ARTESIAN RESOURCES CORP - Annual Report: 2001 (Form 10-K)

For the fiscal year ended December 31, 2001

Commission file number 0-18516

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Class A Non-Voting Common Stock
(Title of class)

          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.

          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.

          The aggregate market value of the non-voting and voting stock held by non-affiliates of the registrant at March 1, 2002 was $46,447,073 and $3,803,280, respectively.

          As of March 1, 2002, 1,663,262 shares and 391,824 shares of Class A Non-Voting Common Stock and Class B Common Stock, respectively, were outstanding.

PART I

Item 1.-Business.

          Artesian Resources Corporation ("Artesian Resources" the "Company") operates as the parent holding company of Artesian Water Company, Inc. ("Artesian Water") our principal subsidiary, Artesian Water Pennsylvania, Inc. and two non-regulated subsidiaries. Artesian Water Company was organized in 1927 as the successor to the Richardson Park Water Company, founded in 1905. In 1984, the name of Artesian Water Company was changed to Artesian Resources Corporation and the utility assets were contributed to the newly formed subsidiary, Artesian Water. In this Annual Report on Form 10-K, we frequently use the terms "we," "our" and the "Company" to refer to Artesian Resources and its subsidiaries, including Artesian Water.

          We distribute and sell water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware. As of December 31, 2001, we had 66,173 metered customers and served a population of approximately 220,000 (including contract services), representing approximately 27% of Delaware's total population. We also provide water for public and private fire protection to customers in our service territories. Our gross water sales revenue for 2001 was approximately $31 million, and our percentages of gross water sales revenue by major customer classifications were 60% for residential, 32% for commercial, industrial, governmental, municipal and utility, and 8% for fire protection and other. These percentages have remained fairly constant for the past three years. We are currently seeking and anticipate the recognition of Artesian Water Pennsylvania Inc. as a regulated public water utility by the Pennsylvania Public Utility Commission.

          Our current market area is the State of Delaware, which had a population of approximately 801,000 at December 31, 2001. According to the US Census Bureau, Delaware's population has increased 17.6% over the last 10 years, the 14th largest percentage increase among the states. Although New Castle is the most populous of Delaware's three counties, Sussex County, in southern Delaware, has experienced the most significant growth with a population increase of approximately 38.3% over the last ten years. The largest project we are currently undertaking with continued investment in 2002 is the Bayville Iron Removal Facilities project in Sussex County, Delaware, with a total cost of $2.68 million. Substantial portions of Delaware, particularly outside of New Castle County, are not served by a public water system and represent potential opportunities for Artesian Water to obtain new exclusive franchised service areas for Artesian Water. We continue to focus resources on developing and serving existing service territories and obtaining new territories throughout the state.

          In Delaware, a Certificate of Public Convenience and Necessity ("CPCN") grants a water company the exclusive right to serve all existing and new customers within a designated area. Effective July 1, 2001, the authority to issue CPCNs was transferred to the Delaware Public Service Commission ("PSC") from the Delaware Department of Natural Resources and Environmental Control ("DNREC"). In this Annual Report on Form 10-K, we refer to these Certificates as "CPCNs" or "franchises." We hold CPCNs for approximately 140 square miles of exclusive service territory, which is segmented into a number of service areas. Our largest connected regional water system, consisting of approximately 98.6 square miles and 62,500 customers, is located in northern Delaware. A significant portion of our exclusive service territory remains undeveloped, and if and when development occurs and there is population growth in these areas, we will increase our customer base by providing water service to the newly developed areas and new customers. The total number of customers we serve has grown at an average annual rate of approximately 2.8% for the last ten years. Within our existing service territory, we hold CPCNs for nearly 5,000 acres zoned for industrial and manufacturing development.

          Since 1993, we have been significantly expanding our service territory by acquiring new exclusive service areas in Delaware through grants of CPCNs. This expansion, which has occurred in southern New Castle, Kent and Sussex Counties, has increased our exclusive service area in Delaware by approximately 27% since 1993. The pursuit of new service territory in the State of Delaware by water companies is competitive.

          We have identified sufficient sources of groundwater supply to serve our expanding customer base for the foreseeable future. Our self-supply has increased from 63% of our total water supply in 1992 to approximately 82% in 2001. Since 1992, we have increased our sources of groundwater supply from our own wells by 50%, or nearly nine million gallons per day, and plan to continue development of new sources of groundwater supplies previously identified.

          Our primary sources of water are our wells that pump groundwater from aquifers and other formations. To supplement our groundwater supply, we purchase surface water through interconnections only in the northern service area of our New Castle County system. The purchased surface water is blended with our groundwater supply for distribution to our customers. Nearly 82% of the overall 7.3 billion gallons of water we distributed in all our systems during 2001 came from our groundwater wells, while the remaining 18% came from interconnections with other utilities and municipalities. During 2001, our average rate of water pumped was approximately 16.4 million gallons per day ("mgd") from our groundwater wells and approximately 3.6 mgd was supplied from interconnections. Our peak water supply capacity currently is approximately 43.0 mgd. Our peak water demand in 2001 was approximately 27.9 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.

