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, 2010
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-18516
ARTESIAN RESOURCES CORPORATION
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(Exact name of registrant as specified in its charter)
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Delaware
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51-0002090
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number)
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664 Churchmans Road, Newark, Delaware 19702
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Address of principal executive offices
(302) 453 – 6900
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Class A Non-Voting Common Stock
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Name of each exchange on which registered
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The NASDAQ Global Select Market
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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o
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Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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o
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Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes
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o
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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o
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Yes
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o
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No
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Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12(b)-2 of the Exchange Act.:
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-Accelerated Filer o
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Smaller Reporting Company o
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
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o
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Yes
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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, 2010 was $119,022,000 and $4,741,000, 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 Global Market on June 30, 2010. 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, 2010, which trade date was June 10, 2010.
As of March 9, 2011, 6,767,983 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.
TABLE OF CONTENTS
SPECIAL NOTE 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 and expectation for our water and wastewater subsidiaries and non-regulated subsidiaries, customer base growth opportunities in Delaware and 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, our expectation of the timing of decisions by regulatory authorities, our expectation of the timing of the closing for pending acquisitions, the impact of weather on our operations and the execution of our strategic initiatives, our expectation of the timing for construction on new projects, our belief regarding our reliance on outside engineering firms, our expectation relating to the adoption of recent accounting pronouncements, contract operations opportunities, legal proceedings, our properties, deferred tax assets, 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, our ability to refinance our debt as it comes due, the timing and terms of renewals of our lines of credit, plans to increase our wastewater treatment operations, engineering services and other revenue streams less affected by weather, 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. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “projects”, “forecasts”, “may”, “should”, variations of such words and similar expressions are intended to identify such forward-looking statements. 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.
General Information
Artesian Resources Corporation operates as the holding company of eight wholly-owned subsidiaries offering water, wastewater and other services on the Delmarva Peninsula. 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, municipal and utility customers throughout the states of Delaware, Maryland and Pennsylvania. We provide wastewater services to customers in Delaware and have entered into purchase agreements in order to provide wastewater services in the State of Maryland. In addition, we provide contract water and wastewater operations, water and sewer Service Line Protection Plans, wastewater management services, and design, construction and engineering services. Our Class A Non-Voting Common Stock is listed on NASDAQ Global Select 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 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 898,000 at July 1, 2010. According to the US Census Bureau, Delaware's population increased an estimated 14.6% from 2000 to 2010, as compared to the nationwide growth rate of approximately 9.7%. 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 2007, we expanded 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. In 2005, the federal Base Realignment and Closure Commission, or BRAC, announced the relocation of approximately 14,000 jobs to nearby Aberdeen, Maryland by September 2011. The Wilmington Metropolitan Area Planning Commission projects Cecil County will grow 61% between 2005 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. With so many new workers coming to the area in the next several years, as a result of the BRAC relocation implementation in 2011, Cecil County and other surrounding areas expect a significant increase in development.
We have interconnection agreements for the sale of water with the towns of Elkton and Chesapeake City, Maryland. The Town of Elkton began taking a minimum of 50,000 gallons per day of water through the interconnection in July 2009 and may take a maximum of 250,000 gallons per day. At the Town of Elkton’s request, the maximum daily take may be raised to 1.5 million gallons per day, with the minimum required take set at one quarter of the requested maximum level. 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 and have purchased water assets from the Town of Port Deposit, which are both discussed below. The existing water and wastewater systems in the Cecil County agreements serve approximately 3,400 customers, while the existing water system in the Town of Port Deposit, or Port Deposit, serves approximately 280 customers.
In 2010, we added approximately 2 square miles of franchised water service area in Maryland following the purchase of Port Deposit’s water assets. We also have several new service territory applications pending that are expected to be approved in 2011. We hold Certificates of Public Convenience and Necessity, or CPCNs, for approximately 275 square miles of exclusive water service territory and approximately 24 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 67,900 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 and/or wastewater service to the newly developed areas and new customers.
Subsidiaries
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. In addition, Artesian Water provides services to other water utilities, including operations and billing functions, and also has contract operation agreements with private and municipal water providers. We also provide water for public and private fire protection to customers in our service territories.
Artesian Water Maryland
Artesian Water Maryland began operations in August 2007 and has expanded its operations through the following transactions:
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Carpenters Point Water Company – August 2007 acquisition of the Carpenters Point Water Company, which includes a 141 home community in Cecil County near the Interstate 95 growth corridor between Philadelphia and Baltimore and which has sufficient groundwater supply and elevated water storage to serve additional customers in the undeveloped portions of its franchise and surrounding area.
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Mountain Hill Water Company - August 2008 acquisition of Mountain Hill Water Company, which includes service rights to 8,000 acres of undeveloped land in Cecil County’s growth area. Included in this Mountain Hill Service Area is the Principio Business Park, as well as the proposed 660 home residential development of Charlestown Crossing. We currently serve three commercial accounts in the Principio Business Park. On June 4, 2009, the Maryland Public Service Commission, or MDPSC, approved installation of a water main to serve residents of Whitaker Woods, an existing 172 home development located adjacent to the Mountain Hill Service Area. As of December 31, 2010, 39 homes in Whitaker Woods were receiving water service. On September 9, 2009, the MDPSC approved Artesian Water Maryland’s request to construct a water system to serve the first phase, consisting of 71 homes, in the Charlestown Crossing housing development.
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Town of Port Deposit – November 2010 purchase of water assets, which includes access to the Susquehanna River as a source of water supply and water service rights for the service area that encompasses Port Deposit’s existing 280 customers and several adjacent tracts of land including the Bainbridge property, a 1,200-acre former U.S. Navy facility, which has the potential to be developed for 2,800 residential homes as well as office, commercial, and educational uses. In December 2009, Artesian Water Maryland signed an agreement, or the Port Deposit Purchase Agreement, to purchase all of the assets used in providing potable water, water distribution and water meter services, or the Facilities, from Port Deposit. On November 1, 2010, Artesian Water Maryland closed on this transaction. Port Deposit transferred to Artesian Water Maryland all of Port Deposit’s right, title and interest in and to all of the plant and equipment, associated real property, contracts and permits possessed by Port Deposit at closing related to the operation of the Facilities as well as the water distribution, treatment and water meter systems possessed by Port Deposit or used in the operation of the Facilities. Port Deposit also transferred to Artesian Water Maryland all rights to serve the customers within Port Deposit (which shall include Port Deposit as it currently exists as well as certain additional growth areas that may be added to Port Deposit in the future) and all rights to be served by all vendors and suppliers of Port Deposit. Port Deposit shall collect and remit to Artesian Water Maryland its tariffed connection charges as approved by the MDPSC for new connections to the water system within Port Deposit. Artesian Water Maryland also assumed certain liabilities arising as of and after the closing. In addition, the Port Deposit Purchase Agreement includes a provision granting Port Deposit a right of first refusal in the event that Artesian Water Maryland ever wishes to sell all or part of the acquired assets, as well as a provision governing Artesian Water Maryland’s ability to raise rates between closing and March 31, 2013. The total price for the purchased assets and access to the Susquehanna River as a source of water supply was $1,256,000. Artesian Water Maryland paid $250,000 to Port Deposit, less $85,000 already paid as a deposit and $82,000 owed to Artesian Utility for operating the plant and equipment prior to closing. Artesian Water Maryland also executed a promissory note in the amount of $800,000, or the Promissory Note. In December 2010, the Promissory Note was paid in full. In addition, Artesian Water Maryland paid off Port Deposit’s $206,000 loan from the Maryland Water Quality Financing Administration, or MWQFA. The MDPSC approved this transaction on July 28, 2010, including the exercise of franchise agreements granted by Port Deposit and Cecil County, Maryland. The existing water system consists of a water treatment facility, an existing 700,000 gallon per day Susquehanna River Water Appropriation Permit, a 500,000-gallon ground storage tank and water mains.
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In addition, Artesian Water Maryland has entered into the following agreement to further expand our service capabilities:
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Cecil County Agreement - In October 2008, Artesian Water Maryland signed an agreement, or the Cecil County 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 Route 7 water facilities and the associated parcels of real property, easement rights and water transmission and distribution systems at 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 in cash at closing or, upon mutual agreement, by a note payable to Cecil County. In response to the Cecil County Purchase Agreement, the Appleton Regional Community Alliance, or Appleton Alliance, filed a petition with The Circuit Court of Cecil County, Maryland, or Circuit Court, in opposition to the transactions on the grounds that Cecil County has no right to sell the assets involved in the transaction, which has delayed the closing. The Circuit Court decided in favor of Cecil County on July 24, 2009. On August 19, 2009, the Appleton Alliance filed an appeal of the Circuit Court’s decision with the Maryland Court of Special Appeals. Upon the request of Cecil County, which was not opposed by the Appleton Alliance, the matter was moved to the state’s highest Court of Appeals, where it was heard on June 2, 2010. The Court of Appeals decision is now pending. Closing on this transaction is also subject to the approval of the MDPSC. The Cecil County Purchase Agreement may be terminated by either party, subject to certain exceptions, in the event of uncured breach by the other party. Upon the mutual agreement of the parties, the closing date has been extended to within six months after the final judicial determination by the Maryland Court of Appeals on the Appleton Alliance petition.
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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 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 Management, Inc., or Artesian Wastewater, is a regulated entity that 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 million gallons per day, or mgd.
The preliminary engineering and design work was completed on a regional wastewater treatment and disposal facility located in the northern Sussex County area that has the potential to treat up to approximately 8 mgd. This facility is strategically situated to provide service to the growing population in the Georgetown, Ellendale and Milton areas, 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. The agreement signed on June 30, 2008 (and as amended on April 29, 2009) between Artesian Utility Development, Inc., or Artesian Utility, and Northern Sussex Regional Water Recycling Complex, LLC, or NSRWRC, for the design, construction and operation of this facility was cancelled on August 6, 2010. Artesian Wastewater will manage the design and construction of the facility going forward and, once completed, the operation of the facility.
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 mgd of wastewater capacity for the town.
Artesian Wastewater Maryland
Artesian Wastewater Maryland was incorporated on June 3, 2008 specifically for the purpose of executing the purchase agreements described below in order to provide regulated wastewater services in the State of Maryland.
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Meadowview Wastewater Facility - In October 2008, Artesian Wastewater Maryland signed an agreement, or the Meadowview Agreement, to purchase 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 from Cecil County at 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 $7.2 million due by Cecil County under a tax-exempt Cecil County Sanitary District Bond, Series 2004B, or the Bond. In the event that the net asset value of the purchased assets as of the closing exceeds the amount due under the Bond, 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.
