6,750
|
18.43
|
24,299
|
Ms.
Dian
C. Taylor and Nicholle R. Taylor were granted option awards on May 14,
2008 as
noted in the table above. The Class A Non-voting Common stock shares
available under the grant become exercisable one year after the date of
grant,
are for a term of ten years from the date of grant, and automatically terminate
upon the first occurrence of:
|
(i)
|
The
expiration of the 90-day period after the Grantee ceases to provide
service to the Company, if the termination of service is for
any reason
other than Disability, death or Cause (as defined in the
award);
|
|
(ii)
|
The
expiration of the one-year period after Grantee ceases to provide
service
to the Company on account of her
Disability;
|
|
(iii)
|
The
expiration of the one-year period after Grantee ceases to provide
service
to the Company, if she dies while providing service to the Company
or
within 90 days after the she ceases to provide such services
on account of
a termination described in (i) above;
or
|
|
(iv)
|
The
date on which Grantee ceases to provide service to the Company
for
Cause. In addition, notwithstanding the prior provisions, if
Grantee engages in conduct that constitutes Cause after her employment
or
service terminates, the Option shall immediately
terminate.
|
Outstanding
Equity Awards at Fiscal Year-End Table – 2008
|
Option
Awards
|
||||
|
Name
|
Number
of Securities Underlying Unexercised
Options(#) Exercisable
|
Number
of Securities Underlying Unexercised Options
(#) Unexercisable
|
Option
Exercise Price($)
|
Option
Expiration Date
|
|
Dian
C. Taylor
|
3,925
|
0
|
8.50
|
5/18/2009
|
|
6,750
|
0
|
9.28
|
5/31/2010
|
|
|
6,750
|
0
|
9.76
|
5/30/2011
|
|
|
6,750
|
0
|
12.40
|
6/5/2012
|
|
|
6,750
|
0
|
13.30
|
5/21/2013
|
|
|
6,750
|
0
|
16.13
|
5/26/2014
|
|
|
11,250
|
0
|
19.70
|
12/20/2015
|
|
|
6,750
|
0
|
21.11
|
5/12/2016
|
|
|
6,750
|
0
|
19.59
|
5/16/2017
|
|
|
6,750(1)
|
18.43
|
5/14/2018
|
||
|
David
B. Spacht
|
2,425
|
0
|
9.33
|
5/18/2009
|
|
6,750
|
0
|
10.28
|
5/31/2010
|
|
|
6,750
|
0
|
10.85
|
5/30/2011
|
|
|
6,750
|
0
|
12.40
|
6/5/2012
|
|
|
6,750
|
0
|
14.85
|
5/21/2013
|
|
|
6,750
|
0
|
16.13
|
5/26/2014
|
|
|
11,250
|
0
|
19.70
|
12/20/2015
|
|
|
Joseph
A. DiNunzio
|
6,750
|
0
|
10.28
|
5/31/2010
|
|
11,250
|
0
|
10.85
|
5/30/2011
|
|
|
6,750
|
0
|
12.40
|
6/5/2012
|
|
|
6,750
|
0
|
14.85
|
5/21/2013
|
|
|
6,750
|
0
|
16.13
|
5/26/2014
|
|
|
11,250
|
0
|
19.70
|
12/20/2015
|
|
|
John
M. Thaeder
|
4,207
|
0
|
10.28
|
5/31/2010
|
|
6,750
|
0
|
10.85
|
5/30/2011
|
|
|
6,750
|
0
|
12.40
|
6/5/2012
|
|
|
6,750
|
0
|
14.85
|
5/21/2013
|
|
|
6,750
|
0
|
16.13
|
5/26/2014
|
|
|
11,250
|
0
|
19.70
|
12/20/2015
|
|
|
Nicholle
R. Taylor
|
2,625
|
0
|
9.33
|
5/18/2009
|
|
6,750
|
0
|
16.13
|
5/26/14
|
|
|
11,250
|
0
|
19.70
|
12/20/2015
|
|
|
6,750(1)
|
18.43
|
5/14/2018
|
||
(1)
The option grant for 6,750 will vest on May 14, 2009.
Option
Exercises and Stock Vested Table – 2008
|
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
|
6,575
|
57,090
|
N/A
|
N/A
|
|
|
David
B. Spacht
|
3,000
|
27,247
|
N/A
|
N/A
|
|
|
Joseph
A. DiNunzio
|
5,625
|
51,571
|
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 March 2, 2009 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
|
150,148
|
2.3
|
157,722
|
17.9
|
|
|
Kenneth
R. Biederman (3)(4)
|
82,125
|
1.2
|
|||
|
John
R. Eisenbrey, Jr. (3)(5)(6)
15
Albe Drive
Newark,
Delaware 19702
|
101,390
|
1.5
|
45,707
|
5.2
|
|
|
Nicholle
R. Taylor (3)(7)(8)
206
Rothwell Drive
Wilmington,
Delaware 19804
|
26,639
|
279,476
|
31.7
|
||
|
William
C. Wyer (3)
|
75,750
|
1.1
|
|||
|
Joseph
A. DiNunzio (3)(9)
|
64,339
|
1.0
|
103
|
||
|
David
B. Spacht (3)
|
55,655
|
189
|
|||
|
John
M. Thaeder (3)
|
65,339
|
1.0
|
1,350
|
||
|
Louisa
Taylor Welcher
(10)
219
Laurel Avenue
Newark,
DE 19711
|
56,992
|
136,006
|
15.4
|
||
|
Directors
and Executive Officers as a Group (10 Individuals)(3)
|
739,682
|
10.5
|
484,547
|
55.0
|
|
|
(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 March 2, 2009.