          We have 87 operating and 54 monitoring wells in our systems. Our northern New Castle County system is interconnected. In the remainder of the state, we have several satellite systems that have not yet been connected by transmission and distribution facilities. We intend to join these systems into larger integrated regional systems through the construction of a transmission and distribution network as development continues and our expansion efforts provide us with contiguous exclusive service territories.

          We have 14 interconnections with four neighboring water utilities and four municipalities that provide us with the ability to purchase or sell water. Interconnection agreements with the Chester Water Authority and the City of Wilmington have "take or pay" clauses requiring us to take, as of December 31, 2001, minimum draws totaling 1.3 billion gallons annually. We presently use the minimum draws under these agreements. The Chester Water Authority agreement, which expires in 2021, provides for a renewal period of an additional 25 years at our option, subject to the approval of the Susquehanna River Basin Commission. We decided not to renew one interconnection agreement with the City of Wilmington, which reduced our overall take or pay requirement by 100 million gallons annually. Our remaining take or pay agreement with that municipality was renewed in December 2001 for a period of five years. All of the interconnections provide Artesian Water the ability to sell water to neighboring water utilities or municipalities.

          Under state laws and regulations, we are required to file applications with the DNREC for water allocation permits for each of our production wells pumping quantities of water above certain levels. Presently, we have permits for 73 wells, permit applications pending for 2 wells and 12 wells not requiring a permit. Our access to aquifers within our service territory is not exclusive. Water allocation permits control the amount of water which 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. Our ability to supply the demands of our customers has not been affected by private usage of the aquifers by landowners or the limits imposed by the state. 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.

          At the end of 2001, we were serving customers through 888 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, cast iron or transite pipe. Ductile iron is more durable than plastic and we install ductile iron pipes wherever possible. We are installing a more durable type of plastic pipe only near ocean front property in southern Delaware where corrosive conditions of the surrounding ground affect the longevity of ductile iron pipe. We also supply public fire protection service through 3,611 hydrants installed throughout our service territories.

          We have 24 storage tanks, most of which are elevated, providing total system storage of 36.0 million gallons. We also are developing and using an aquifer storage and recovery system. At some locations, we rely on hydropneumatic tanks to maintain adequate system pressures. Where possible, we will combine our smaller satellite systems with systems having elevated storage facilities.

          We pump all of our water with electric power purchased from major electric utilities. We also have diesel and propane powered generating equipment at selected treatment and elevated storage facilities for the provision of basic water service during possible electrical outages.

          We derive about 90% of our self-supplied groundwater from wells located in the Atlantic Coastal Plain. The remaining 10% comes from wells in the Piedmont Province. We use a variety of treatment methods, including aeration, pH adjustment, chlorination, fluoridation and iron removal, to meet federal, state and local water quality standards. Additionally, a corrosion inhibitor is added to all of our self-supplied groundwater and most of the supply from interconnections. We have 38 different water treatment facilities. All water supplies that we purchase from neighboring utilities are potable. We believe the costs of treating groundwater are significantly lower than those of treating surface water.

          We are subject to regulation by federal, state and local agencies with respect to, among other things, rates charged for water service, awards of new service territory, water allocation rights, water quality and environmental matters.

          Artesian Water, as a public utility, is regulated by the Public Service Commission with respect to rates and charges for service, the sale and issuance of securities, mergers and other matters. We periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business.

          The Public Service Commission approved an increase in rates, Docket 00-647, for water service on June 19, 2001, to allow the Company to earn an increase in annual revenues of about $3.7 million (13.05%). Rates became effective July 1, 2001. We currently derive our water service revenues from water consumption upon which base rates are applied, which were last increased as of July 1, 2001. This increase also authorized a return on equity of 10.50% and an overall rate of return of 8.99%.

          A public water utility operating in Delaware must obtain a CPCN for a service territory to begin or expand its operations, which is granted by the PSC. Currently the PSC grants a CPCN under circumstances where there has been a determination that the water in the proposed service area does not meet the regulations governing drinking water standards of the State Board of Health for human consumption, where the supply is insufficient to meet the projected demand, or where the applicant is in possession of one of the following: (i) a 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; (ii) a petition requesting such service signed by a majority of the landowners of the proposed territory to be served; or (iii) a 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, and a water utility must obtain the approval of the PSC to abandon a service territory once granted.

          The United States Environmental Protection Agency (the "EPA"), DNREC, Delaware Division of Public Health ("DPH"), the Pennsylvania Public Utility Commission and the Wilmington City Council regulate the water quality of our treatment and distribution systems. We believe that we are in material compliance with all current federal, state and local water quality standards, including regulations under the federal Safe Drinking Water Act. Chester Water Authority, which supplies water to Artesian Water through interconnections in northern New Castle County, is regulated by the Pennsylvania Department of Environmental Protection as well as the EPA.

          As required by the Safe Drinking Water Act, the EPA has established maximum contaminant levels for various substances found in drinking water. DPH has set maximum contaminant levels for certain substances that are more restrictive than the maximum contaminant levels set by the EPA. The DPH is the EPA's agent for enforcing the Safe Drinking Water Act in Delaware and, in that capacity, monitors the activities of Artesian Water and reviews the results of water quality tests performed by Artesian Water for adherence to applicable regulations. Artesian Water is also subject to other laws regulating substances and contaminants in water, including the Lead and Copper Rule, rules for volatile organic compounds and the Total Coliform Rule. Because we have no surface water sources of supply that we treat for consumption, the Surface Water Treatment Rule generally does not apply to us.