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Cherry Hill and Harbourview Wastewater Facilities - In October 2008, Artesian Wastewater Maryland signed an agreement, or the Cherry Hill Agreement, to purchase 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 from Cecil County at a price 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. 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 Agreement is less than the Indebtedness, Cecil County will pay out of its own funds any amount sufficient to discharge in full the Indebtedness in excess of the purchase price. If the purchase price exceeds the amount of Indebtedness, the positive difference will be paid by Artesian Wastewater Maryland and may be financed through a note payable to Cecil County.
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The Meadowview Agreement and the Cherry Hill Agreement are also subject to the petition filed by the Appleton Alliance described in the Artesian Water Maryland section above. As a result, closing will be delayed until the final judicial determination on the Appleton Alliance petition. Closing on these transactions is also subject to the approval of the MDPSC. Under each of the agreements, either party may terminate such agreement, subject to certain exceptions, in the event of uncured breach by the other party. Upon the mutual agreement of the parties, the closing date has been extended to within six months after the final judicial determination by the Maryland Court of Appeals on the Appleton Alliance petition.
Artesian Utility
Artesian Utility 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 water or wastewater facilities and the type of technology that should be used for treatment at such facilities, and operates water and wastewater facilities in Delaware and Maryland for municipal and governmental organizations. Artesian Utility also has several contracts with developers for design and construction of wastewater facilities within the Delmarva Peninsula, using a number of different technologies for treatment of wastewater at each facility.
We currently operate wastewater treatment facilities for the town of Middletown, in Southern New Castle County, or Middletown, under a 20-year contract that expires on February 1, 2021. The facilities include two wastewater treatment stations with capacities of up to approximately 2.5 mgd and 250,000 gallons per day, respectively. We also operate a wastewater disposal facility in Middletown in order to support the 2.5 mgd wastewater treatment station.
One of the wastewater treatment facilities in Middletown now provides reclaimed wastewater for use in spray irrigation on public and agricultural lands in the area. Our relationship with the Town of Middletown has given us the opportunity to create the Artesian Water Resource Management Partnership, or AWRMP, to encourage and support the use of reclaimed water for agricultural irrigation and other needs. Using reclaimed water to irrigate farm fields can save the Delmarva region millions of gallons of groundwater each day. The AWRMP’s first project in Middletown will save up to 3 million gallons of water per day during the peak growing season. Through the AWRMP initiative, Artesian will provide planning, engineering and technical expertise and help bring together the various state, local and private partners needed for water recycling project approvals.
As a result of the Company’s decision to end insufficiently profitable contracts and focus efforts on expansion in our core utility operations in Maryland, we no longer provide contract water and wastewater operation services in Pennsylvania for the contracts related to our acquisition of TMH Environmental Services, Inc. in May 2007.
The agreement signed on June 30, 2008 (and as amended April 29, 2009) between Artesian Utility and 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 was cancelled on August 6, 2010. Artesian Wastewater will manage the design and construction of the facility going forward and, once constructed, the operation of the facility.
In connection with the Meadowview Agreement and the Cherry Hill Agreement described above under Artesian Wastewater Maryland, in March 2009, Artesian Utility signed an agreement with the Cecil County Department of Public Works in Cecil County, Maryland to operate the Meadowview Wastewater and Highlands Wastewater treatment and disposal facilities until Artesian Wastewater Maryland’s purchase of the facilities is final. This agreement also employs Artesian Utility to operate two water supply and treatment stations and two booster stations in Cecil County.
Artesian Development
Artesian Development owns an approximately six-acre parcel of land zoned for office buildings located immediately adjacent to our corporate headquarters and two nine-acre parcels of land located in Sussex County.
In October 2007, Artesian Development purchased the two nine-acre parcels noted above, located on Route 9, west of the City of Lewes in Sussex County, Delaware. Artesian Development received a conditional use grant for this land from Sussex County that permits 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 their 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 submitted designs to DNREC along with supplementary information seeking to increase the number of units approved to be served at the site from 400 units to approximately 1,900 units. The permitting process is complete. Additional groundwater studies, which are designed to improve the phasing and implementation of the systems operation in accordance with DNREC requirements, are complete. Construction of the entrance to this site is also complete. We have current requests for service from four local developments.
In October 2010, Artesian Development purchased an office facility located in Sussex County, Delaware. The facility consists of approximately 10,000 square feet of office space along with nearly 10,000 square feet of warehouse space. This facility has allowed all of our Sussex County, Delaware operations to be housed in one central location.
Artesian Consulting Engineers
Artesian Consulting Engineers provides an array of engineering services to developers, private residential clients, commercial clients and municipal clients. On June 6, 2008, Artesian Consulting Engineers acquired all the assets of Meridian Architects and Engineers, or Meridian, a leading provider of engineering services in Delaware. The acquisition included the assignment of certain current contract agreements to provide engineering services to developers and included services to be provided to Artesian Water. This acquisition provided Artesian Resources with enhanced design and engineering capabilities that we believe have decreased our reliance on outside engineering firms for similar services. In addition, we believe that Artesian Consulting Engineer’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, provides additional revenues that are not weather sensitive.
Other
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 participating customers’ leaking water service lines up to an annual limit. As of December 31, 2010, approximately 15,700, or 22.8%, of our 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, the Sewer Service Line Protection Plan, or SSLP Plan, covers all parts, material and labor required to repair or replace participating customers’ leaking or clogged sewer lines up to an annual limit. As of December 31, 2010, approximately 8,200, or 11.9%, of our eligible customers had signed up for the SSLP Plan. Also, in the second quarter of 2010, the WSLP Plan and SSLP Plan were extended to include non-customers of Artesian Resources. As of December 31, 2010, approximately 570 non-customer participants have signed up for either the WSLP Plan or SSLP Plan.
Regulatory Matters
Overview
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 Delaware Public Service Commission, or 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.
Water and Wastewater Rates
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.
On December 29, 2010, Artesian Water Maryland filed an application with the MDPSC to revise its rates and charges concerning the former Mountain Hill Water system. Artesian Water Maryland requested authorization to implement proposed rates for water and wastewater services to meet a requested increase in revenue of approximately $65,000 on an annualized basis. In addition to the increase in rates, Artesian Water Maryland is requesting a change to its rate structure, reducing the per thousand gallon charge while adding a monthly customer and fire protection charge. These charges are consistent wth other public water utilities. If approved, these changes will result in a 34% increase for the average residential customer.
On August 19, 2009, Artesian Water, DEPSC, the Division of the Public Advocate and Christiana Care Health Services, Inc. entered into an agreement to settle Artesian Water’s April 2008 application for an increase in rates. PSC Order No. 7657 was signed by the DEPSC on September 22, 2009, approving the settlement agreement, which made the existing 15% temporary increase in base rates permanent. Since the rate was equal to the 15% temporary increase in rates charged to customers since December 17, 2008, Artesian Water was not required to refund any amounts to customers. This settlement also included the agreement that Artesian Water will not apply for a further rate increase for an 18-month period from the date of the DEPSC’s order closing this application. It was also agreed that the revenue recovered by the Company pursuant to the settlement does not include any recovery of funds attributable to state income tax expense, as it is unlikely that any state income tax will be paid by Artesian Water during the rate effective period.
In March 2009, Artesian Wastewater filed an application with the DEPSC for approval of a uniform tariff applicable to all of our wastewater territories in Delaware. Previously, each time we added a new service territory, an application was required to be submitted to the DEPSC for rate approval. As a result of the July 7, 2009 DEPSC approval of our application, Artesian Wastewater is now permitted to apply its tariffed rates to any new service territories without prior DEPSC approval.
Service Territory Expansion
In Delaware, 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 DEPSC 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 DEPSC may grant 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 or where the supply is insufficient to meet the projected demand. For a wastewater company, the DEPSC has jurisdiction over non-governmental wastewater utilities having fifty or more customers in the aggregate. A CPCN for water and wastewater utilities shall be granted by the DEPSC to applicants 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. A water or wastewater utility that has a CPCN must obtain the approval of the DEPSC to abandon a service territory. Once a CPCN is granted to a water or 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 has been granted an exclusive franchise for each of its existing water and wastewater systems, its ability to expand service areas can be affected by the DEPSC awarding franchises to other regulated water or wastewater utilities with whom we compete for such franchises.
On September 7, 2010, the DEPSC entered Order No. 7833, which approved the Revised Water Certificates of Public Convenience and Necessity Regulations as final. After extensive proceedings regarding Regulation Docket No. 51, the DEPSC repealed and replaced its existing Regulations Governing Certificates of Public Convenience and Necessity for Water Utilities with a new revised set of regulations (the “Revised Water CPCN Regulations”). The Revised Water CPCN Regulations changed the definition of a “Proposed Service Area” to encompass either a single parcel or two or more contiguous parcels that will be provided water by the same system or main extension.
In Maryland, if we are seeking new franchise areas, we must first seek approval from the county or town 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. 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.
On June 4, 2009, the MDPSC approved Artesian Water Maryland’s request to construct a water system to serve the 172 residents of the Whitaker Woods housing development located adjacent to the Mountain Hill Service Area. This expanded franchise area is subject to the Mountain Hill tariff rates. We began serving customers in this development in November 2009. On September 9, 2009, the MDPSC approved Artesian Water Maryland’s request to construct a water system to serve 71 residents in the Charlestown Crossing housing development. Construction was completed in July 2010.
In December 2009, Artesian Water Maryland applied for approval from the MDPSC to exercise a franchise to provide water service to the Town of Port Deposit. This application also requested authority to finance the purchase of water system facilities, and to establish water service rates. On July 28, 2010, the MDPSC approved our application. On November 1, 2010, Artesian Water Maryland completed the purchase of Port Deposit’s water assets.
Other Regulatory Matters
Delaware law 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 may be implemented by water utilities 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 cannot exceed 5% within any 12-month period. We did not have DSIC in effect during 2009. During 2010, Artesian Water filed two applications with the DEPSC for approval to collect a 0.34% increase and 0.68% increase during the first and second half of the year, respectively. These increases recover the costs of eligible revenue producing improvements made since the last rate increase in 2008, and were calculated to generate approximately $286,000 in revenue annually. The DEPSC approved the DSIC effective January 1, 2010 and July 1, 2010, subject to audit at a later date. For the year ended December 31, 2010, we earned approximately $288,000 in DSIC revenue. In November 2010, we filed an application with the DEPSC for approval to increase the DSIC rate to 1.47% effective January 1, 2011, which will generate approximately $390,000 in revenue on an annual basis.
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 February 12, 2010 and February 11, 2011, respectively, we filed the first and second of three required annual reports with the DEPSC, in order to demonstrate our compliance with Regulation Docket 15.
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 filed a new certification of self-sufficiency with the DEPSC on June 30, 2009, for the period through 2012. On June 1, 2010, the DEPSC accepted our self-sufficiency certification through 2012.