|
|
(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 March 2, 2009, 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 (61,425 shares); Mr. Biederman (65,250 shares);
Mr. Eisenbrey (55,639 shares); Ms. N. Taylor (20,625 shares);Mr.
Wyer
(62,250 shares); Mr. DiNunzio (49,500 shares); Mr. Spacht (47,425
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)
|
100,202
shares were pledged by Ms. Taylor as collateral for a loan.
|
|
(8)
|
Includes
3 shares of the Class A Stock held in a custodial account for
Ms. Taylor’s
daughter.
|
|
(9)
|
Includes
16 shares of the Class A Stock held in a custodial account for
Mr.
DiNunzio’s son.
|
|
(10)
|
Includes
144 shares of the Class B Stock held jointly by Ms. Welcher’s husband and
son, and 391 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 2008 and 2007
by the
independent registered public accounting firm, BDO Seidman
LLP:
|
(In
thousands)
|
2008
|
2007
|
||||||
|
Audit
Fees
|
$ | 395 | $ | 548 | ||||
|
Audit-Related
Fees
|
--- | --- | ||||||
|
Tax
Fees
|
--- | --- | ||||||
|
All
Other
Fees
|
---- | ---- | ||||||
|
Total
Fees
|
$ | 395 | $ | 548 | ||||
Approximately
60% of the total hours
spent on audit and audit-related services for the Company for the year
ended
December 31, 2008 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 2008 and 2007. The fees billed to the Company for the 401(k)
Plan’s audit was $16,400 and $16,000 for 2008 and 2007
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 2008
and 2007.
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 2008 and
2007 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, 2008, 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:
|
|
|
74
|
||
|
43
|
||
|
44
|
||
|
45
|
||
|
46
|
||
|
47
- 73
|
||
|
(2)
|
Financial
Statement Schedule:
|
|
|
98
|
||
|
(3)
|
93
- 94
|
|
|
*
Page number shown refers to page number in this Report on Form
10-K
|
FORM
10-K
ANNUAL REPORT
YEAR
ENDED DECEMBER 31, 2008
|
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
|
Twentieth
Supplemental Indenture dated as of December 1, 2008, between
Artesian
Water Company, Inc., subsidiary of the Company, and Wilmington
Trust
Company, as Trustee. Incorporated by reference to Exhibit 4.1
filed with the Company's Form 8-K filed on December 4,
2008.
|
|
4.2
|
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.
|
|
4.3
|
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.
|
|
4.4
|
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.
|
|
4.5
|
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.
|
|
4.6
|
Bond
Purchase Agreement, dated December 1, 2008 by and between Artesian
Water
Company, Inc., subsidiary of the Company, and CoBank,
ACB. Incorporated by reference to exhibit 4.2 filed with the
Company’s form 8-K filed on December 4, 2008.
|
|
10.1
|
Asset
Purchase Agreement between Artesian Water Maryland, Inc., subsidiary
of
the Company, and Cecil County, Maryland, dated October 7,
2008. Incorporated by reference to exhibit 10.1 filed with the
Company’s form 8-K filed on October 10, 2008.
|
|
10.2
|
Asset
Purchase Agreement between Artesian Wastewater Maryland, Inc.,
subsidiary
of the Company, and Cecil County, Maryland, dated October 7,
2008. Incorporated by reference to exhibit 10.2 filed with the
Company’s form 8-K filed on October 10,
2008.
|
|
10.3
|
Asset
Purchase Agreement between Artesian Wastewater Maryland, Inc.,
subsidiary
of the Company, and Cecil County, Maryland, dated October 7,
2008. Incorporated by reference to exhibit 10.3 filed with the
Company’s form 8-K filed on October 10, 2008.
|
|
10.4
|
Limited
Liability Interest Purchase Agreement between Artesian Water
Maryland,
Inc., subsidiary of the Company, and Mountain Hill Water Company,
LLC,
dated May 5, 2008. Incorporated by reference to exhibit 10.1
filed with the Company’s form 8-K filed on May 9, 2008.
|
|
10.5
|
Wastewater
Services Agreement between Artesian Utility Development, Inc.,
subsidiary
of the Company, and Northern Sussex Regional Water Recharge
Complex, LLC,
dated June 30, 2008. This exhibit is subject to an order
granting confidential treatment issued by the SEC and therefore
certain
confidential portions have been omitted as indicated by the
bracketed
language [CONFIDENTIAL PORTION DELETED]. Incorporated by
reference to exhibit 10.1 filed with the Company’s form 10-Q for the
quarter ended June 30, 2008.
|
|
10.6
|
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.
|
|
10.7
|
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.