          Delaware enacted legislation in 1998 requiring water utilities to meet secondary water quality standards that include limitations on iron content, odor and other water quality-related issues that are not proven health risks but may be objectionable for consumption. We believe our current treatment systems and facilities meet or exceed these secondary standards.

          As a normal by-product of iron removal, our treatment facility at Old County Road in New Castle County and our treatment facility in South Bethany in Sussex County generate iron removed from untreated groundwater plus residue from chemicals used in the treatment process. We have contracted with a licensed third party vendor to dispose of the solids produced at these facilities. Our other iron removal facilities rely on disposal through county-approved wastewater facilities. 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 Artesian Resources.

          On December 19, 1996, Artesian Wastewater Management, Inc. ("Artesian Wastewater") was created as a non-regulated subsidiary of Artesian Resources. Artesian Wastewater provides wastewater treatment services in Delaware. In 1999, Artesian Wastewater began operating a wastewater facility for the town of Middletown in southern New Castle County. This subsidiary did not engage in any business activity in 1998 or 1997. On March 12, 1997, Artesian Wastewater became a one-third participant, along with heavy-construction contractor George and Lynch and engineering firm Woodward-Clyde International-Americas (a subsidiary of URS Greiner), in a limited liability company called AquaStructure Delaware, L.L.C. ("AquaStructure"), which is developing and marketing various proposals to provide wastewater treatment services. In the first quarter of 2001, D. Preston Lee, Jr. P. E., Inc. replaced Woodward-Clyde International-Americas as a member of the L.L.C. In 2001, AquaStructure initiated design and construction of a 2.5 million gallon per day spring irrigation wastewater treatment facility for Middletown, Delaware. Upon completion in mid-2002, Artesian Wastewater will operate the plant under contract for a twenty-year term.

          The business of Artesian Water is subject to seasonal fluctuations. The demand for water during the warmer months is generally greater than during cooler months due primarily to additional requirements for water in connection with cooling systems, private and public swimming pools and lawn sprinklers. Throughout the year, and particularly during warmer months, demand will vary with rainfall and temperature levels.

          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, 2001, we employed 170 full-time and six part-time employees, all of whom were non-unionized. Of this number, 19 were officers and managers; 105 were employed as operations personnel, including engineers, technicians, draftsman, maintenance and repair persons, meter readers and utility personnel; and 45 were employed in the accounting, budgeting, information systems, human resources, customer relations, public relations and conservation departments. The remaining seven employees were administrative personnel. We believe that our employee relations are good.

Item 2.-Properties.

          The corporate headquarters of Artesian Resources, Artesian Water and its other non-regulated subsidiaries are located at 664 Churchmans Road, Newark, Delaware. The property is leased from White Clay Realty by Artesian Water through December 31, 2002. See Item 13, Certain Relationships and Related Transactions, for further disclosures. The lease may be extended at the Company's option for two consecutive five-year renewal terms subject to the terms set forth in the lease.

          The Artesian Resources Company and the Artesian Development Company, Inc. ("ADC") (a wholly-owned subsidiary of the Artesian Resources Corporation), own various parcels of land in New Castle County, Delaware. The Artesian Water Company owns land, transmission and distribution mains, pump facilities, treatment plants, storage tanks and related facilities within New Castle, Kent and Sussex Counties, Delaware. In the aggregate we own rights-of-way and easements, totaling approximately 694 acres. Substantially all of Artesian Water's utility plant, except utility plant within the town of Townsend, Delaware, is pledged as security for First Mortgage Securities.

          Of the 694 acres we own, 52 acres of land will be the site of a future well field and iron removal facility in northern New Castle County. ADC owns approximately 12 acres zoned for office buildings located immediately adjacent to our corporate headquarters. ADC has no present plans to purchase new land or develop the acreage it owns.

          All of Artesian Water's existing facilities adequately meet current necessary production capacities and current levels of utilization.

Item 3.-Legal Proceedings.

          On December 5, 2000, Artesian Water filed a petition with the PSC for an increase in rates. A settlement agreement was approved on June 19, 2001, for a revenue increase of 13.05%, or $3.7 million.

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

Item 4.-Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5.-Market for Company's Common Equity and Related Stockholder Matters.

          Artesian Resources' Class A Non-Voting Common Stock ("Class A Stock") is listed on the Nasdaq National Market and trades under the symbol "ARTNA." On March 1, 2002 there were 747 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 on the Nasdaq National Market and the cash dividends declared per share:

CLASS A NON-VOTING COMMON STOCK

          The closing sale prices shown above reflect prices between dealers and do not include retail markups or markdowns or commissions and may not necessarily represent actual transactions.

          Our Class B Voting Stock ("Class B Stock") is quoted on the OTC Bulletin Board under the symbol "ARTNB." There has been a limited and sporadic public trading market for the Class B Voting Common Stock. As of February 26, 2002, the last reported trade of the Class B Voting Common Stock on the OTC Bulletin Board was at a price of $30.00 per share on January 10, 2002. As of February 27, 2002, we had 229 holders of record of the Class B Voting Common Stock.