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.
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.
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 117 operating and 56 observation and monitoring wells in our Delaware systems. At December 31, 2010, we had allocation permits for 84 wells, permit applications pending for 10 wells, and 23 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.
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 Drinking Water 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.
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 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, 2010, we have 5 wells that pump groundwater to 2 separate water treatment facilities, and one water treatment facility that treats surface water from the Susquehanna River, located in Cecil County, Maryland.
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 all requirements of federal, state and local standards.
Sources of Water
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 55 different water treatment facilities in our Delaware systems. 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 2010 came from our groundwater wells, while the remaining 15% came from interconnections with other utilities and municipalities. During 2010, our average rate of water pumped was approximately 17.7 million gallons per day, or mgd, from our groundwater wells and approximately 3.1 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.
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. In Maryland, we have an interconnection that connects the Artesian Water system from the Delaware state line to the Town of Elkton, providing up to 1.5 mgd.
We have 21 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, 2010, 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, 2010, we were serving customers through approximately 1,131 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 5,336 hydrants installed throughout our service territories.
We have 29 storage tanks in Delaware, 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 New Castle County, 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, Maryland we have 3 storage tanks capable of storing approximately 1.1 million gallons.
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 is 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.
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, 2010, we employed 238 full-time and 8 part-time employees. Of these employees, 24 were officers and managers; 146 were employed as operations personnel, including engineers, technicians, draftsman, maintenance and repair persons, meter readers and utility personnel; and 59 were employed in accounting, budgeting, information systems, human resources, customer relations and public relations. The remaining 17 employees were administrative personnel. 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 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. 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 a 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 when rainfall is more 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.
We are subject to risks associated with the collection, treatment and disposal of wastewater.
Wastewater collection, treatment and disposal involve various unique risks. If collection or treatment systems fail, overflow, or do not operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to aquatic life and economic damages, which may not be recoverable in fees. This risk is most acute during periods of substantial rainfall or flooding, which are common causes of sewer overflow and system failure. Liabilities resulting from such damages and injuries could materially and adversely affect the Company’s results of operations and financial condition.
Turnover in our management team could have an adverse impact on our business or the financial market’s perception of our ability to continue to grow.
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. Recent 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 extended 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.
The continuing effects of adverse U.S. economic conditions 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.
We also may experience risks relating to the challenges and costs of closing a transaction and the risk that an announced transaction may not close. Completion of certain acquisition transactions are conditioned upon, among other things, the receipt of approvals, including from the certain state public utilities commissions. Failure to complete a pending transaction would prevent us from realizing the anticipated benefits. We would also remain liable for significant transaction costs, including legal and accounting fees, whether or not the transaction is completed.
We are subject to, and could be further subject to, governmental investigations or actions by other third parties.
We are subject to various federal and state laws, including environmental laws, violations of which can involve civil or criminal sanctions. Artesian Water received a federal grand jury subpoena in connection with an investigation being conducted by the United States Attorney’s Office in the Eastern District of Pennsylvania and the Environmental Protection Agency. The subpoena requests certain documents from Artesian Water principally relating to eight wastewater facilities in Pennsylvania formerly operated by personnel of Artesian Utility Development, Inc., our wholly owned subsidiary. Artesian Resources was subsequently advised that Artesian Utility’s operation of the eight wastewater facilities in Pennsylvania is a subject of the grand jury investigation. We are fully cooperating with the investigation. Due to the stage of the investigation, we are unable to predict the outcome of the investigation, or the possible loss or range of loss, if any, which could be associated with the resolution of any possible criminal charges or civil claims that may be brought against us. Should such charges or claims be brought, we could face significant fines, damage awards or regulatory consequences which could have a material adverse effect on our business, financial position and results of operations.
In addition, we are currently subject to pending litigation. On December 22, 2010, Artesian Water filed a complaint in the United States District Court for the Eastern District of Pennsylvania against Chester Water Authority claiming breach of contract, unjust enrichment and requesting declaratory judgment in relation to an agreement by Chester Water to supply bulk water supplies to Artesian Water. On February 11, 2011, Artesian Water received an answer and counterclaim from Chester Water Authority denying Artesian Water’s claims and allegations, asserting a counterclaim for breach of contract and seeking monetary damages, related costs and attorneys’ fees. Although Artesian Water intends to pursue its claims and defense in the action vigorously, there can be no assurances that it will prevail on any of the claims in the action, or, if it does prevail on one or more claims, of the amount or nature of recovery that may be awarded to it for such claim(s).
Our operations from time to time could be parties to or targets of additional lawsuits, claims, investigations and proceedings, including system failure, injury, contract, environmental, health and safety and employment matters, which are handled and defended in the ordinary course of business. The results of any future litigation or settlement of such lawsuits and claims are inherently unpredictable, but such outcomes could also materially and adversely affect our business, financial position and results of operations.
We are dependent on the continuous and reliable operation of our information technology systems.
We rely on our information technology systems in connection with the operation of our business, specifically with respect to customer service and billing, managing construction projects, managing our financial records, tracking assets, remotely monitoring some of our plants and facilities and managing human resources, inventory and accounts receivable collections. A loss of these systems or major problems with the operation of these systems could affect our operations and have a significant material adverse effect on our results of operations.
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 an 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.
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 have and will continue to bear any increase in costs for security precautions to protect our facilities, operations and supplies, most of which have been recoverable under state regulatory policies. While the costs of increases in security, including capital expenditures, may be significant, we expect these costs to continue to be recoverable in water and wastewater rates. Despite our security measures, we may not be in a position to control the outcome of terrorist events, or other attacks on our water systems, should they occur.
None.
Our corporate headquarters are located at 664 Churchmans Road, Newark, Delaware and are owned by Artesian Water.
Artesian Development owns approximately 6 acres of land in New Castle County, Delaware zoned for office development and approximately two nice-acre parcels of land in Sussex County, Delaware for water and wastewater treatment facilities and elevated water storage. Artesian Development also owns an office facility located in Sussex County, Delaware. The facility consists of approximately 10,000 square feet of office space along with approximately 10,000 square feet of warehouse space.
Artesian Wastewater owns a 75-acre parcel of land for the operation of the wastewater facility known as the Northern Sussex Regional Water Recharge Complex. The purchase of this land resulted in the reclassification of the facility from non-utility property to utility plant on our Consolidated Balance Sheet. The Company paid off the outstanding balance of a construction loan secured by the 75-acre parcel that was previously guaranteed by the Company, and the loan was cancelled. There is no other security pledged for the 75-acre parcel of land.
Artesian Water owns land, rights-of-way, easements, 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, 2010.
|
Utility plant comprises:
|
||||||||
|
In thousands
|
||||||||
|
Estimated Useful Life
|
||||||||
|
(In Years)
|
2010
|
|||||||
|
Utility plant at original cost
|
||||||||
|
Utility plant in service-Water
|
||||||||
|
Intangible plant
|
--- | $ | 140 | |||||
|
Source of supply plant
|
45-85 | 16,422 | ||||||
|
Pumping and water treatment plant
|
35-62 | 57,168 | ||||||
|
Transmission and distribution plant
|
||||||||
|
Mains
|
81 | 182,319 | ||||||
|
Services
|
39 | 29,770 | ||||||
|
Storage tanks
|
76 | 22,703 | ||||||
|
Meters
|
26 | 17,208 | ||||||
|
Hydrants
|
60 | 9,678 | ||||||
|
General plant
|
3-31 | 42,645 | ||||||
|
Utility plant in service-Wastewater
|
||||||||
|
Treatment and Disposal Plant
|
35-62 | 11,611 | ||||||
|
Collection Mains and Lift Stations
|
81 | 4,944 | ||||||
|
General plant
|
3-31 | 1,015 | ||||||
|
Property held for future use
|
--- | 13,489 | ||||||
|
Construction work in progress
|
--- | 5,521 | ||||||
| 414,633 | ||||||||
|
Less – accumulated depreciation
|
69,250 | |||||||
| $ | 345,383 | |||||||
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, 2010, 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.
Artesian Water received a federal grand jury subpoena in connection with an investigation being conducted by the United States Attorney’s Office in the Eastern District of Pennsylvania and the Environmental Protection Agency. The subpoena requests certain documents from Artesian Water principally relating to eight wastewater facilities in Pennsylvania formerly operated by personnel of Artesian Utility Development, Inc., our wholly owned subsidiary. Artesian Resources was subsequently advised that Artesian Utility’s operation of the eight wastewater facilities in Pennsylvania is a subject of the grand jury investigation. We are fully cooperating with the investigation. Due to the stage of the investigation, we are unable to predict the outcome of the investigation, or the possible loss or range of loss, if any, which could be associated with the resolution of any possible criminal charges or civil claims that may be brought against us. Should such charges or claims be brought, we could face significant fines, damage awards or regulatory consequences which could have a material adverse effect on our business, financial position and results of operations.
Periodically, we are involved in other proceedings or litigation arising in the ordinary course of business. We do not believe that the ultimate resolution of these matters will materially affect our business, financial position or results of operations.
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 Select Market and trades under the symbol "ARTNA." On March 4, 2011, the last closing sale price as reported by the NASDAQ Global Select Market was $19.77 per share. On March 4, 2011, there were 790 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 Select Market and the cash dividends declared per share.
CLASS A NON-VOTING COMMON STOCK
|
High
|
Low
|
Dividend Per Share
|
||||||||||
| 2009 | ||||||||||||
|
First Quarter
|
$ | 16.19 | $ | 12.95 | $ | 0.1784 | ||||||
|
Second Quarter
|
16.44 | 13.90 | 0.1784 | |||||||||
|
Third Quarter
|
17.83 | 16.06 | 0.1784 | |||||||||
|
Fourth Quarter
|
18.61 | 15.65 | 0.1873 | |||||||||
| 2010 | ||||||||||||
|
First Quarter
|
$ | 18.62 | $ | 17.05 | $ | 0.1873 | ||||||
|
Second Quarter
|
19.33 | 16.61 | 0.1882 | |||||||||
|
Third Quarter
|
19.07 | 17.31 | 0.1882 | |||||||||
|
Fourth Quarter
|
19.50 | 18.53 | 0.1892 | |||||||||
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 4, 2011, the last reported trade of the Class B Stock on the OTC Bulletin Board was at a price of $20.00 per share on February 28, 2011. As of March 4, 2011, we had 173 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, 2010, 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, 2010 under the Company’s stockholder 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
|
440,800 | $ | 17.18 | 466,500 | ||||||||
|
Equity compensation plans not approved by security holders
|
--- | --- | --- | |||||||||
|
Total
|
440,800 | 466,500 | ||||||||||
The following graph compares the percentage change in cumulative shareholder return on the Company’s Class A common stock with the Standard & Poor’s 500 Stock Index and a Peer Group of water utility companies having similar market capitalizations. The graph covers the period from December 2005 (assuming a $100 investment on December 31, 2005, and the reinvestment of any dividends) through December 2010:
|
INDEXED RETURNS
|
||||||
|
Base Period
|
Years Ending December 31
|
|||||
|
Company Name / Index
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
|
Artesian Resources Corporation
|
100
|
102.78
|
102.25
|
89.47
|
107.81
|
116.30
|
|
S&P 500 Index
|
100
|
115.79
|
122.16
|
76.96
|
97.33
|
111.99
|
|
Peer Group
|
100
|
100.30
|
96.46
|
96.75
|
95.64
|
114.05
|
The Peer Group includes American States Water Company, American Water Works Company, Inc., Aqua America, Inc., California Water Service Group, Connecticut Water Service, Inc., Middlesex Water Company, Pennichuck Corporation, SJW Corporation, and York Water Company.
