Artesian Resources - 10-Q quarterly report FY

          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.

          As of June 30, 2002, 2,173,953 shares and 391,824 shares of Class A Non-Voting Common Stock and Class B Common Stock, respectively, were outstanding.

Part I - Financial Information
Item I - Financial Statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL

          The unaudited consolidated financial statements of Artesian Resources Corporation and its wholly-owned subsidiaries (the Company or Artesian Resources), including its principal operating company, Artesian Water Company, Inc. (Artesian Water), presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures prescribed by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2001, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. The accompanying consolidated financial statements have not been audited by independent accountants in accordance with generally accepted auditing standards and, in the opinion of management such consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to fairly summarize the Company's financial position and results of operations. The results of operations for the interim periods may not be indicative of the results that may be expected for the entire year due to the institution of mandatory drought restrictions and certain factors, such as developments in our current rate proceeding, competitive market pressures, material changes in demand from larger customers, changes in weather, changes in government policies, and changes in economic conditions.

NOTE 2 - REGULATORY ASSETS

          Certain expenses are recoverable through rates, without a return on investment, and are deferred and amortized during future periods using various methods as permitted by the Delaware Public Service Commission PSC ("Delaware PSC"). Expenses related to rate proceedings are amortized on a straight-line basis over a period of 2 years. The postretirement benefit obligation, which is being amortized over 20 years, is adjusted for the difference between the net periodic postretirement benefit costs and the cash payments. The deferred income taxes will be amortized over future years as the tax effects of temporary differences previously flowed through to the customers reverse. Regulatory assets at December 31, net of amortization, comprise:

NOTE 3 - RELATED PARTY TRANSACTIONS

          The office building and shop complex utilized by Artesian Water are leased at an average annual rental of $180,000 from a partnership, White Clay Realty, in which certain of Artesian Resources' officers and directors are partners. The lease expires at the end of 2002, with provisions for renewals for two consecutive 5-year periods thereafter. Management believes that the payments made to White Clay Realty for the lease of its office building and shop complex and maintenance costs, taxes and other ownership type costs paid are comparable to what Artesian Water would have to pay to unaffiliated parties for similar facilities.

          Expenses associated with related party transactions are as follows:

NOTE 4 - NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE

          Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share is based on the weighted average number of common shares outstanding and potentially dilutive effect of employee stock options. The following table summarizes the shares used in computing basic and diluted net income per share:

          Equity per common share was $19.49 and $16.22 at June 30, 2002 and 2001, respectively. These amounts were computed by dividing common stockholders' equity, excluding preferred stock, by the number of shares of common stock outstanding on June 30, 2002 and 2001, respectively.

NOTE 5 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

          In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement nullifies EITF 94-3 which addressed this subject. The statement requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred. Our adoption of this statement will not have a material impact on our financial condition or results of operation.

          In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. Statement No. 145 eliminates accounting treatment described in Statements 4 and 64 related to Extinguishment of Debt and amends Statement 13 regarding the use of sale - lease back accounting. Our adoption of this statement will not have a material impact on our financial condition or results of operation.

          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.

NOTE 6 - RATE PROCEEDINGS

          On April 2, 2002, Artesian Water filed a rate increase application with the Delaware PSC to request a rate increase of 23.1%, or approximately $7.5 million, on an annualized basis. On June 17, 2002, we filed a supplemental application reducing our requested increase to 19.0%, or approximately $6.4 million on an annualized basis. On June 6, 2002, both the City of Wilmington and General Motors were granted permission to intervene in our rate increase application. The City of Wilmington is challenging the approval of a new industrial rate classification for water service to a General Motors facility that has received water service from both the City of Wilmington and Artesian Water. General Motors petitioned to intervene to protect their interest with regard to the City of Wilmington's intervention. On June 1, 2002, Artesian Water placed temporary rates into effect, up to the statutory limit of $2.5 million on an annualized basis, under bond until the Delaware PSC decides the level of permanent rates.

NOTE 7 - STOCK OFFERING

          On June 6, 2002, the Company completed the sale of 500,000 shares of Class A Non-Voting Common Stock. The net proceeds of approximately $15.1 million were used to reduce borrowing on Artesian Water Company's lines of credit.