WHERE YOU CAN FIND MORE INFORMATION

          We file annual, quarterly and special reports and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any of the reports and other information we file at the SEC's public reference facilities located in Washington at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and in Chicago at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. Copies of such material can also be obtained from the Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Our SEC filings are also available to the public over the Internet at the SEC's web site which is located at the following address: http://www.sec.gov.

          You may request a free copy of our Annual Report on Form 10-K for the year ended December 31, 2001, other than exhibits, by writing or telephoning us at: Artesian Resources Corporation, 664 Churchmans Road, Newark, Delaware 19702, Attention: Joseph A. DiNunzio, Senior Vice President and Secretary, Telephone
(302) 453-6900.

Item 6.-Selected Financial Data.

Item 7.-Management's Discussion and Analysis of Financial Condition and Results of Operations.

General Information

          Artesian Resources Corporation (Artesian Resources) is a non-operating holding company, whose income is derived from the earnings of our four wholly owned subsidiary companies and our one-third interest in AquaStructure, a Limited Liability Corporation whose primary activity is marketing wastewater services. Artesian Water Company, Inc. (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. We distribute and sell water to residential, commercial, industrial, governmental, municipal and utility customers throughout Delaware. In addition, we provide services to other water utilities, including operations and billing functions. We also have contract operation agreements with six private and municipal water providers. In 2001, approximately 99.6% of our earnings are attributable to Artesian Water's service to customers, with the remaining 0.4% related to the other subsidiaries.

          Our other water utility subsidiary, Artesian Water Pennsylvania, Inc., is currently seeking recognition, in the form of an application for a Certificate of Convenience and Necessity, from the Pennsylvania Public Utility Commission as a regulated utility and was not active in 2001. We do expect to begin operations in Pennsylvania in 2002, providing water service to a residential community, consisting of 41 homes, in Chester County.

          Our other subsidiaries, neither of which is regulated, include Artesian Wastewater Management, Inc., which provides wastewater services in Delaware, and Artesian Development Corporation, whose sole activity has been ownership of an eleven-acre parcel of land.

Strategic Direction

          Our profitability is primarily attributable to the sale of water by Artesian Water, the amount of which is dependent on seasonal fluctuations in weather, particularly during the summer months when water demand may vary with rainfall and temperature.

          Ensuring our customers have a dependable supply of safe, high-quality water has been, and will continue to be, a high priority. We expect to make investments in 2002 that will increase our sources of water by approximately two million gallons per day and enhance our ability to deliver supply from our Aquifer Storage and Recovery Program. We are the first and only water utility in Delaware to utilize this technology that capitalizes on Delaware's unique geology to provide storage capacity for water to be used during periods of peak water demand.

          While customer growth in our utility subsidiary will continue to be a major focus in 2002, we are aggressively seeking opportunities, which produce non-weather-affected revenue streams. These opportunities include our wastewater management subsidiary's operation of a new 2.5 million gallon per day spray irrigation wastewater treatment facility for the town of Middletown, Delaware, which we expect to begin in the third quarter of 2002. In addition, we will continue to focus attention on expanding our contract operations opportunities with municipalities and private water providers in Delaware and surrounding areas.

Regulatory Matters and Inflation

          As of December 31, 2001, we had approximately 66,000-metered customers and serviced a population of approximately 220,000, representing approximately 27% of Delaware's total population. The Delaware Public Service Commission ("PSC") regulates Artesian Water's rates charged for water service, the sale and issuance of our securities and other matters. We periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business. Increases in customers served by Artesian Water also contribute to increases in our operating revenues. Our business is also subject to seasonal fluctuations and the effects of weather.

          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. In 2001, Delaware passed a statute permitting 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 (DSIC). This charge is available to water utilities to be implemented between general rate increase applications, which normally recognize changes in a water utility's overall financial position, and significantly reduces expenses associated with general rate increase requests. The first effective date for the implementation of DSIC was January 1, 2002. We requested on November 30, 2001, and subsequently implemented, a 0.53% overall surcharge for bills rendered subsequent to January 1, 2002.

Significant Accounting Policies

          We record water service revenue, including amounts billed to customers on a cycle basis and unbilled amounts, based upon estimated usage from the date of the last meter reading to the end of the accounting period. These estimates are made on an individual customer basis, based on the previous year's consumption in the same period, 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.

          Our regulated water utility records deferred regulatory assets under Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," which are expenses that may be recovered over various lengths of time as prescribed by the PSC. As the utility incurs certain expenses, such as expenses related to rate case applications, a deferred regulatory asset is created. Adjustments to these deferred regulatory assets are made when the PSC 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 no longer recoverable in rates charged to customers. Adjustments to reflect changes in recoverability of certain deferred regulatory assets may have a material affect on our financial results.

Results of Operations

2001 Compared to 2000

Operating Revenues

          Revenues totaled $32.0 million in 2001 and were 16.1% above revenues in 2000 of $27.6 million, reflecting an increase in water sales of 15.8% due to customer growth and rate increases approved by the PSC in 2001. We realized 98.0% of our total revenue in 2001 from the sale of water.