**
|
|
10.8
|
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.**
|
|
10.9
|
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.**
|
|
10.10
|
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.**
|
|
10.11
|
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, 2008. Valuation and
qualifying accounts for the years ended December 31, 2008,
2007 and 2006.
*
|
|
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. *
|
|
*
|
Filed
herewith.
|
|
**
|
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, 2009
|
By:
/s/ DAVID B. SPACHT
|
|
|
David
B. Spacht
|
||
|
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, 2009
|
|
Principal
Financial and Accounting Officer:
|
||
|
/s/
DAVID B. SPACHT
|
||
|
David
B. Spacht
|
Chief
Financial Officer and Treasurer
|
March
12, 2009
|
|
Directors:
|
||
|
/s/
DIAN C. TAYLOR
|
||
|
Dian
C. Taylor
|
Director
|
March
12, 2009
|
|
/s/
KENNETH R. BIEDERMAN
|
||
|
Kenneth
R. Biederman
|
Director
|
March
12, 2009
|
|
/s/
WILLIAM C. WYER
|
||
|
William
C. Wyer
|
Director
|
March
12, 2009
|
|
/s/
JOHN R. EISENBREY, JR.
|
||
|
John
R. Eisenbrey, Jr.
|
Director
|
March
12, 2009
|
|
/s/
NICHOLLE R. TAYLOR
|
||
|
Nicholle
R. Taylor
|
Director
|
March
12, 2009
|
ARTESIAN
RESOURCES CORPORATION
FORM
10-K
ANNUAL REPORT
YEAR
ENDED DECEMBER 31, 2008
|
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
|
Twentieth
Supplemental Indenture dated as of December 1, 2008, between
Artesian
Water Company, Inc., subsidiary of the Company, and Wilmington
Trust
Company, as Trustee. Incorporated by reference to Exhibit 4.1
filed with the Company's Form 8-K filed on December 4,
2008.
|
|
4.2
|
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.
|
|
4.3
|
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.
|
|
4.4
|
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.
|
|
4.5
|
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.
|
|
4.6
|
Bond
Purchase Agreement, dated December 1, 2008 by and between Artesian
Water
Company, Inc., subsidiary of the Company, and CoBank,
ACB. Incorporated by reference to exhibit 4.2 filed with the
Company’s form 8-K filed on December 4, 2008.
|
|
10.1
|
Asset
Purchase Agreement between Artesian Water Maryland, Inc., subsidiary
of
the Company, and Cecil County, Maryland, dated October 7,
2008. Incorporated by reference to exhibit 10.1 filed with the
Company’s form 8-K filed on October 10, 2008.
|
|
10.2
|
Asset
Purchase Agreement between Artesian Wastewater Maryland, Inc.,
subsidiary
of the Company, and Cecil County, Maryland, dated October 7,
2008. Incorporated by reference to exhibit 10.2 filed with the
Company’s form 8-K filed on October 10,
2008.
|
|
10.3
|
Asset
Purchase Agreement between Artesian Wastewater Maryland, Inc.,
subsidiary
of the Company, and Cecil County, Maryland, dated October 7,
2008. Incorporated by reference to exhibit 10.3 filed with the
Company’s form 8-K filed on October 10, 2008.
|
|
10.4
|
Limited
Liability Interest Purchase Agreement between Artesian Water
Maryland,
Inc., subsidiary of the Company, and Mountain Hill Water Company,
LLC,
dated May 5, 2008. Incorporated by reference to exhibit 10.1
filed with the Company’s form 8-K filed on May 9, 2008.
|
|
10.5
|
Wastewater
Services Agreement between Artesian Utility Development, Inc.,
subsidiary
of the Company, and Northern Sussex Regional Water Recharge Complex,
LLC,
dated June 30, 2008. This exhibit is subject to an order
granting confidential treatment issued by the SEC and therefore
certain
confidential portions have been omitted as indicated by the bracketed
language [CONFIDENTIAL PORTION DELETED]. Incorporated by
reference to exhibit 10.1 filed with the Company’s form 10-Q for the
quarter ended June 30, 2008.
|
|
10.6
|
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.
|
|
10.7
|
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.
**
|
|
10.8
|
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.**
|
|
10.9
|
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.**
|
|
10.10
|
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.**
|
|
10.11
|
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, 2008. Valuation and
qualifying accounts for the years ended December 31, 2008, 2007
and 2006.
*
|
|
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. *
|
|
*
|
Filed
herewith.
|
|
**
|
Compensation
plan or arrangement required to be filed or incorporated as an
exhibit.
|
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, 2008
Valuation
allowance for deferred tax assets
|
$88,000
|
---
|
---
|
$17,000
|
$71,000
|
|
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
|