ITEM 2
ARTESIAN RESOURCES CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2002

RESULTS OF OPERATIONS

Overview

          Artesian Resources is a non-operating holding Company whose income is derived from the earnings of its four wholly owned subsidiary companies and its one-third interest in AquaStructure Delaware, LLC, or AquaStructure, whose primary activity is marketing wastewater services. Artesian Water, our principal subsidiary, is the oldest and largest regulated public water utility in the State of Delaware and has been providing water within the state since 1905. We distribute and sell water to residential, commercial, industrial, governmental, municipal and utility customers throughout Delaware. As of June 30, 2002, we had approximately 67,300 metered customers and served a population of approximately 220,000, representing approximately 27% of Delaware's total population.

          The Delaware Public Service Commission, or Delaware PSC, regulates Artesian Water's rate charges for water service, the issuance of Certificates of Public Convenience and Necessity, the sale and issuance of securities by Artesian Water, and other matters. We periodically seek and receive rate increases to cover the cost of increased expenses, due to additional investments in utility plant and equipment and other costs of doing business. Increases in customers served by Artesian Water also contribute to increases in our operating revenues, although such increases have been offset slightly by reductions in customers' individual usage. We continue our efforts to contain expenses and improve efficiencies that contribute to increases in our operating income. Our business is also subject to seasonal fluctuations and the effects of weather.

Operating Revenues

          We realized 97.7% of our total revenue in the quarter ended June 2002 and the first six months of 2002 from the sale of water. Total revenues increased $670,000, or 8.4%, and $1,454,000, or 9.7%, for the quarter ended June 30, 2002 and the six months ended June 30, 2002 compared to the quarter ended June 30, 2001 and the first six months of 2001. The increase for both periods was primarily due to a growth in the number of customers served, rate increases approved by the Delaware PSC, effective February 3, 2001 and July 1, 2001, and implementation of temporary rates effective June 1, 2002 related to a rate increase request filed April 2, 2002. In Delaware, utilities are permitted to place rates into effect on a temporary basis pending completion of a rate increase proceeding. If such rates are found to be in excess of rates the Commission finds to be appropriate, the utility must refund the portion found in excess to customers with interest.

          We filed an application with the Delaware 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 Delaware 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 Delaware PSC finds to be appropriate, the utility must refund the portion found in excess to customers with interest. We received final approval, in Delaware 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 Delaware 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 Delaware PSC.

          On April 2, 2002, Artesian Water filed a rate increase application with the Delaware PSC to request a rate increase of 23.1%, or approximately $7.5 million, on an annualized basis. On June 17, 2002, we filed a supplemental application reducing our requested increase to 19.0%, or approximately $6.4 million on an annualized basis. On June 6, 2002, both the City of Wilmington and General Motors were granted permission by the Hearing Examiner to intervene in our rate increase application. The City of Wilmington is challenging the approval of a new industrial rate classification for water service to a General Motors facility that has received water service from both the City of Wilmington and Artesian Water. General Motors petitioned to intervene to protect their interest with regard to the City of Wilmington's intervention. On June 1, 2002, Artesian Water placed temporary rates into effect, up to the statutory limit of $2.5 million on an annualized basis, under bond until the Delaware PSC decides the level of permanent rates.

          By Executive Order on August 2, 2002, Governor Minner implemented mandatory water use restrictions in Northern New Castle County in light of continuing drought conditions. These mandatory restrictions primarily affect our customers outside water use. The Governor had previously declared a drought warning on March 5, 2002 and requested voluntary conservation. We believe that the voluntary restrictions have resulted in a lower than anticipated demand during the recent hot dry weather conditions. We expect that the mandatory water use restrictions will result in decreases in water use by our customers.

Operating Expenses

          Operating and maintenance expenses, excluding depreciation and taxes, increased $600,000 for the quarter ended June 30, 2002, and $842,000 for the six months ended June 30, 2002, over comparable periods ended June 30, 2001. An increase in payroll and benefits of $309,000 for the quarter and $409,000 for the six months ended June 30, 2002, due to additional positions, wage increases and bonuses, contributed to the increase in operating and maintenance expenses. In addition, due to to the increased use of temporary and outside consulting services, administration expenses increased $222,000 for the quarter and $263,000 for the six months ended June 30, 2002.

          Due to capital additions, depreciation and amortization expense increased $50,000, or 6.6% for the quarter ended June 30, 2002 and $154,000, or 10.5% for the six months ended June 30, 2002, when compared to the same period in 2001. Income tax expense increased $54,000, or 8.8% and $257,000, or 32.9% for the quarter and the six months ended June 30, 2002, as a result of increased profitability.

Interest Charges

          Interest charges decreased $30,000, or 2.6%, over the quarter ended June 30, 2002, and was flat for the first six months of 2002, when compared to the quarter ended June 2001 and the first six months of 2001. This can be primarily attributed to lower interest rates charged for short-term financing.

Net Income

          For the quarter and six months ended June 30, 2002, our net income applicable to common stock increased $13,000 and $293,000 when compared to the same period in 2001. The increase in net income was predominantly due to rate increases authorized in 2001 and 2002 and continued customer growth.

LIQUIDITY AND CAPITAL RESOURCES

          Our primary sources of liquidity for the quarter ended June 30, 2002 were $15.6 million primarily from the proceeds from issuance of 500,000 shares of common stock and $3.6 million provided by cash flow from operating activities. Cash flow from operating activities was, for the most part, provided by our utility operations, and was positively impacted by the timeliness and adequacy of rate increases.

          A significant part of our ability to maintain and meet our financial objectives is to assure our investments in utility plant and equipment are recovered in the rates charged to customers. As such, from time to time we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment. On April 2, 2002 Artesian Water filed a rate increase application with the Delaware PSC to request a rate increase of 23.1%, or $7.5 million on an annualized basis. On June 17, 2002, we filed a supplemental application reducing our requested increase to 19.0%, or approximately $6.4 million on an annualized basis. On June 6, 2002, both the City of Wilmington and General Motors were granted permission by the Hearing Examiner to intervene in our rate increase application. The City of Wilmington is challenging the approval of a new industrial rate classification for water service to a General Motors facility that has received water service from both the City of Wilmington and Artesian Water. General Motors petitioned to intervene to protect their interest with regard to the City of Wilmington's intervention. On June 1, 2002, Artesian Water placed temporary rates into effect, up to the statutory limit of $2.5 million on an annualized basis, under bond, until the Delaware PSC decides the level of permanent rates.

          At June 30, 2002, Artesian Water had lines of credit with three separate financial institutions totaling $35.0 million to meet its temporary cash requirements. These revolving credit facilities are unsecured. As of June 30, 2002, we had $25.3 million of available funds under these lines. The interest rate for borrowings under each of these lines is the London Interbank Offering Rate plus 1.0% or, at our discretion, the bank's federal funds rate plus 1.0% and at June 30, 2002 was 2.80 %. All the facilities are reviewed annually by each bank for renewal. Our cash from operations and lines of credit are sufficient to meet our financial obligations for the next twelve months.

CAUTIONARY STATEMENT

          Statements in this Quarterly Report on Form 10-Q which express our "belief", "anticipation" or "expectation", as well as other statements which are not historical fact including statements regarding our rate application and the effects of the mandatory water use restrictions are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected. Certain factors, such as developments in our current rate proceeding, competitive market pressures, material changes in demand from larger customers, changes in weather, changes in government policies, changes in economic conditions, and other matters listed under the heading Risk Factors in our Registration Statement on Form S-2 (File No. 333-87864), could cause results to differ materially from those in the forward-looking statements. We do not undertake to update any of the forwarding looking statements included in the Quarterly Report on Form 10-Q.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          We are 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. Our interest rate risk related to existing fixed rate, long-term debt is not material due to the term of our First Mortgage Bonds, which have maturity dates ranging from 2003 to 2020

          Directors are elected by a plurality of the votes cast; therefore, votes cast in the election could not be recorded against or as an abstention, nor could broker-non votes be recorded.

2. Proposal to approve an amendment to the Company's restated Certificate of Incorporation to increase the number of total authorized shares of capital stock from 4,730,868 to 16,230,868 shares, and to increase the total number of authorized shares of the Class A Stock from 3,500,000 to 15,000,000 shares. Holders of record of the Company's Class B Common Stock and Class A Common Stock were entitled to vote on this proposal. The result of the vote tabulated at the Annual Meeting for the approval of the aforementioned proposal was as follows:

Exhibit 99.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Exhibit 99.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002