          We filed an application with the PSC on December 5, 2000, to increase rates for water service for all of Artesian Water's customers. A temporary rate increase, calculated to increase annualized revenues $2.5 million, was approved by the PSC and placed into effect on February 3, 2001. In Delaware, utilities are permitted to place rates into effect on a temporary basis pending completion of a rate increase proceeding. If such rates are found to be in excess of rates the PSC finds to be appropriate, the utility must refund the portion found in excess to customers with interest. We received final approval, in PSC Docket 00-647 on June 19, 2001, to increase rates up to a total annualized increase in revenues of $3.7 million, or $1.2 million more than permitted under temporary rates. The approval was the result of a stipulated settlement reached by the PSC Staff and Division of Public Advocate. The increase in revenues for the various customer classes will not consistently match changes in consumption levels for the class primarily due to our use of a multiple rate block structure. This structure charges different rates for different levels of consumption. In addition, rate increases are distributed among the rate blocks and service charges through a cost of service analysis and may not reflect, on an individual class or charge basis, the overall increase in rates approved by the PSC.

Residential

          Residential water service revenues in 2001 amounted to $19.3 million, an increase of 17.4% over the $16.4 million recorded in 2000. The increase in 2001 follows an increase of 1.4% in 2000. The volume of water sold to residential customers, however, decreased marginally from 3,817 million gallons in 2000 to 3,809 million gallons in 2001. The number of residential customers served increased 2.0% in 2001.

Commercial

          Revenues from commercial customers in 2001 increased by 12.1% to $7.9 million, from $7.1 million in 2000. The volume of water sold to commercial customers increased by 16.9% from 2,039 million gallons in 2000 to 2,384 million gallons in 2001. The number of commercial customers served increased 1.1% in 2001.

Industrial

          Revenues from industrial customers in 2001 increased by 93.9% to $400,000, from $207,000 in 2000. The volume of water sold to industrial customers increased 108.9% from 79 million gallons in 2000 to 165 million gallons in 2001 primarily as a result of the addition of one new customer.

Government and Other

          Government and other revenues in 2001 increased by 10.9% to $3.7 million, from $3.4 million in 2000. Revenues derived from state, federal and local governmental agencies totaled $700,000 in 2001, exceeding 2000 revenue by 41.8%. The remaining revenue increase was derived from the sale of water to neighboring utilities, public fire protection service, pools and other temporary and seasonal customers.

Other Utility Operating Revenue

          Other utility operating revenue, derived from contract operations, antenna leases on water tanks and finance charges increased 21.8% in 2001 to $509,000, from $418,000 in 2000. The increase is primarily a result of a 28.3% increase in revenues for antenna leases and the addition of contract operation agreements.

Operating Expenses

          Operating expenses, excluding depreciation and taxes, increased approximately $2.2 million, or 14.4%, to $17.6 million in 2001. The increase in operating expenses resulted primarily from an increase in payroll and related expense of $1.2 million, or 15.7%, due to the addition of new employees and increases in annual merit compensation. Purchased water expenditure increased $201,000 over 2000 levels despite continuing to maintain minimum purchase requirements primarily due to the recognition of a credit in 2000 for water sold back to a provider in 2000. Repair and maintenance expenses increased as a result of an increase of $244,000 for tank painting expense, which reflects the first year of a five-year tank painting and maintenance agreement, which we entered into in 2000. Water treatment expense increased $86,000 reflecting the increased amount of chemicals used as a result of an increase in water pumped and a $42,000 increase related to the expanded testing of our sources of supply. Finally, our administrative expenses increased approximately $481,000, which primarily reflects the one-time $280,000 expense recognition for legal costs associated with the suspended negotiations for the purchase of Tidewater Utilities, a subsidiary of Middlesex Water Company, as well as, an additional $73,000 increase in our auditing and tax expense was recorded and reflects an increase in fees associated with the 2001 year end audit and additional fees related to our 2000 year end audit services. The remaining increase of $128,000 represents increases in a number of administrative expenses including bank fees, customer survey expense, regulatory commission expense and training expenses. The ratio of operating expense, excluding depreciation and taxes, to total revenue was 55.1% for the year ended December 31, 2001, compared to 55.9% for the year ended December 31, 2000.

          Depreciation and amortization expense increased $295,000, or 10.9%, due to increases in our utility plant in service. Income tax expense increased $565,000, or 34.9% due to increased profitability in 2001. Our total effective income tax rate for 2000 and 2001 was 39.8% and 39.7%, respectively.

Interest Charges

          Interest charges increased $482,000, or 11.9%, primarily due to an increase of $949,000 in interest related to long-term debt due to a full year recognition of interest on the Series O First Mortgage bonds issued December 29, 2000, and the interest associated with the $4.3 million note issued by the Delaware Department of Health and Social Services on January 31, 2001. This increase is partially offset by a $353,000 decrease in interest associated with our short-term debt. The average outstanding lines of credit during 2001 of $14.2 million increased by $1.4 million, compared to the average outstanding lines of credit during 2000 of $12.8 million, however, the average interest rate applied to these balances decreased from 7.2% in 2000 to 4.8% in 2001. In addition, interest charges related to the early redemption of the Series K First Mortgage Bond of $47,000 and $65,000 for refunds of revenues collected under bond which were in excess of the final rate increase award in 2000 were reflected in 2000 for which no similar entry was recorded in 2001.