The selected statement of operations and balance sheet data shown below were derived from our consolidated financial statements. The consolidated statement of operations data for the years ended December 31, 2010, 2009 and 2008 and the consolidated balance sheet data as of December 31, 2010 and 2009 have been derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2007 and 2006 and the consolidated balance sheet data as of December 31, 2008, 2007 and 2006 have been derived from audited consolidated financial statements which are not included in this Annual Report on Form 10-K. You should read this selected financial data together with our consolidated financial statements and related notes, as well as the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
|
In thousands, except per share and operating data
|
2010
|
2009
|
2008
|
2007
|
2006
|
|||||||||||||||
|
STATEMENT OF OPERATIONS DATA
|
||||||||||||||||||||
|
Operating revenues
|
||||||||||||||||||||
|
Water sales
|
$ | 56,685 | $ | 53,871 | $ | 50,101 | $ | 48,461 | $ | 44,272 | ||||||||||
|
Other utility operating revenue
|
2,973 | 2,208 | 2,019 | 1,699 | 1,268 | |||||||||||||||
|
Non-utility operating revenue
|
5,227 | 4,833 | 4,065 | 2,364 | 1,725 | |||||||||||||||
|
Sale of land
|
--- | --- | --- | --- | 1,322 | |||||||||||||||
|
Total operating revenues
|
$ | 64,885 | $ | 60,912 | $ | 56,185 | $ | 52,524 | $ | 48,587 | ||||||||||
|
Operating expenses
|
||||||||||||||||||||
|
Operating and maintenance
|
$ | 34,714 | $ | 32,368 | $ | 30,871 | $ | 28,594 | $ | 25,733 | ||||||||||
|
Depreciation and amortization
|
7,032 | 6,556 | 5,782 | 5,162 | 4,610 | |||||||||||||||
|
State and federal income taxes
|
5,082 | 4,860 | 4,427 | 4,134 | 3,887 | |||||||||||||||
|
Property and other taxes
|
3,789 | 3,483 | 3,199 | 2,868 | 2,562 | |||||||||||||||
|
Total operating expenses
|
$ | 50,617 | $ | 47,267 | $ | 44,279 | $ | 40,758 | $ | 36,792 | ||||||||||
|
Operating income
|
$ | 14,268 | $ | 13,645 | $ | 11,906 | $ | 11,766 | $ | 11,795 | ||||||||||
|
Other income, net
|
647 | 835 | 1,125 | 802 | 613 | |||||||||||||||
|
Total income before interest charges
|
$ | 14,915 | $ | 14,480 | $ | 13,031 | $ | 12,568 | $ | 12,408 | ||||||||||
|
Interest charges
|
$ | 7,295 | $ | 7,218 | $ | 6,613 | $ | 6,305 | $ | 6,337 | ||||||||||
|
Net income
|
$ | 7,620 | $ | 7,262 | $ | 6,418 | $ | 6,263 | $ | 6,071 | ||||||||||
|
Dividends on preferred stock
|
--- | --- | --- | --- | --- | |||||||||||||||
|
Net income applicable to common stock
|
$ | 7,620 | $ | 7,262 | $ | 6,418 | $ | 6,263 | $ | 6,071 | ||||||||||
|
Net income per share of common stock:
|
||||||||||||||||||||
|
Basic
|
$ | 1.01 | $ | 0.97 | $ | 0.87 | $ | 0.92 | $ | 1.00 | ||||||||||
|
Diluted
|
$ | 1.00 | $ | 0.97 | $ | 0.86 | $ | 0.90 | $ | 0.97 | ||||||||||
|
Avg. shares of common stock outstanding
|
||||||||||||||||||||
|
Basic
|
7,557 | 7,454 | 7,353 | 6,787 | 6,055 | |||||||||||||||
|
Diluted
|
7,618 | 7,512 | 7,427 | 6,936 | 6,235 | |||||||||||||||
|
Cash dividends per share of common stock
|
$ | 0.75 | $ | 0.72 | $ | 0.71 | $ | 0.66 | $ | 0.61 | ||||||||||
|
In thousands, except per share and operating data
|
2010
|
2009
|
2008
|
2007
|
2006
|
|||||||||||||||
|
BALANCE SHEET DATA
|
||||||||||||||||||||
|
Utility plant, at original cost
|
||||||||||||||||||||
|
less accumulated depreciation
|
$ | 345,383 | $ | 326,899 | $ | 318,243 | $ | 272,396 | $ | 253,182 | ||||||||||
|
Total assets
|
$ | 371,529 | $ | 358,895 | $ | 348,706 | $ | 294,589 | $ | 269,360 | ||||||||||
|
Lines of credit
|
$ | 29,071 | $ | 25,123 | $ | 20,286 | $ | 898 | $ | 7,906 | ||||||||||
|
Long-term obligations and
|
||||||||||||||||||||
|
redeemable preferred stock,
|
||||||||||||||||||||
|
including current portions
|
$ | 106,606 | $ | 107,555 | $ | 109,071 | $ | 92,073 | $ | 92,383 | ||||||||||
|
Stockholders’ equity
|
$ | 95,146 | $ | 91,174 | $ | 87,794 | $ | 85,132 | $ | 61,800 | ||||||||||
|
Total capitalization
|
$ | 200,207 | $ | 197,199 | $ | 195,349 | $ | 176,889 | $ | 153,873 | ||||||||||
|
OPERATING DATA
|
||||||||||||||||||||
|
Average water sales per customer
|
$ | 723 | $ | 701 | $ | 661 | $ | 645 | $ | 600 | ||||||||||
|
Water pumped (millions of gallons)
|
7,517 | 7,063 | 7,526 | 7,755 | 7,608 | |||||||||||||||
|
Number of metered customers
|
78,400 | 76,900 | 75,800 | 75,149 | 73,814 | |||||||||||||||
|
Miles of water main
|
1,131 | 1,124 | 1,112 | 1,086 | 1,051 | |||||||||||||||
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 in Artesian Water comprise 87.2% of total operating revenues. Our profitability is also attributed to the various contract operations, water and sewer Service Line Protection Plans and other services we provide. Water sales are 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 contract operations and other services provide a revenue stream that is not affected by changes in weather patterns.
While water sales revenues are our primary source of revenues, we continue to seek growth opportunities to provide wastewater service in Delaware, Maryland and the surrounding areas. We also continue to explore and develop relationships with developers and municipalities in order to increase revenues from contract water and wastewater operations, wastewater management services, design, construction and engineering services. We plan to continue developing and expanding our contract operations and other services in a manner that complements our growth in water service to new customers. Our anticipated growth in these areas is subject to changes in residential and commercial construction, which may be affected by interest rates, inflation and general housing and economic market conditions. We anticipate continued growth in our non-regulated division due to our water and sewer Service Line Protection Plans. We will continue to focus attention on expanding our contract operations opportunities with municipal and government water providers in Delaware and surrounding areas.
Water Division
Overview
Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water service to residential, commercial, industrial, governmental, municipal and utility customers. Increases in the number of customers served contributed to increases in our operating revenue. The Town of Middletown, which is one of our municipal customers and is located in southern New Castle County, Delaware, has nearly doubled in population since 2001, and population growth in this area is expected to continue for some time as a result of ongoing and future residential construction. As population growth continues in Middletown and other areas in Delaware, we believe that the demand for water will increase, thereby contributing to an increase in our operating revenues. As of December 31, 2010, we had approximately 77,900 metered water customers in Delaware, an increase of approximately 1,000 compared to December 31, 2009. The number of metered water customers in Maryland increased by approximately 300 compared to 2009, and the number of metered water customers in Pennsylvania remained consistent with 2009.
2010 Operational Highlights
In December 2009, Artesian Water Maryland signed an agreement, or the Port Deposit Purchase Agreement, to purchase all of the assets used in providing potable water, water distribution and water meter services, or the Facilities, from the Town of Port Deposit, Maryland, or Port Deposit. On November 1, 2010, Artesian Water Maryland closed on this transaction. In December 2009, Artesian Water Maryland applied for approval from the MDPSC to exercise a franchise to provide water service to the Town of Port Deposit. This application also requested authority to finance the purchase of water system facilities, and to establish water service rates. On July 28, 2010, the MDPSC approved our application. The existing water system subject to the Port Deposit Purchase Agreement consists of a water treatment facility, an existing 700,000 gallon per day Susquehanna River Water Appropriation Permit, a 500,000-gallon ground storage tank, water mains, access to the Susquehanna River as a source of water supply and water service rights for the service area that encompasses Port Deposit’s existing 280 customers, in addition to several adjacent tracts of land including the Bainbridge property, a 1,200-acre former U.S. Navy facility, which has the potential to be developed for 2,800 residential homes as well as office, commercial and educational uses.
In September 2009, the MDPSC approved Artesian Water Maryland’s request to construct a water system to serve 71 residents in the Charlestown Crossing housing development. The construction of the water system was completed in July 2010.
In October 2008, Artesian Water Maryland signed an agreement with Cecil County to purchase four water facilities. In opposition of Cecil County’s sale of the water facilities, the Appleton Regional Community Alliance, or Appleton Alliance, filed a petition with The Circuit Court of Cecil County, Maryland, or Circuit Court, challenging the proposed transfer of certain Cecil County property and assets to Artesian, delaying the closing of this transaction until a final judicial determination is received. The Circuit Court decided in favor of Cecil County on July 24, 2009. On August 19, 2009, the Appleton Alliance filed an appeal of the Circuit Court’s decision with the Maryland Court of Special Appeals. Upon the request of Cecil County, which was not opposed by the Appleton Alliance, the matter was moved to the state’s highest Court of Appeals, where it was heard on June 2, 2010. The Court of Appeals decision is now pending. Closing on this transaction is also subject to the approval of the MDPSC. The Cecil County Purchase Agreement may be terminated by either party, subject to certain exceptions, in the event of uncured breach by the other party. Upon the mutual agreement of the parties, the closing date has been extended to within six months after the final judicial determination by the Maryland Court of Appeals on the Appleton Alliance petition.
Wastewater Division
Overview
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 Maryland. Our wastewater customers are billed a flat monthly fee, which contributes to providing a revenue stream unaffected by weather.
2010 Operational Highlights
In October 2008, Artesian Wastewater Maryland signed two asset purchase agreements with Cecil County to purchase four wastewater facilities in Maryland. These asset purchase agreements with Cecil County are also subject to the petition filed by the Appleton Alliance described above. As a result, closing will be delayed until the final judicial determination on the Appleton Alliance petition. Closing on these transactions is also subject to the approval of the MDPSC. Under each of the agreements, either party may terminate such agreement, subject to certain exceptions, in the event of uncured breach by the other party. Upon the mutual agreement of the parties, the closing date has been extended to within six months after the final judicial determination by the Maryland Court of Appeals on the Appleton Alliance petition.
Non-Regulated Division
Overview
Artesian Utility provides contract water and wastewater operation services to private, municipal and governmental institutions. Artesian Utility currently operates wastewater treatment facilities for the town of Middletown, in Southern New Castle County, or Middletown, under a 20-year contract that expires on February 1, 2021. The facilities include two wastewater treatment stations with capacities of up to approximately 2.5 mgd and 250,000 gallons per day, respectively. We also operate a wastewater disposal facility in Middletown in order to support the 2.5 mgd wastewater facility.
One of the wastewater treatment facilities in Middletown now provides reclaimed wastewater for use in spray irrigation on public and agricultural lands in the area. Our relationship with the Town of Middletown has given us the opportunity to create the Artesian Water Resource Management Partnership, or AWRMP, to encourage and support the use of reclaimed water for agricultural irrigation and other needs. Using reclaimed water to irrigate farm fields can save the Delmarva region millions of gallons of groundwater each day. The AWRMP’s first project in Middletown will save up to 3 million gallons of water per day during the peak growing season. Through the AWRMP initiative, Artesian will provide planning, engineering and technical expertise and help bring together the various state, local and private partners needed for water recycling project approvals.
Artesian Development is a real estate holding company that owns properties, including land zoned for office buildings, a water treatment plant and wastewater facility, as well as property for current operations, including the recent purchase of an office facility as described below.
Artesian Consulting Engineers provides an array of engineering services to developers, private residential clients, commercial clients and municipal clients. In June 2008, Artesian Consulting Engineers acquired all the assets of Meridian, which included the assignment of certain current contract agreements to provide engineering services to developers and includes services to be provided to Artesian Water.
2010 Operational Highlights
Artesian Utility has an agreement with the Cecil County Public Works in Cecil County, Maryland to operate the Meadowview Wastewater and Highlands Wastewater treatment and disposal facilities until Artesian Wastewater Maryland’s purchase of the facilities is closed. This agreement also employs Artesian Utility to operate two water supply and treatment stations and two booster stations in Cecil County.
In October 2010, Artesian Development purchased an office facility located in Sussex County, Delaware. The facility consists of approximately 10,000 square feet of office space along with nearly 10,000 square feet of warehouse space. This facility allows all of our Sussex County, Delaware operations to be housed in one central location.
Protection Plans
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 participating customers’ leaking water service lines up to an annual limit. As of December 31, 2010, approximately 15,700, or 22.8%, of our 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, the Sewer Service Line Protection Plan, or SSLP Plan, covers all parts, material and labor required to repair or replace participating customers’ leaking or clogged sewer lines up to an annual limit. As of December 31, 2010, approximately 8,200, or 11.9%, of our eligible customers had signed up for the SSLP Plan. Also, in the second quarter of 2010, the WSLP Plan and SSLP Plan were extended to include non-customers of Artesian Resources. As of December 31, 2010, approximately 570 non-customer participants have signed up for either the WSLP Plan or SSLP Plan.
Strategic Direction
Our strategy is to significantly increase customer growth, revenues, earnings and dividends by expanding our water, wastewater, Service Line Protection Plan and engineering 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 water, wastewater and engineering services, we believe 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, reputable entities, through which we have captured additional service territories that will serve as a base for future revenue. With recent acquisitions, we have successfully integrated 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 supply water to customers and educating customers on the wise use of water. Our strategy includes focused efforts to expand in new regions added to our Delaware service territory over the last 10 years. In addition, we believe growth will occur 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, management and 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 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. Delaware’s lower property and income tax rate make it an attractive region for new home development and retirement communities. 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 United States Census Bureau, Delaware's population increased an estimated 14.6% from 2000 to 2010, as compared to the nationwide growth rate of approximately 10.6%.
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 on the Delmarva Peninsula. 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. The preliminary engineering and design work was completed on a regional wastewater treatment and disposal facility located in the northern Sussex County area that has the potential to treat up to approximately 8 mgd. This facility is strategically situated on 75 acres to provide service to the growing population in the Georgetown, Ellendale and Milton areas, 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 Wastewater will manage the design and construction of the facility and, once constructed, the operation of the facility.
Artesian Wastewater Maryland signed two agreements in October 2008 with Cecil County for the purchase of specific wastewater facilities. The closing of these transactions is delayed until a final judicial determination is received on the petition filed by the Appleton Alliance as further described in Item 1 of this Form 10-K under the heading “Subsidiaries-Artesian Water Maryland.” Closing on these transactions is also subject to the approval of the Maryland Public Service Commission, or MDPSC. Once completed, these acquisitions will add four wastewater facilities to our service area.
The general need for increased capital investment in our water and wastewater systems is due to a combination of population growth, more protective water quality standards and aging infrastructure. Our capital investment plan for the next five years includes projects for water and wastewater treatment plant improvements and additions 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 Delaware Public Service Commission and Maryland Public Service Commission have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates for current customers and capacity charges for new customers.
In our non-regulated division, we are actively pursuing opportunities to expand our contract operations. In Artesian Utility, we will seek 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. Artesian Development owns two nine-acre parcels of land, located in Sussex County, Delaware, which will allow for construction of a water treatment facility and wastewater treatment facility. Artesian Consulting Engineers continues to provide an array of civil engineering, land surveying and architectural work for public and private residential, commercial and municipal clients, including Artesian Resources. We believe these engineering services will continue to provide a revenue stream that is not weather-sensitive, while also providing additional opportunities for Artesian Resources. In addition, Artesian Consulting Engineers provides Artesian Resources with enhanced design and engineering capabilities that we believe decrease our reliance on outside engineering firms for similar services.
Inflation
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 AND ESTIMATES
Critical accounting policies and estimates are those we believe are most important to portraying the financial condition and results of operations and also require significant estimates, assumptions or other judgments by management. The following provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of the Company. Changes in the estimates, assumptions or other judgments included within these accounting policies could result in a significant change to the financial statements in any quarterly or annual period. We consider the following policies to be the most critical in understanding the judgment that is involved in preparing our Consolidated Financial Statements. Senior management has discussed the selection and development of our critical accounting policies and estimates with the Audit Committee of the Board of Directors.
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. As actual usage amounts are received, adjustments are made to the unbilled estimates in the next billing cycle based on the actual results. 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.
Our regulated utilities record deferred regulatory assets under FASB ASC Topic 980, 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.
Our long-lived assets consist primarily of utility plant in service and regulatory assets. We review for impairment of our long-lived assets, including utility plant in service, in accordance with the requirements of FASB ASC Topic 360. We review regulatory assets for the continued application of FASB ASC Topic 980. 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. Adjustments to the carrying value of these assets would be made in instances where changes in circumstances or events indicate the carrying value of the asset may not be recoverable. The Company believes there are no impairments in the carrying amounts of its long-lived assets at December 31, 2010.
Results of Operations
2010 Compared to 2009
Operating Revenues
Revenues totaled $64.9 million in 2010 and were 6.5% above revenues in 2009 of $60.9 million, which is partially due to an increase of $2.8 million, or 5.2%, in total water sales revenue. Water sales revenues totaled $56.7 million in 2010 and were 5.2% above revenues in 2009 of $53.9 million. The heavy precipitation experienced in 2009 reduced per capita consumption, thereby reducing water sales revenue for the full year 2009. The increase in water sales in 2010 compared to 2009 more closely reflects the return to the average annual per capita consumption over a five-year period. We realized 87.4% of our total operating revenue in 2010 from the sale of water as compared to 88.4% in 2009.
Non-utility operating revenue totaled $5.2 million in 2010 as compared to $4.8 million in 2009. This increase is attributable to an increase in contract revenue in Artesian Utility, primarily due to design and permitting services performed for a project in Middletown, Delaware and increased contract services performed for municipalities in Maryland. The increase in non-utility revenue also reflects an increase in water and wastewater Service Line Protection Plan, or collectively SLP Plans, revenue earned by Artesian Resources. The SLP Plans provide coverage for all material and labor required to repair or replace participants’ leaking water service or clogged sewer lines up to an annual limit. The increase in non-utility operating revenue is partially offset by a decrease in contract revenue in Artesian Utility, a result of the reduction in contract services for Pennsylvania.
Other utility operating revenue totaled $3.0 million in 2010 as compared to $2.2 million in 2009. The increase is primarily the result of increased wastewater customer service revenues and an increase in our service charges.
|
Percentage of Operating Revenues
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Water Sales
|
||||||||||||
|
Residential
|
54.0 | % | 54.2 | % | 55.3 | % | ||||||
|
Commercial
|
20.6 | 21.3 | 21.4 | |||||||||
|
Industrial
|
0.2 | 0.3 | 0.5 | |||||||||
|
Government and Other
|
12.6 | 12.7 | 12.0 | |||||||||
|
Non-utility operating revenues
|
8.1 | 7.9 | 7.2 | |||||||||
|
Other utility operating revenues
|
4.5 | 3.6 | 3.6 | |||||||||
|
Total
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Residential
Residential water service revenues in 2010 amounted to $35.0 million, an increase of $2.0 million, or 6.1% over the $33.0 million recorded in 2009, primarily due to an increase in water consumption. The heavy precipitation experienced in 2009 reduced per capita consumption, thereby reducing water sales revenue for the full year 2009. The increase in water sales in 2010 compared to 2009 more closely reflects the return to the average annual per capita consumption over a five-year period. The increase in 2010 follows an increase of $2.0 million, or 6.3%, in 2009, which was primarily due to rate increases effective June and December 2008. The volume of water sold to residential customers increased to 3,908 million gallons in 2010 compared to 3,631 million gallons in 2009, a 7.6% increase, primarily the result of the reduced water consumption in 2009 due to the unusually wet weather experienced during the year. The number of residential customers served increased by 1,085, or 1.4%, in 2010.
Commercial
Water service revenues from commercial customers in 2010 increased by 2.6%, from $13.0 million in 2009 to $13.3 million in 2010, primarily due to increased water consumption. We sold 2,130 million gallons of water to commercial customers in 2010, a 1.8% increase as compared to 2,093 million gallons sold in 2009.
Industrial
Water service revenues from industrial customers decreased by 34.6%, from $181,000 in 2009 to $118,000 in 2010. The volume of water sold to industrial customers decreased by 50.9%, from 36 million gallons in 2009 to 18 million gallons in 2010, primarily as a result of decreased usage by an industrial customer that reduced operations.
Government and Other
Government and other water service revenues in 2010 increased by 6.9%, from $7.7 million in 2009 to $8.2 million in 2010, primarily due increased water consumption from municipalities for re-sale. Consumption for government and other customers increased 147 million gallons in 2010 as compared to 2009.
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 34.6% in 2010, from $2.2 million in 2009 to $3.0 million in 2010. As a percentage of operating revenues, other utility operating revenues increased to 4.5% from 3.6%. The increase, approximately $765,000, is primarily the result of increased wastewater customer service revenues and an increase in our service charges.
Non-Utility Operating Revenue
Non-utility operating revenue, derived from non-regulated water and wastewater operations, increased from $4.8 million in 2009 to $5.2 million in 2010. This increase is attributable to an increase in contract revenue in Artesian Utility of approximately $283,000, primarily due to design and permitting services performed for a project in Middletown, Delaware and increased contract services performed for municipalities in Maryland. The increase in non-utility revenue also reflects an increase of $93,000 and $268,000, respectively, in water and wastewater SLP Plans revenue earned by Artesian Resources. The increase in non-utility operating revenue is partially offset by an approximately $292,000 decrease in contract revenue in Artesian Utility, a result of the reduction in contract services in Pennsylvania.
Operating Expenses
Operating expenses, excluding depreciation and income taxes, increased $2.7 million, or 7.4%, to $38.5 million in 2010. The components of the change in operating expenses includes an increase in utility operating expenses of $2.0 million and an increase in non-utility operating expenses of $377,000.
The increase in utility operating expenses of $2.0 million, or 6.8%, in 2010 as compared to 2009, is comprised of an increase in payroll and employee benefits costs, purchased water expense, repair and maintenance expenses, and administration expenses, partially offset by a decrease in water treatment costs. Payroll and employee benefit costs increased $1.2 million, or 7.8%, primarily the result of a decrease in capitalized labor and benefits, an increase in hours worked due to the unusual winter weather experienced in the first quarter of 2010, an increase in wages and increased medical benefit premiums. Purchased water expense increased $402,000, or 12.4%, primarily due to an increase of 11.0% in Chester Water Authority’s rates effective in July 2009 and an 11.5% rate increase effective July 1, 2010. Repair and maintenance expenses increased $334,000, or 16.8%, a result of increased water treatment equipment maintenance costs, higher equipment parts and supplies purchases, increased building maintenance and increased fuel costs. As a percentage of operating expenses, purchased water expenses increased to 10.5% from 10.0% and repair and maintenance expenses increased to 6.7% from 6.1%. Administration expenses increased $151,000, or 3.9%, primarily the result of an increase in outside service costs and an increase in printing and postage costs. The increase in administrative expenses is partially offset by a decrease in rate case expense. Water treatment costs decreased $89,000, or 6.6%, primarily due to a decrease in chemical costs.
Non-utility expenses increased approximately $377,000, or 11.1%, primarily the result of more project activity in Artesian Utility as compared to the same period in 2009. As a percentage of operating expenses, non-utility expenses increased to 10.9% from 10.5%.
|
Percentage of Operating and Maintenance Expenses
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Payroll and Associated Expenses
|
46.9 | % | 46.7 | % | 46.8 | % | ||||||
|
Administrative
|
21.0 | 22.6 | 24.1 | |||||||||
|
Purchased Water
|
10.5 | 10.0 | 9.6 | |||||||||
|
Repair and Maintenance
|
6.7 | 6.1 | 7.2 | |||||||||
|
Water Treatment
|
4.0 | 4.1 | 3.4 | |||||||||
|
Non-utility Operating
|
10.9 | 10.5 | 8.9 | |||||||||
|
Total
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Property and other taxes increased by $306,000, or 8.8%, compared to the same period in 2009, reflecting increases in tax rates charged for public schools in various areas where Artesian holds property and increases in the number of plants owned by Artesian. Property taxes are assessed on land, buildings and certain utility plants, which include the footage and size of pipe, hydrants and wells primarily owned by Artesian Water. Property taxes also increased due to the first-year assessment of a facility located in Maryland, which was retroactive to 2009. In addition, the increase in property and other taxes reflects an increase in payroll taxes, a result of increased payroll costs.
Depreciation and amortization expense increased $476,000, or 7.3%, due to continuing investment in utility plant in service providing supply, treatment, storage and distribution of water. Income tax expense increased $222,000, or 4.6%, due to higher taxable income in 2010. Our total effective income tax rate, or ETR, for 2010 and 2009 was 40.0% for each.
Other Income, Net
Miscellaneous income increased approximately $42,000, primarily due to the amount of the annual CoBank investment patronage distribution. The distribution in 2010 included an increased return due to the addition of the $15 million Series S Bond issued in December 2008. Our Allowance for Funds Used During Construction, or AFUDC, decreased $230,000, due to management’s decision to reduce discretionary capital expenditures and the general slowdown in the housing market, resulting in decreased long-term construction activity subject to AFUDC.
Interest Charges
Interest charges increased $77,000, or 1.1%, primarily due to an increase in short-term debt outstanding and increased short-term borrowing interest charges that were previously capitalized, a result of the Termination Agreement with NSRWRC as of August 6, 2010. The increase in interest charges is partially offset by the decrease in long-term debt outstanding. The average interest rate on our short-term credit balance increased from 1.5% in 2009 to 1.7% in 2010.
Net Income
For the year ended December 31, 2010, our net income applicable to common stock increased $358,000, or 4.9%, as compared to 2009. This increase was primarily due to higher operating income margins from our water utility business derived from the drier weather experienced in 2010 as compared to 2009.
2009 Compared to 2008
Operating Revenues
Revenues totaled $60.9 million in 2009 and were 8.4% above revenues in 2008 of $56.2 million, which is partially due to an increase of $3.8 million, or 7.5% in total water sales revenue. The increase in water sales revenue in Artesian Water reflects a 5% temporary rate increase effective June 21, 2008 and a 10% temporary rate increase effective December 17, 2008. These temporary rate increases were made permanent on September 22, 2009, upon DEPSC approval of the rate settlement agreement. However, per capita demand declined for the year ended December 31, 2009 in comparison to the same period a year ago, primarily due to the effects of an unusually wet summer weather pattern, thereby reducing the effect of the temporary rate increases. We realized 88.4% of our total revenue in 2009 from the sale of water. During 2008 we realized 89.2% of our total revenue from water sales. Non-utility revenue totaled $4.8 million in 2009 as compared to $4.1 million in 2008. This increase is attributable to an increase of $156,000 and $376,000, respectively, in water and wastewater Service Line Protection, “SLP,” Plan revenue earned by Artesian Resources. The SLP 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. Non-utility revenue also increased approximately $164,000 in Artesian Engineers, which was acquired in June 2008, resulting in twelve months of revenue in 2009 versus seven months in 2008. The increase in non-utility revenue also reflects increased contract revenues in Artesian Utility of approximately $72,000, primarily due to design and permitting services performed for a project in Middletown, Delaware and increased contract services performed for municipalities in Maryland.
Residential
Residential water service revenues in 2009 amounted to $33.0 million, an increase of $2.0 million, or 6.3% over the $31.0 million recorded in 2008, primarily due to rate increases effective June 21, 2008 and December 17, 2008. However, per capita demand declined for the year ended December 31, 2009 in comparison to the year ended December 31, 2008, primarily due to the effects of an unusually wet summer weather pattern, thereby reducing the effect of the rate increases. The increase in 2009 follows an increase of $0.8 million, or 3.0%, in 2008. The volume of water sold to residential customers decreased to 3,631 million gallons in 2009 compared to 3,935 million gallons in 2008, a 7.7% decrease, as a result of the unusually wet weather experienced in 2009. The number of residential customers served increased by 1,087, or 1.5%, in 2009.
Commercial
Water service revenues from commercial customers in 2009 increased by 7.9%, from $12.0 million in 2008 to $13.0 million in 2009, primarily due to rate increases. We sold 2,093 million gallons of water to commercial customers in 2009, a 5.0% decrease as compared to 2,202 million gallons sold in 2008.
Industrial
Water service revenues from industrial customers decreased by 31.9%, from $266,000 in 2008 to $181,000 in 2009. The volume of water sold to industrial customers decreased by 51.5%, from 74 million gallons in 2008 to 36 million gallons in 2009, primarily as a result of decreased usage by an industrial customer that closed its facility mid-year 2009.
Government and Other
Government and other water service revenues in 2009 increased by 14.0%, from $6.7 million in 2008 to $7.7 million in 2009, primarily due to rate increases. Consumption for government and other customers decreased slightly in 2009 compared to 2008.
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 9.4% in 2009, from $2.0 million in 2008 to $2.2 million in 2009. The increase, approximately $189,000, is primarily the result of increased wastewater customer service revenues.
Non-Utility Operating Revenue
Non-utility operating revenue, derived from non-regulated water and wastewater operations, increased from $4.1 million in 2008 to $4.8 million in 2009. This increase is attributable to an increase of $156,000 and $376,000, respectively, in water and wastewater SLP Plan revenue earned by Artesian Resources. Non-utility revenue also increased approximately $164,000 in Artesian Engineers, which was acquired in June 2008, resulting in twelve months of revenue in 2009 versus seven months in 2008. The increase in non-utility revenue also reflects increased contract revenues in Artesian Utility of approximately $72,000, primarily due to design and permitting services performed for a project in Middletown, Delaware and increased contract services performed for municipalities in Maryland.
Operating Expenses
Operating expenses, excluding depreciation and taxes, increased approximately $1.5 million, or 4.8%, to $32.4 million in 2009. Payroll and benefits increased approximately $677,000 due to increased annual merit payments, partially offset by increased capitalized labor and benefits in 2009. Purchased water expense increased approximately $274,000, primarily due to a 7.8% increase in rates effective July 2008 and an 11.0% increase in rates effective in July 2009. Water treatment increased approximately $271,000, primarily due to increased chemical costs. Repair and maintenance expense decreased approximately $247,000, primarily the result of decreased gas and maintenance parts expenses. Administration expense decreased approximately $269,000, primarily the result of a decrease in consulting services used. Non-utility operating expenses increased approximately $686,000, primarily the result of more project activity in Artesian Utility as compared to the same period in 2008.
Depreciation and amortization expense increased $774,000, or 13.4%, due to continuing investment in utility plant in service providing supply, treatment, storage and distribution of water and the addition of the new office building. Income tax expense increased $433,000, or 9.8%, due to higher taxable income in 2009. Our total effective income tax rate, or ETR, for 2009 and 2008 was 40.0% and 40.6%, respectively.
Other Income, Net
Our Allowance for Funds Used During Construction, or AFUDC, decreased $346,000, or 45.6%, due to the general slowdown in the housing market, resulting in decreased long-term construction activity subject to AFUDC for the year ended December 31, 2009, compared to the same period in 2008. Miscellaneous Income increased $56,000, primarily due to an increase in the income earned on our temporary investments.
Interest Charges
Interest charges increased $605,000 or 9.1%, in 2009, primarily due to an increase in long term debt in 2009 compared to 2008. In December 2008, we issued a First Mortgage Bond, Series S, in the amount of $15 million at an interest rate of 6.73%. Offsetting the increase in long term debt is a decrease in short term debt interest. The average interest rate on our short term credit balance decreased from 3.4% in 2008 to 1.5% in 2009, while our average outstanding balance was $5.7 million in 2009, compared to $12.7 million in 2008.
Net Income
For the year ended December 31, 2009, our net income applicable to common stock increased $844,000, or 13.2%, compared to 2008. This increase was primarily due to higher operating income margins from our water utility business as well as our SLP Plan business and non-utility contract services. However, this increase in net income was adversely affected by decreased water demand, a result of the effects of weather associated with the increased rainfall experienced during the second and third quarters of 2009, therefore reducing the impact of our temporary rate increases.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity for the year ended December 31, 2010 were $18.1 million provided by cash flow from operating activities, $3.9 million in borrowing on our lines of credit, $2.2 million in net contributions and advances from developers and $1.9 million net proceeds from the issuance of common stock. Cash flow from operating activities is primarily provided by our utility operations, and is impacted by the timeliness and adequacy of rate increases and changes in water consumption as a result of year-to-year variations in weather conditions, particularly during the summer. A significant part of our ability to maintain and meet our financial objectives is to ensure that 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 amount outstanding on the Company’s lines of credit was $29.1 million, an increase of $3.9 million over the amount outstanding as of December 31, 2009, compared to an increase of $4.8 million for the year ended December 31, 2009 over the outstanding balance as of December 31, 2008. The increase in overall borrowings during 2010 as compared to 2009 was primarily the result of higher investments made in utility plant in 2010. An increase in accrued expenses of $1.4 million is also associated with the Company’s higher 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 2011 will be approximately $27.4 million. Our total obligations related to interest and principal payments on indebtedness, rental payments and water service interconnection agreements for 2011 are anticipated to be approximately $12.4 million. We expect to fund our activities for the next year using our available cash balances, bank credit lines and projected cash generated from operations. 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. However, since part of our business strategy is to expand through strategic acquisitions, we may seek additional debt financing or issue additional equity securities to finance future acquisitions or for other purposes.
Investment in Plant and Systems
The primary focus of Artesian Water’s investment was to continue to provide high quality reliable service to our growing service territory. We invested $19.6 million in capital expenditures in 2010 as compared to $17.4 million invested in 2009. In 2010, we invested $0.9 million to enhance or improve existing treatment facilities and for the rehabilitation of pumping equipment to better serve our customers. We invested $2.7 million to upgrade and automate our meter reading equipment. We invested approximately $3.2 million for our rehabilitation program for transmission and distribution facilities and replacing aging or deteriorating mains. We invested approximately $0.7 million in mandatory utility plant expenditures, due to governmental highway projects, which require the relocation of water service mains. Approximately $2.2 million was invested in new transmission and distribution facilities. Developers financed $1.3 million for the installation of water mains and hydrants in 2010 as compared to $1.6 million in 2009. Approximately $2.2 million was invested in the purchase of an office facility located in Sussex County, Delaware, which consists of office space and warehouse space. We also invested $0.8 million for renovations made to the main office building located in New Castle County and furniture and equipment related to the renovation. The investment in general plant also includes an additional investment of $0.7 million for computer hardware and software upgrades and approximately $1.1 in transportation and equipment purchases. An additional $2.2 million was invested in wastewater projects in Sussex County, Delaware. Also, developers financed $0.3 million for transmission and distribution facilities in Cecil County, Maryland. Approximately $1.3 million was invested in the purchase of Port Deposit’s water assets.
The following chart summarizes our investment in plant and systems over the past three fiscal years.
|
In thousands
|
2010
|
2009
|
2008
|
|||||||||
|
Source of supply
|
$ | 976 | $ | 295 | $ | 1,665 | ||||||
|
Treatment and pumping
|
1,095 | 1,044 | 6,094 | |||||||||
|
Transmission and distribution
|
9,089 | 8,023 | 13,381 | |||||||||
|
General plant and equipment
|
4,811 | 5,118 | 13,980 | |||||||||
|
Developer financed utility plant
|
1,633 | 1,584 | 3,178 | |||||||||
|
Wastewater facilities (including NSRWRC)
|
2,210 | 1,739 | 7,518 | |||||||||
|
Allowance for Funds Used During Construction, AFUDC
|
(183 | ) | (413 | ) | (759 | ) | ||||||
|
Total
|
$ | 19,631 | $ | 17,390 | $ | 45,057 | ||||||
|
Mountain Hill
|
--- | --- | $ | 4,772 | ||||||||
We have planned to invest approximately $28.3 million in utility plant in 2011. Of the $28.3 million we expect to invest in 2011, approximately $6.7 million will be invested in transmission and distribution facilities, including the replacement of facilities, and the extension of facilities to address service needs in growth areas of our service territory. Approximately $1.8 million will be invested in the relocations of facilities as a result of government mandates and renewals associated with the rehabilitation of aging infrastructure. In addition, we plan to invest another $4.2 million for new treatment facilities, facility upgrades, equipment and wells throughout Delaware and Maryland to identify, develop, treat and protect sources of water supply to assure uninterrupted service to our customers.
We plan to invest $5.8 million in general plant, which includes new corporate automation, building renovations and transportation and equipment upgrades. Additionally, $6.6 million is planned to be invested in Artesian Water Maryland and Artesian Wastewater Maryland following the purchase of water and wastewater assets in Maryland in 2011. 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 expect to fund our activities for the next twelve months using our available cash balances, bank credit lines, projected cash generated from operations and financing in the capital markets as necessary, including Delaware Drinking Water State Revolving Fund loans.
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 $27.4 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.
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 state Public Service Commissions.
Lines of Credit
At December 31, 2010, Artesian Resources had a $40 million line of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources. As of December 31, 2010, there was $13.9 million of available funds under this line of credit. The interest rate for borrowings under this line is based on the London Interbank Offered Rate, or LIBOR. This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time. The term of this line of credit expires on the earlier of January 18, 2012 or any date on which Citizens demands payment.
At December 31, 2010, Artesian Water had a $20 million line of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 million of this line available for the operations of Artesian Water Maryland. As of December 31, 2010, there was $17.0 million of available funds under this line of credit. The interest rate for borrowings under this line is LIBOR plus 1.50%. The term of this line of credit expires on January 17, 2012.
Pursuant to the Termination Agreement between Artesian Resources and Darin A. Lockwood signed on August 6, 2010, Artesian Resources purchased the 75-acre parcel of land, previously purchased by Darin A. Lockwood on July 1, 2008, for the operation of the wastewater facility known as the Northern Sussex Regional Water Recharge Complex. The Company purchased the land (with a carrying value of $5.2 million) and all engineering and design work (with a carrying value of $2.7 million) by paying off the $7.9 million remaining balance of the NSRWRC’s construction loan with a financial institution secured by the 75-acre parcel that was previously guaranteed by the Company. There is no other security pledged for the 75-acre parcel of land.
|
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
|
$ | 29,071 | $ | ----- | $ | ----- | $ | ----- | ||||||||
Long-Term Debt
On August 1, 2008, Artesian Water Maryland executed a promissory note in the amount of approximately $2.3 million to Sunrise Holdings, L.P., or Sunrise, in connection with the Mountain Hill acquisition, that bears interest at a variable interest rate of LIBOR plus 1.50%. The note is payable in four equal annual installments, commencing on the first anniversary of the closing date. Two annual installment payments were made in the amount of $0.6 million each, the remaining principal balance due on this note, as of December 31, 2010, is $1.2 million. 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.
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 52.8% at December 31, 2010. In addition, our revolving line of credit with CoBank contains customary affirmative and negative covenants that are binding on us (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on our ability to make certain loans and investments, guaranty certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions, transfer certain assets, change our business or incur additional indebtedness. In addition, this line of credit requires us to abide by certain financial covenants and ratios. As of December 31, 2010, we were in compliance with these covenants.
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.
|
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)
|
$ | 7,067 | $ | 14,022 | $ | 13,847 | $ | 154,594 | $ | 189,530 | ||||||||||
|
State revolving fund loans
|
610 | 1,260 | 1,260 | 4,923 | 8,053 | |||||||||||||||
|
Note Payable (Principal and Interest)
|
591 | 580 | --- | --- | 1,171 | |||||||||||||||
|
Operating leases
|
64 | 92 | 96 | 1,638 | 1,890 | |||||||||||||||
|
Unconditional purchase obligations
|
3,770 | 7,549 | 7,539 | 22,638 | 41,496 | |||||||||||||||
|
Tank painting contractual obligation
|
312 | --- | --- | --- | 312 | |||||||||||||||
|
Total contractual cash obligations
|
$ | 12,414 | $ | 23,503 | $ | 22,742 | $ | 183,793 | $ | 242,452 | ||||||||||
Long-term debt obligations reflect the maturities of certain series of our first mortgage bonds, which we intend to refinance when due. 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 February 12, 2010, Artesian Water entered into a Drinking Water State Revolving Fund Financing Agreement, or DWSRF Agreement, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health and Social Services, Division of Public Health, or the Department. The Company has been given a loan of approximately $3.9 million, or the Loan, from the Delaware Safe Drinking Water Revolving Fund to finance all or a portion of the cost of improvements and upgrades to specific water mains in service areas located in New Castle County, Delaware (collectively, the “Project”). In accordance with the DWSRF Agreement, the Company will from time to time request funds under the Loan as it incurs costs in connection with the Project. The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 1.705% per annum and an administrative fee at the rate of 1.705% per annum. As of December 31, 2010, approximately $0.6 million in funds have been drawn on the loan.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 17 to our Consolidated Financial Statements for a full description of the impact of recent accounting pronouncements.
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 final maturity dates ranging from 2018 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
|
CONSOLIDATED BALANCE SHEETS
|
||||||||
|
(In thousands)
|
||||||||
|
ASSETS
|
December 31, 2010
|
December 31, 2009
|
||||||
|
Utility plant, at original cost less accumulated depreciation
|
$ | 345,383 | $ | 326,899 | ||||
|
Current assets
|
||||||||
|
Cash and cash equivalents
|
179 | 474 | ||||||
|
Accounts receivable (less allowance for doubtful accounts 2010 - $230; 2009-$142)
|
5,094 | 5,505 | ||||||
|
Unbilled operating revenues
|
3,614 | 3,518 | ||||||
|
Materials and supplies
|
1,246 | 1,220 | ||||||
|
Prepaid property taxes
|
1,260 | 1,222 | ||||||
|
Prepaid expenses and other
|
2,640 | 1,304 | ||||||
|
Total current assets
|
14,033 | 13,243 | ||||||
|
Other assets
|
||||||||
|
Non-utility property (less accumulated depreciation 2010-$377; 2009-$255)
|
4,480 | 11,241 | ||||||
|
Other deferred assets
|
5,023 | 4,994 | ||||||
|
Total other assets
|
9,503 | 16,235 | ||||||
|
Regulatory assets, net
|
2,610 | 2,518 | ||||||
| $ | 371,529 | $ | 358,895 | |||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
|
Stockholders' equity
|
||||||||
|
Common stock
|
$ | 7,637 | $ | 7,507 | ||||
|
Preferred stock
|
--- | --- | ||||||
|
Additional paid-in capital
|
69,989 | 68,090 | ||||||
|
Retained earnings
|
17,520 | 15,577 | ||||||
|
Total stockholders' equity
|
95,146 | 91,174 | ||||||
|
Long-term debt, net of current portion
|
105,061 | 106,025 | ||||||
| 200,207 | 197,199 | |||||||
|
Current liabilities
|
||||||||
|
Lines of credit
|
29,071 | 25,123 | ||||||
|
Current portion of long-term debt
|
1,545 | 1,530 | ||||||
|
Accounts payable
|
3,401 | 3,696 | ||||||
|
Accrued expenses
|
2,126 | 685 | ||||||
|
Overdraft payable
|
740 | 1,026 | ||||||
|
Deferred income taxes
|
459 | 439 | ||||||
|
Accrued interest
|
1,189 | 1,361 | ||||||
|
Customer deposits
|
805 | 592 | ||||||
|
Other
|
2,549 | 2,069 | ||||||
|
Total current liabilities
|
41,885 | 36,521 | ||||||
|
Commitments and contingencies (Note 10)
|
--- | --- | ||||||
|
Deferred credits and other liabilities
|
||||||||
|
Net advances for construction
|
16,159 | 18,433 | ||||||
|
Postretirement benefit obligation
|
525 | 737 | ||||||
|
Deferred investment tax credits
|
664 | 685 | ||||||
|
Deferred income taxes
|
37,558 | 34,077 | ||||||
|
Total deferred credits and other liabilities
|
54,906 | 53,932 | ||||||
|
Net contributions in aid of construction
|
74,531 | 71,243 | ||||||
| $ | 371,529 | $ | 358,895 | |||||
The notes are an integral part of the consolidated financial statements.
|
In thousands, except per share amounts
|
||||||||||||
|
For the Year Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Operating revenues
|
||||||||||||
|
Water sales
|
$ | 56,685 | $ | 53,871 | $ | 50,101 | ||||||
|
Other utility operating revenue
|
2,973 | 2,208 | 2,019 | |||||||||
|
Non-utility operating revenue
|
5,227 | 4,833 | 4,065 | |||||||||
| 64,885 | 60,912 | 56,185 | ||||||||||
|
Operating expenses
|
||||||||||||
|
Utility operating expenses
|
30,934 | 28,965 | 28,154 | |||||||||
|
Non-utility operating expenses
|
3,780 | 3,403 | 2,717 | |||||||||
|
Depreciation and amortization
|
7,032 | 6,556 | 5,782 | |||||||||
|
Taxes
|
||||||||||||
|
State and federal income
|
||||||||||||
|
Current
|
950 | 116 | 74 | |||||||||
|
Deferred
|
4,132 | 4,744 | 4,353 | |||||||||
|
Property and other
|
3,789 | 3,483 | 3,199 | |||||||||
| 50,617 | 47,267 | 44,279 | ||||||||||
|
Operating income
|
14,268 | 13,645 | 11,906 | |||||||||
|
Other income, net
|
||||||||||||
|
Allowance for funds used during construction (AFUDC)
|
183 | 413 | 759 | |||||||||
|
Miscellaneous
|
464 | 422 | 366 | |||||||||
| 647 | 835 | 1,125 | ||||||||||
|
Income before interest charges
|
14,915 | 14,480 | 13,031 | |||||||||
|
Interest charges
|
7,295 | 7,218 | 6,613 | |||||||||
|
Net income applicable to common stock
|
$ | 7,620 | $ | 7,262 | $ | 6,418 | ||||||
|
Income per common share:
|
||||||||||||
|
Basic
|
$ | 1.01 | $ | 0.97 | $ | 0.87 | ||||||
|
Diluted
|
$ | 1.00 | $ | 0.97 | $ | 0.86 | ||||||
|
Weighted average common shares outstanding:
|
||||||||||||
|
Basic
|
7,557 | 7,454 | 7,353 | |||||||||
|
Diluted
|
7,618 | 7,512 | 7,427 | |||||||||
|
Cash dividends per share of common stock
|
$ | 0.7529 | $ | 0.7225 | $ | 0.7136 | ||||||
The notes are an integral part of the consolidated financial statements.
|
In thousands
|
For the Year Ended December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net income
|
$ | 7,620 | $ | 7,262 | $ | 6,418 | ||||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||||||
|
Depreciation and amortization
|
7,032 | 6,556 | 5,782 | |||||||||
|
Deferred income taxes, net
|
3,480 | 4,600 | 4,390 | |||||||||
|
Stock compensation
|
111 | 98 | 122 | |||||||||
|
Allowance for funds used during construction
|
(183 | ) | (413 | ) | (759 | ) | ||||||
|
Changes in assets and liabilities:
|
||||||||||||
|
Accounts receivable, net of reserve for bad debts
|
290 | (603 | ) | 1,275 | ||||||||
|
Unbilled operating revenues
|
(96 | ) | 79 | (399 | ) | |||||||
|
Materials and supplies
|
(26 | ) | (73 | ) | 45 | |||||||
|
Prepaid property taxes
|
(38 | ) | (103 | ) | (61 | ) | ||||||
|
Prepaid expenses and other
|
(1,336 | ) | (813 | ) | 366 | |||||||
|
Other deferred assets
|
(111 | ) | (159 | ) | (836 | ) | ||||||
|
Regulatory assets
|
(92 | ) | 45 | (882 | ) | |||||||
|
Accounts payable
|
(295 | ) | (860 | ) | 1,331 | |||||||
|
Accrued expenses
|
1,441 | (2,183 | ) | 385 | ||||||||
|
Accrued interest
|
(172 | ) | 110 | 925 | ||||||||
|
Customer deposits and other, net
|
693 | (92 | ) | 129 | ||||||||
|
Postretirement benefit obligation
|
(212 | ) | (75 | ) | (56 | ) | ||||||
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
18,106 | 13,376 | 18,175 | |||||||||
|
CASH FLOWS USED IN INVESTING ACTIVITIES
|
||||||||||||
|
Capital expenditures (net of AFUDC)
|
(19,631 | ) | (17,390 | ) | (45,057 | ) | ||||||
|
Investments in acquisitions
|
--- | --- | (4,772 | ) | ||||||||
|
Proceeds from sale of assets
|
61 | 43 | 62 | |||||||||
|
NET CASH USED IN INVESTING ACTIVITIES
|
(19,570 | ) | (17,347 | ) | (49,767 | ) | ||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Net borrowings under lines of credit agreements
|
3,948 | 4,837 | 19,388 | |||||||||
|
(Decrease) increase in overdraft payable
|
(286 | ) | 242 | (888 | ) | |||||||
|
Net advances and contributions in aid of construction
|
2,179 | 1,854 | 2,667 | |||||||||
|
Increase in deferred debt issuance costs
|
36 | 114 | 1 | |||||||||
|
Net proceeds from issuance of common stock
|
1,918 | 1,399 | 1,314 | |||||||||
|
Dividends
|
(5,677 | ) | (5,379 | ) | (5,193 | ) | ||||||
|
Issuance of long-term debt
|
--- | --- | 15,000 | |||||||||
|
Principal repayments of long-term debt
|
(949 | ) | (1,516 | ) | (323 | ) | ||||||
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
1,169 | 1,551 | 31,966 | |||||||||
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(295 | ) | (2,420 | ) | 374 | |||||||
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
474 | 2,894 | 2,520 | |||||||||
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
$ | 179 | $ | 474 | $ | 2,894 | ||||||
|
Supplemental Disclosures of Cash Flow Information:
|
||||||||||||
|
Utility plant received as construction advances and contributions
|
$ | 376 | $ | 845 | $ | 7,101 | ||||||
|
Contractual amounts of contributions in aid of construction due from developers included in accounts receivable
|
$ | 509 | $ | 678 | $ | --- | ||||||
|
Contractual amounts of contributions in aid of construction received from developers included in accounts receivable
|
$ | 630 | $ | --- | $ | --- | ||||||
|
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
|
||||||||||||
|
In thousands
|
For the Year Ended December 31,
|
|||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Artesian Water Maryland, Inc. acquired all the outstanding
|
||||||||||||
|
membership interests of Mountain Hill Water Company, LLC
|
||||||||||||
|
in August 2008 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
|
$ | 7,467 | $ | 7,107 | $ | 5,576 | ||||||
|
Income taxes paid
|
$ | 1,942 | $ | 350 | $ | --- | ||||||
The notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
In thousands
|
Common Shares Outstanding Class A Non-Voting (1) (3) (4)
|
Common Shares Outstanding Class B Voting (2)
|
$1 Par Value Class A Non-Voting
|
$1 Par Value Class B Voting
|
Additional Paid-in Capital
|
Retained Earnings
|
Total
|
||||||||||||||||||||||
|
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(4)
|
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 | ||||||||||||||||
|
Net income
|
--- | --- | --- | --- | --- | 7,262 | 7,262 | |||||||||||||||||||||
|
Cash dividends declared
|
||||||||||||||||||||||||||||
|
Common stock
|
--- | --- | --- | --- | --- | (5,379 | ) | |||||||||||||||||||||