Net Income

          For the year ended December 31, 2001, our net income applicable to common stock increased $880,000, or 36.8%, compared to the same period in 2000. The increase in net income was primarily due to rate increases authorized in 2000 and 2001, increases in consumption following a period of reduced consumption in 2000, a year with unusual frequency of summer rainfall, continued customer growth and lower interest rates on short-term lines of credit.

2000 Compared to 1999

Operating Revenues

          Revenues totaled $27.6 million in 2000 and were 2.9% above revenues in 1999 of $26.8 million, reflecting an increase in water sales due to customer growth of 3.64% and rate increases approved by the PSC in 2000. We realized 98.3% of our total revenue in 2000 from the sale of water.

          We received approval from the PSC on August 30, 2000, in PSC Docket 99-197, to increase rates for water service. We reflected in revenues water sales totaling $173,000 of the $720,000 in operating revenues we deferred in 1999 pending the completion of the rate increase proceeding. The remaining $547,000 deferred in 1999, and an additional $808,000 collected under bond in 2000, was refunded to customers with interest. These operating revenues were a result of a temporary increase we had placed into effect, on July 1, 1999. The increased revenues from the approved rate increase were offset by a decrease in usage per customer. The decrease in our rate of consumption per customer was a result of the unusual frequency of rainfall during the summer of 2000.

Residential

          Residential water service revenues in 2000 amounted to $16.4 million, an increase of 1.4% over the $16.2 million recorded in 1999. The increase in 2000 followed an increase of 3.4% in 1999. The volume of water sold to residential customers increased by 4.5% from 3,651 million gallons in 1999 to 3,817 million gallons in 2000. The number of residential customers served increased 3.8% in 2000.

Commercial

          Revenues from commercial customers in 2000 increased by 6.9% to $7.1 million, from $6.6 million in 1999. The volume of water sold to commercial customers increased by 0.3% from 2,033 million gallons in 1999 to 2,039 million gallons in 2000. The number of commercial customers served decreased 1.0% in 2000.

Industrial

          Revenues from industrial customers in 2000 increased by 13.1% to $207,000, from $183,000 in 1999. The volume of water sold to industrial customers decreased 6.3% from 84 million gallons in 1999 to 79 million gallons in 2000.

Government and Other

          Public and other revenues in 2000 increased by 2.1% to $3.4 million, from $3.3 million in 1999. Revenues derived from state, federal and local governmental agencies totaled $500,000 in 2000, declining from 1999 revenue by 23.3%. The remaining revenue increase was derived from the sale of water to neighboring utilities, public fire protection service, pools and other temporary and seasonal customers.

Other Utility Operating Revenue

          Other utility operating revenue, derived from finance charges on customer accounts, leases for communications antenna space and other miscellaneous customer charges, decreased 2.3% in 2000 to $418,000, from $427,000 in 1999.

Operating Expenses

          Operating expenses, excluding depreciation and taxes, increased $709,000, or 4.8%, primarily due to increased payroll and related expenses, increased purchased water expenditures of $111,000 and an increase of $75,000 in transportation expenses related to fuel. These increases were partially offset by a $130,000 reduction in legal expenses due, in part, to the hiring of in-house counsel. The ratio of operating expense, excluding depreciation and taxes, to total revenue was 55.9% for the year ended December 31, 2000, compared to 54.9% for the year ended December 31, 1999. Payroll and related expenses increased $689,000, or 8.7%, primarily due to the addition of new employees, increases in annual merit compensation and a 17.0% increase in medical insurance premiums.

          Depreciation and amortization expense increased $289,000, or 12.0%, due to increases in our utility plant in service. Income tax expense decreased $341,000, or 17.4% due to decreased profitability in 2000. Our total effective income tax rate for 1999 and 2000 was 39.8%.

Interest Charges

          Interest charges increased $757,000, or 23.0%, primarily due to an increase of $497,000 in interest related to short term debt due to increases in the average outstanding lines of credit during 2000 of $12.8 million, compared to the average outstanding lines of credit during 1999 of $7.1 million. Interest on long term debt increased by $119,000, or 4.4%, primarily due to a full year of interest expense related to the $4.5 million note issued to Ellis and Helena Taylor in exchange for our purchase of 24,165 shares of Class A Non-Voting Common Stock and 126,353 shares of Class B Common Stock. In addition, we expensed $47,000 of unamortized issuance cost for our First Mortgage Bonds, Series K, as a result of their early redemption. Finally, we paid customers $65,000 in interest on the refund of operating revenues collected under bond but which were found to be in excess of the final rate award discussed above.

Net Income

          For the year ended December 31, 2000, our net income applicable to common stock decreased $519,000, or 17.8%, compared to the same period in 1999. The decrease in net income was primarily due to reduced consumption as a result of the unusual frequency of rainfall experienced during the summer of 2000. In addition, we incurred approximately $500,000 in interest expense related to $15.9 million invested in utility plant since June 30, 1999, the end of the test period in our prior rate application. Because of the length of the prior rate proceeding, which was filed on April 30, 1999 but not concluded until August 29, 2000, we were delayed in filing a new rate increase request to take into consideration new investment in utility plant placed in service after June 30, 1999.

Liquidity and Capital Resources

Overview

          Our primary sources of liquidity for 2001 were $4.3 million in proceeds from the issuance of Artesian Water's 4.48% state revolving fund loan, $8.9 million provided by cash flow from operating activities and an increase of $9.8 million in our outstanding lines of credit. Cash flow from operating activities was primarily provided by our utility operations, and was impacted by the timeliness and adequacy of rate increases and weather conditions.

          A significant part of our ability to maintain and meet our financial objectives is to assure our investments in utility plant are recovered in the rates charged to customers. As such, we file rate increase requests to recover increases in operating expenses and investments in utility plant, the timing of which is dependent upon the estimated cost of the administrative process in relation to the deficiency which is to be alleviated. On February 1, 2002, we provided notice to the Delaware Public Service Commission of our intent to file a rate increase request in 2002. Under the PSC's administrative procedures, a utility must tell the PSC of its intent to file a rate increase application at least 60 days prior to such filing. However, a company is not obligated to file any request for increase if circumstances change.

          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 2002 will be approximately $22.8 million. Our total obligations related to dividend and sinking fund payments on preferred stock, interest and principal payments on indebtedness, rental payments and water service interconnection agreements for 2002 are anticipated to be approximately $7.7 million.

Investment in Utility Plant and Systems

          Capital expenditures increased by approximately $6.9 million for the year ended December 31, 2001, or approximately 48.6%, from $14.4 million in 2000 to $21.3 million in 2001. Investment in utility plant, excluding advances and contributions in aid of construction received from real estate developers, increased by $6.3 million, or 49.6%, from $12.8 million in 2000 to $19.1 million in 2001. Developers financed $2.2 million for the installation of water mains and hydrants serving their developments, compared to $1.6 million financed by developers in 2000.

          We invested over $10.6 million in new transmission and distribution facilities, including refunds of advances for developer-financed infrastructure. Approximately $2.9 million of the $10.6 million investment for transmission and distribution facilities was made for the relocation of infrastructure as a result of roadway improvements and relocations. $2.1 million was invested in our rehabilitation program for transmission and distribution facilities, replacing aging or deteriorating mains. In addition, we invested $5.6 million in new infrastructure to serve 1,271 new customers, which included construction of a $1.4 million new elevated storage tank in Sussex County.

          Capital expenditures of $7.1 million were made to enhance or improve existing treatment facilities, rehabilitation of pumping equipment and installation of new wells to increase supply capabilities. We invested $4.9 million of the $7.1 million for new sources of supply throughout Delaware which made available approximately two million gallons a day for customers. In addition, we invested approximately $2.2 million for sources of supply to add new treatment processes and upgrade existing facilities. In particular, we added activated carbon treatment processes to two facilities to remove a contaminant, which was detected at these well fields and for which a new temporary standard was imposed by Delaware's Division of Public Health.

          The remaining $1.4 million of capital investment in 2001 was made for general plant, including fleet vehicles and computer equipment.

          We have planned to invest approximately $22.8 million in utility plant in 2002. Developers are expected to finance an additional $3.6 million in utility plant construction. The largest portion of projected investment is primarily a result of our efforts to identify, develop, treat and protect sources of water supply to assure uninterrupted service to our customers. We expect to invest approximately $9.6 million in new treatment facilities, equipment and wells throughout Delaware expecting to produce two million gallons per day in additional water supply. Approximately $4 million of this expected investment would be made at two new facilities. Approximately $1.6 million is needed to supply southern New Castle County at Willow Grove and $2.4 million to supplement a rapidly growing Sussex County system near Bayville. Another $1.4 million is to be invested in two new facilities to increase available sources of supply in northern New Castle County. In addition to the investment in new facilities, we continue to maximize and enhance our existing treatment facilities and expect to invest over $4.2 million in 2002 to provide the highest quality water, which surpass state and federal water quality standards. The largest single enhancement is scheduled for our Windsong treatment facility in Kent County where changes in state and federal standards have required us to invest nearly $1.0 million in new treatment processes and equipment.

          As part of our total utility plant investment, we expect to invest over $10.2 million in transmission and distribution facilities. We project approximately $3.8 million will be invested in the relocations of facilities as a result of government mandates and renewals associated with the rehabilitation of aging infrastructure. We will also invest approximately $6.4 million in new transmission and distribution facilities to improve our system hydraulics and address service needs in growth areas of our service territory.

          The remaining $3.0 million of expected utility plant investment represents expenditures for our general plant and equipment, such as fleet vehicles, computer equipment and tools, and refunds paid to developers for investments that they made in infrastructure to service developments in our service territory.

Financing

          We have several sources of liquidity to finance our investment in utility plant and other fixed assets. We estimate that the projected investment of approximately $22.8 million will be financed by our operations and external sources, including a combination of capital investment and short-term borrowings under our revolving credit agreements discussed below. Developers are expected to finance, through advances and contributions in aid of construction, an additional $3.6 million of capital expenditures, which includes the installation of mains and hydrants in new developments.

          Our cash flow from operations are primarily derived from water sales revenues and may be materially affected by a changes in water sales due to weather and the timing and extent of increases in rates approved by the Delaware Public Service Commission.

          At December 31, 2001, Artesian Water had lines of credit with three separate financial institutions totaling $35.0 million to meet its temporary cash requirements. These revolving credit facilities are unsecured. As of December 31, 2001, we had $18.9 million of available funds under these lines. The interest rate for borrowings under each of these lines is the London Interbank Offering Rate plus 1.0% or the banks' federal funds rate plus 1.0%, at our discretion. All the facilities are reviewed annually by each bank for renewal.

          We may, from time to time, sell our securities to meet capital requirements. The amount and timing of future sales of our securities will depend upon market conditions and our specific needs. Our trust indentures, which set certain criteria for the issuance of new long-term debt, limits long-term debt, including the short-term portion thereof, to 66 2/3% of total capitalization. Our debt to total capitalization, including the short-term portion thereof, was 59.34% at December 31, 2001.

          In order to meet the expected level of investment in utility plant and retain future financing flexibility, we anticipate that we will sell either debt and/or equity to the public in 2002. Additionally, Artesian Water anticipates it will refinance its Series L 8.03% First Mortgage Bonds when they come due on February 1, 2003, along with any outstanding short-term debt under our lines of credit.

          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 provisions, which would result in default and subsequently require the obligation to be repaid, however, there are also specific cure provisions which allow us to avoid default of the obligation. We have not experienced conditions, which would result in our default under these agreements, and we do not anticipate any such occurrence. Payments for unconditional purchase obligations reflect minimum purchase obligations under our interconnection agreements with neighboring utilities.

Impact of Recent Accounting Pronouncements

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

          The Company is required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that is acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized as they were prior to the adoption of Statement 142. Our adoption of SFAS No.141 and SFAS No. 142 will not have a material impact on our financial statements.

          In August 2001, the FASB issued statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Statement No. 143 requires recognition of a liability at fair value and an increase to the carrying value of the related asset for any retirement obligation. This amount would then be amortized over the life of the asset. The liability would be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows. This statement is effective June 2003. Our adoption of this statement will not have a material impact on our financial condition or results of operations.

          In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 incorporated the disposal of a business segment into the framework of Statement No. 121. Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement also excludes goodwill that was included in Statement No. 121 scope and provided refinement to cash flow estimations for defining any applicable impairment. This statement is effective January 1, 2002. Our adoption of this statement will not have a material impact on our financial condition or results of operations.

Cautionary Statement

          Statements in this Annual Report which express our "belief", "anticipation", "projection" or "expectation," including statements regarding when we will commence operations in Pennsylvania, our goals, priorities and growth and expansion plans, our obligations and investment plans in 2002, and our plans regarding a debt and/or equity offering and our expected profitability, as well as other statements which are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties that could cause actual results to differ materially from those projected, including material changes in demand from larger customers, changes in weather, availability of labor, changes in government policies, levels of rate relief granted and changes in economic conditions and the other risks set forth in our Annual Report on Form 10-K under the caption "Risk Factors." All of the forward-looking statements made in this Annual Report are based on our current beliefs and we undertake no obligation to update any of these cautionary statements.

Item 8.-Financial Statements and Supplementary Data.

The notes and schedules are an integral part of the consolidated financial statements.

The notes and schedules are an integral part of the consolidated financial statements.

Supplemental Schedule of Non-Cash Investing and Financing Activities:
During 1999, 24,165 shares of Class A stock and 126,353 shares of Class B stock were reacquired in exchange for a note in the amount of $4,450,000 that is discussed under Note 6.

The notes and schedules are an integral part of the consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation-- The consolidated financial statements include the accounts of Artesian Resources Corporation and its wholly-owned subsidiaries ("Artesian Resources" or the "Company"), including its principal operating company, Artesian Water Company, Inc. ("Artesian Water"). Appropriate elimination's have been made for all material inter-company transactions and account balances.

Utility Subsidiary Accounting-- The accounting records of Artesian Water are maintained in accordance with the uniform system of accounts as prescribed by the Delaware Public Service Commission ("PSC"). Artesian Water follows the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," which provides guidance for companies in regulated industries.

Utility Plant and Capitalized Leases-- All additions to plant are recorded at cost. Cost includes direct labor, materials, and indirect charges for such items as transportation, supervision, pension, and other fringe benefits related to employees engaged in construction activities. When depreciable units of utility plant are retired, the cost of retired property, together with any cost associated with retirement and less any salvage value or proceeds received, is charged to accumulated depreciation. Maintenance, repairs, and replacement of minor items of plant are charged to expense as incurred.

          In accordance with a rate order issued by the PSC, Artesian Water accrues an Allowance for Funds Used During Construction ("AFUDC"). AFUDC, which represents the cost of funds devoted to construction projects through the date the project is placed in service, is capitalized as part of construction work in progress. The rate used for the AFUDC calculation is based on Artesian Water's weighted average cost of debt and the rate of return on equity authorized by the PSC. The rate used to capitalize AFUDC in 2001, 2000 and 1999 was 8.5%, 9.3%, and 9.4%, respectively.

Utility plant comprises: