UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

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

(Exact name of registrant as specified in its charter)

Delaware		51-0002090
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

664 Churchmans Road, Newark, Delaware 19702

Address of principal executive offices

(302) 453 – 6900

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Class A Non-Voting Common Stock		NASDAQ

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file report reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act.

Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company ( as defined in Exchange Act Rule 12b-2) o Yes þ No

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, 2006 was $96,371,000 and $5,633,000, respectively. The aggregate market value of Class A Non-Voting Common Stock was computed by reference to the closing price of such class as reported on the Nasdaq National Market on June 30, 2006. 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, 2006, which trade date was January 31, 2006.

As of March 9, 2007, 5,231,306 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.

 

 

PART I

Item 1. Business.

General

Artesian Resources Corporation, or “Artesian Resources” operates as the parent holding company of Artesian Water Company, Inc., or “Artesian Water,” Artesian Water Pennsylvania, Inc., or “Artesian Water Pennsylvania,” Artesian Wastewater Management, Inc., or “Artesian Wastewater,” each a regulated public utility, and two non-regulated subsidiaries; Artesian Utility Development, Inc., or “Artesian Utility,” and Artesian Development Corporation, or “Artesian Development.” The terms “we,” “our” and the “Company” as used herein refer to Artesian Resources and its subsidiaries. The business activity conducted by each of our subsidiaries is discussed below under separate headings.

The Company has no collective bargaining agreements with any of its employees, and its work force is not union organized or union represented. As of December 31, 2006, we employed 198 full-time and 6 part-time employees. Of these full-time employees, 19 were officers and managers; 117 were employed as operations personnel, including engineers, technicians, draftsman, maintenance and repair persons, meter readers and utility personnel; and 52 were employed in the accounting, budgeting, information systems, human resources, customer relations, public relations and conservation departments. The remaining 10 employees were administrative personnel. We believe that our employee relations are good.

We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Exchange Act electronically with the Securities and Exchange Commission, SEC. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC, 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-202-551-8090. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

We are a Delaware corporation with our principal executive offices located at 664 Churchmans Road, Newark, Delaware, 19702. Our telephone number is (302)453-6900 and our website address is www.artesianwater.com. We make available free of charge through the Investor Information section of our website our Code of Ethics, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. We include our website address in this Annual Report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our website.

Artesian Water

Artesian Water, our principal subsidiary, is the oldest and largest public water utility in the State of Delaware and has been providing water service within the state since 1905. It was organized in 1927 as the successor to the Richardson Park Water Company, founded in 1905. In 1984, the name of Artesian Water Company was changed to Artesian Resources Corporation and the utility assets were contributed to the newly formed subsidiary, Artesian Water. Artesian Water distributes and sells water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware. As of December 31, 2006, we had approximately 73,800 metered customers and served a population of approximately 243,000 (including contract services), representing approximately 29% of Delaware’s total population. We also provide water for public and private fire protection to customers in our service territories. Our gross water sales revenue for 2006 was approximately $44.3 million, which was 91.1% of total operating revenues for the consolidated group. Our water customer base is diversified among residential, commercial, and industrial customers. Residential customers account for 94% of our customer base, 5% are commercial entities, and the remaining 1% are industrial and other.

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 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.

Our current primary market area is the State of Delaware, which had a population of approximately 853,000 at July 1, 2006. According to the US Census Bureau, Delaware’s population increased an estimated 8.9% from 2000 to 2006, as compared to the nationwide growth rate of approximately 6.4%. Substantial portions of Delaware, particularly outside of New Castle County, are not served by a public water system and represent potential opportunities for Artesian Water to obtain new exclusive franchised service areas. We continue to focus resources on developing and serving existing service territories and obtaining new territories throughout the State. In 2006, we added approximately 20 square miles of franchised service area.

In addition, we are currently pursuing opportunities to expand into Maryland. Cecil County has designated the Interstate 95 corridor as a preferred growth area for business and residential expansion. Recently, the federal Base Re-Alignment and Closure Commission announced the relocation of approximately 14,000 jobs to nearby Aberdeen, Maryland by 2011. The Wilmington Metropolitan Area Planning Commission projects Cecil County will grow at a rate of 86 percent between 2000 and 2030 and the Maryland Department of Planning projects that Cecil County will experience the highest rate of household growth through 2025 of any jurisdiction in the state. We have entered into agreements with the towns of Elkton and Chesapeake City, Maryland to sell water to them at the Delaware state line. Construction of the transmission main to Elkton is expected to begin in the early summer and we anticipate supplying water in 2007. Additional approvals are necessary to construct the transmission line to Chesapeake City.

In Delaware, a Certificate of Public Convenience and Necessity, or “CPCN,” grants a water company the exclusive right to serve all existing and new customers within a designated area. Effective July 1, 2001, the authority to issue these CPCNs was transferred to the Delaware Public Service Commission, PSC, from the Delaware Department of Natural Resources and Environmental Control, DNREC. In this Form 10-K, we may refer to CPCNs as “franchises” or “service territories.” The PSC grants a CPCN under circumstances where there has been a determination that the water in the proposed service area does not meet the regulations governing drinking water standards of the State Division of Public Health for human consumption, where the supply is insufficient to meet the projected demand, or where the applicant is in possession of one of the following:

	•		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;
	•		a petition requesting such service signed by a majority of the landowners of the proposed territory to be served; or
	•		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. Once a CPCN is granted to a water utility, it may not be suspended or terminated unless the PSC determines in accordance with its rules and regulations that good cause exists for any such suspension or termination. In addition, a water utility that has a CPCN must obtain the approval of the PSC to abandon a service territory.

Our business in our franchised service area is substantially free from direct competition with other public utilities, municipalities and other entities. However, although Artesian Water has been granted an exclusive franchise for each of its existing community water systems, its ability to expand service areas can be affected by the PSC awarding franchises to other regulated water utilities with whom we compete for such franchises.

We hold CPCNs for approximately 208 square miles of exclusive service territory or about 10.6% of the total square miles in Delaware, which is segmented into a number of service areas. Our largest connected regional water system, consisting of approximately 98.6 square miles and 68,000 customers, is located in northern Delaware. A significant portion of our exclusive service territory remains undeveloped, and if and when development occurs and there is population growth in these areas, we will increase our customer base by providing water service to the newly developed areas and new customers. Within our existing service territory, we hold CPCNs for nearly 5,000 vacant acres zoned for industrial and manufacturing development.

In 1993, we initiated efforts to expand our service territory in Delaware beyond northern New Castle County. This expansion, which has occurred in southern New Castle, Kent and Sussex Counties, has increased our exclusive

service area in Delaware by approximately 111% since 1993. Since we began expansion of our service territory in 1993, the total number of customers we serve has grown at an average annual rate of approximately 2.5%. The pursuit of new service territory in the State of Delaware by water companies is competitive. Our strategy is to continue our efforts to acquire additional exclusive service areas, although the future rate of increase will depend upon interest rates, land use rules, and our ability to enter into agreements with landowners, developers or municipalities.

Beginning in 1992, we undertook steps to increase our sources of groundwater supply, recognizing that such sources provided improved reliability while also being more cost effective. 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 83% in 2006. Since 1992, we have increased our sources of groundwater supply from our own wells by 101%, or nearly nineteen million gallons per day. We plan to continue development of new sources of groundwater supplies as demand warrants.

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 83% of the overall 7.7 billion gallons of water we distributed in all our systems during 2006 came from our groundwater wells, while the remaining 17% came from interconnections with other utilities and municipalities. During 2006, our average rate of water pumped was approximately 17.5 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 51.0 mgd. Our peak water demand in 2006 was approximately 31.7 mgd. We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories.

Under state laws and regulations, we are required to file applications with the Delaware Department of Natural Resources and Environmental Control for water allocation permits for each of our operating wells pumping greater than 50,000 gallons per day. We have 110 operating and 62 monitoring wells in our systems. At December 31, 2006, we had allocation permits for 76 wells, permit applications pending for 7 wells, and 27 wells that do not require a permit. Our access to aquifers within our service territory is not exclusive. Water allocation permits control the amount of water that can be drawn from water resources and are granted with specific restrictions on water level draw down limits, annual, monthly and daily pumpage limits, and well field allocation pumpage limits. We are also subject to water allocation regulations that control the amount of water that we can draw from water sources. As a result, if new or more restrictive water allocation regulations are imposed, they could have an adverse effect on our ability to supply the demands of our customers, and in turn, our water supply revenues and results of operations. Our ability to supply the demands of our customers historically has not been affected by private usage of the aquifers by landowners or the limits imposed by the state of Delaware. Because of the extensive regulatory requirements relating to the withdrawal of any significant amounts of water from the aquifers, we believe that third party usage of the aquifers within our service territory will not interfere with our ability to meet the present and future demands of our customers. In 2003, Delaware passed legislation requiring all water utilities to certify by July 2006 that they have sufficient sources of self-supply to serve their respective systems. We filed our certification of self-sufficiency of supply with the PSC on March 8, 2005. The review was completed on June 20, 2006, and the PSC concluded that we demonstrated that we have sufficient water supply to meet the demands of our customers through 2006. As required by law, on June 30, 2006, we filed with the PSC a new certification of self-sufficiency for the period through 2009. This filing is currently under review by the PSC.

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

We have 18 interconnections with 2 neighboring water utilities and 5 municipalities that provide us with the ability to purchase or sell water. An interconnection agreement with the Chester Water Authority has a “take or pay” clause requiring us to purchase 1.095 billion gallons annually as of December 31, 2006. During the fiscal year ended December 31, 2006, 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, 2006, we were serving customers through approximately 1,050 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. We supply public fire protection service through approximately 4,500 hydrants installed throughout our service territories.

We have 27 storage tanks, most of which are elevated, providing total system storage of 40.5 million gallons. We have developed and are using an Aquifer Storage and Recovery (ASR) system. Our ASR system provides approximately 130 million gallons of storage capacity, which can be withdrawn at a rate of 1 million gallons per day. At some locations, we rely on hydropneumatic tanks to maintain adequate system pressures. Where possible, we combine our smaller satellite systems with systems having elevated storage facilities.

We pump all of our water with electric power purchased from major electric utilities such as Delaware Electric Cooperative and Delmarva Power. We also have diesel and propane powered generating equipment at most treatment and elevated storage facilities for the provision of basic water service during possible electrical outages. Price caps instituted by electric restructuring legislation in Delaware in 1999 were lifted in 2005 for Delaware Electric Cooperative’s customers, and in 2006 for Delmarva Power’s customers, resulting in extreme price increases. Although we were unable to escape the significant increase associated with the expiration of the price caps, we sought to mitigate future significant increases by signing a two-year supply contract, at a fixed price, with Pepco Energy Services.

We derive about 95% of our self-supplied groundwater from wells located in the Atlantic Coastal Plain. The remaining 5% comes from wells in the Piedmont Province. We use a variety of treatment methods, including aeration, pH adjustment, chlorination, fluoridation and iron removal, to meet federal, state and local water quality standards. Additionally, a corrosion inhibitor is added to all of our self-supplied groundwater and most of the supply from interconnections. We have 53 different water treatment facilities. All water supplies that we purchase from neighboring utilities are potable. We believe, based on our experience, the costs of treating groundwater are significantly lower than those of treating surface water.

The United States Environmental Protection Agency, or the “EPA,” DNREC, and the Delaware Division of Public Health or the “DPH,” regulate the water quality of our treatment and distribution systems. We believe that we are in material compliance with all current federal, state and local water quality standards, including regulations under the federal Safe Drinking Water Act. However, if new water quality regulations are too costly, or if we fail to comply with such regulations, it could have a material adverse affect on our financial condition and results of operations. Chester Water Authority, which supplies water to Artesian Water through interconnections in northern New Castle County, is regulated by the Pennsylvania Department of Environmental Protection, as well as the EPA.

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

Delaware enacted legislation in 1998 requiring water utilities to meet secondary water quality standards that include limitations on iron content, odor and other water quality-related issues that are not proven health risks but may be objectionable for consumption. We believe our current treatment systems and facilities meet or exceed 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 county-approved wastewater facilities or removed from the facilities by a licensed third party vendor. Management believes that compliance with existing federal, state or local laws and regulations regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has no material effect upon the business and affairs of the Company, but there is no assurance that

such compliance will continue to not have a material effect in the future.

Artesian Water, as a public utility, is regulated by the PSC with respect to rates and charges for service, the sale and issuance of securities, mergers and other matters. We periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business. The timing of our rate increase requests are therefore dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we hope to recover through the rate increase. We can provide no assurances that rate increase requests will be approved by applicable regulatory agencies; and, if approved, we cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase.

We currently derive our water service revenues from water distribution, upon which base rates are applied. Our last increase in rates was effective January 1, 2007, which reflected a settlement agreement between the PSC, Public Advocate, and other interested parties. During 2006, we resolved two separate rate cases with the PSC, one filed on February 5, 2004 and one filed on May 9, 2006.

In February 2004, we requested an increase in rates of 24%. We recognized revenues reflecting a temporary increase of $2.5 million on an annual basis between April and September 2004, and a second temporary increase of $3.0 million on an annual basis effective September 2004, for a total of $5.5 million on an annual basis. A portion of the second increase was held in reserve based on an estimated outcome and was not reflected in income. In May 2006, the PSC issued the final order in this case. Based on the PSC decision, Artesian Water’s new rates would generate approximately $4.9 million in additional revenue on an annual basis, or an increase of approximately 13.4% over rates in effect before the implementation of temporary rates in 2004. We were required by law to refund the portion of the temporary rate increase in excess of the 13.4% plus interest to our customers. The refund was completed in December 2006.

In May 2006, Artesian Water filed a petition with the PSC to implement new rates to meet a requested increase in revenue of 23%, or approximately $9.9 million, on an annualized basis. This request was primarily due to the Company’s significant investment in infrastructure, as well as an approximately 92% increase in purchased power expense due to the expiration of price caps imposed in 1999 when deregulation of the electric industry in Delaware was adopted. As permitted by law, in July 2006 we placed into effect temporary rates designed to generate an increase in annual operating revenue of approximately 5.9%, or $2.5 million on an annual basis, until new rates were approved by the PSC.

On December 19, 2006, the PSC approved a Settlement Agreement in this case. The increase in annual revenue requirement under the Settlement Agreement of $6 million will be generated in two steps. The first step was placed in effect on January 1, 2007 to generate approximately $4.8 million in annual revenue. The second step will be designed to generate approximately $1.2 million of annual revenue reflecting the issuance of additional equity not to exceed $20 million. However, should the Company issue less than the projected $20 million in equity, the increase will be adjusted to reflect the change in return associated with the Company’s capital structure.

Artesian Water Pennsylvania

Our other water utility subsidiary, Artesian Water Pennsylvania, began operations upon receiving recognition as a regulated public water utility by the Pennsylvania Public Utility Commission in 2002. It provides water service to a residential community consisting of 39 customers in Chester County. On October 14, 2003, Artesian Water Pennsylvania filed an application with the Pennsylvania Public Utilities Commission to increase our service area in Pennsylvania. This application, which concerns four specific developments that are expected to add 350 customers over 10 years, was approved and a related order was entered on February 4, 2005.

Artesian Wastewater

Artesian Wastewater Management owns wastewater infrastructure and provides wastewater services to customers in Delaware as a regulated public wastewater service company. In Delaware, a CPCN grants a wastewater company the exclusive right to serve all existing and new customers within a designated area. On July 6, 2004, legislation was enacted by the Delaware General Assembly, which granted the PSC jurisdiction to regulate non-governmental wastewater utilities having fifty or more customers in the aggregate and authorizing the PSC to regulate wastewater companies, which includes rates charged for wastewater service, issuance of securities and other matters. This

authority includes the jurisdiction to grant and revoke CPCNs. The PSC has adopted rules, regulations and procedures necessary to implement this authority. CPCNs are not transferable, and a wastewater utility must obtain the approval of the PSC to abandon a service territory once granted. Once a CPCN is granted to a wastewater utility, it may not be suspended or terminated unless the PSC determines in accordance with its rules and regulations that good cause exists for any such suspension or termination. Although Artesian Wastewater has been granted an exclusive franchise for each of its existing wastewater systems, its ability to expand service areas can be affected by the PSC awarding franchises to other regulated wastewater utilities with whom we compete for such franchises.

Artesian Wastewater received recognition as a regulated public wastewater utility by the PSC on March 8, 2005, and began providing service to a planned 725 home residential community in Sussex County, Delaware in July 2005. Artesian Wastewater subsequently received approval for another CPCN in 2005 to provide service to a 97 home community in Sussex County, Delaware. In 2006 Artesian Wastewater received approvals on CPCNs for six planned communities in Sussex County and three planned communities in Kent County, Delaware to provide service to an estimated 1,548 customers. As of December 31, 2006, Artesian Wastewater provided wastewater services to 171 residential customers.

Artesian Utility

Artesian Utility evaluates land parcels, designs and constructs wastewater facilities and infrastructure, provides recommendations to developers on the size of a wastewater facility and the type of technology that should be utilized for treatment at said facility, and actively maintains and operates an additional wastewater facility for Bass Properties, Inc. Artesian Utility is currently evaluating several land parcels within the state of Delaware for their feasibility to handle a wastewater facility and their capacity for such a wastewater facility. Artesian Utility also has several contracts with developers for design and construction of wastewater facilities within the Delmarva Peninsula, utilizing a number of different technologies for treatment of wastewater at each facility. In addition, Artesian Utility has a contract to handle water operations for a company in Maryland.

Artesian Utility is also a one-third participant, along with heavy-construction contractor George and Lynch and engineering firm D. Preston Lee, Jr., P.E., Inc., in a limited liability company called AquaStructure Delaware, L.L.C., or “AquaStructure.” The purpose of AquaStructure is to develop and market proposals for design, construction and operation of wastewater facilities. In 1999, we began operating a 250,000-gallon per day wastewater facility for the town of Middletown, in southern New Castle County. In 2002, AquaStructure completed construction of a 2.5 million gallon per day wastewater facility for Middletown; and Artesian Utility began operating the facility for Middletown under its 20-year contract with Aquastructure.

Artesian Development

Our other non-regulated subsidiary, Artesian Development, owns an approximately six-acre parcel of land zoned for office buildings located immediately adjacent to our corporate headquarters. In September 2006, Artesian Development sold a parcel of land of approximately four acres, resulting in a gain on sale of land of $1.3 million. In January 2007, Artesian Development entered into an agreement for the option to purchase an additional 18.5 acres.

Item 1A. Risk Factors

Our operating revenue is primarily from water sales. The rates that we charge our customers are subject to PSC regulations. Additionally, our business requires significant capital expenditures for additions and replacement of property. If the PSC disapproves our requests for rate increases, or does not approve our requests for rate increases in a timely manner, or approves rate increases that are inadequate to cover our investments or increased costs, our profitability may suffer.

We file rate increase requests, from time to time, to recover our investments in utility plant and expenses. Once a rate increase petition is filed with the PSC, the ensuing administrative and hearing process may be lengthy and costly. We can provide no assurances that any future rate increase request will be approved by the PSC; or if approved, 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 requirements in irrigation systems, swimming pools, cooling systems and other outside water use. When temperatures during typically warmer months are cooler than normal, or when rainfall is more than normal, the demand for our water may decrease and our revenues may be adversely affected.

Drought conditions may impact our ability to serve our current and future customers, and may impact our customers’ use of our water, which may adversely affect our financial condition and results of operations.

We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories. However, severe drought conditions could interfere with our sources of water supply and could adversely affect our ability to supply water in sufficient quantities to our existing and future customers. This may adversely affect our revenues and earnings.

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 face competition from other utilities and service providers which might hinder our growth and reduce our profitability.

We face risks of competition from other utilities authorized by federal, state or local agencies. Once a utility regulator grants a service territory to a utility, that utility is usually the only one to service that territory. Although a new territory offers some protection against competitors, the pursuit of service territories is competitive, especially in Delaware where new territories may be awarded to utilities based upon competitive negotiation. Also, third parties entering into long-term agreements to operate municipal systems might adversely affect us and our long-term agreements to supply water on a contract basis to municipalities.

Any future acquisitions we undertake or other actions to further grow our water and wastewater business may involve risks.

An important 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 by us could result in:

	•		Dilutive issuance of our equity securities;
	•		Incurrence of debt and contingent liabilities;
	•		Difficulties in integrating the operations and personnel of the acquired businesses;
	•		Diversion of our management’s attention from ongoing business concerns;
	•		Failure to have effective internal control over financial reporting;
	•		Shuffling of human resources; and
	•		Other acquisition-related expense

Some or all of these items could have a material adverse effect on our business and our ability to finance our business and comply with regulatory requirements. The businesses we acquire in the future may not achieve sales and profitability that would justify our investment.

Contamination of our water supply may result in disruption in our services and could lead to litigation that may adversely affect our business, operating results and financial condition.

Our water supplies are subject to contamination from naturally-occurring compounds as well as pollution resulting from man-made sources, such as chemical compounds. Even though we monitor the quality of water on on-going basis, any possible contamination due to factors beyond our control could interrupt the use of our water supply until we are able to substitute it from an uncontaminated water source. Additionally, treating the contaminated water source could involve significant costs and could adversely affect our business. We could also be held liable for consequences arising out of human or environmental exposure to hazardous substances, if found, in our water supply. This could adversely affect our business, results of operations and financial condition.

Wastewater operations may entail significant risks.

Wastewater collection and treatment involve many risks associated with damage to the surrounding environment. If collection or treatment systems fail or do not operate properly, untreated or partially treated wastewater could discharge onto property or into nearby streams and rivers, causing property damage or injury to aquatic life, or even human life. Liabilities resulting from such damage could materially and adversely affect the Company’s results of operations and financial condition.

Potential terrorist attacks may disrupt our operations and adversely affect our business, operating results and financial condition.

In the wake of the September 11, 2001 terrorist attacks, we have taken steps to increase security measures at our facilities and heighten employee awareness of threats to our water supply. We also have tightened our security measures regarding delivery and handling of certain chemicals used in our business. We are currently not aware of any specific threats to our facilities, operations or supplies, however, it is possible that we would not be in a position to control the outcome of terrorist events, if they occur.

Turnover in our management team may adversely affect our operating results.

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 our inability to hire and retain experienced management personnel could harm our operating results.

Item 1B. Unresolved Staff Comments.

None.

Item 2. — Properties.

Our corporate headquarters, owned by Artesian Water, are located at 664 Churchmans Road, Newark, Delaware.

Artesian Development, a wholly owned subsidiary of Artesian Resources, owns approximately 6 acres of land in New Castle County, Delaware zoned for office development.

Artesian Water owns land, transmission and distribution mains, pump facilities, treatment plants, storage tanks and related facilities throughout Delaware. Artesian Water Pennsylvania owns transmission and distribution mains. Artesian Wastewater owns treatment and disposal plants. The following table indicates our utility plant as of December 31, 2006.

Utility plant comprises:

		Estimated Useful Life
$ In thousands		(In Years)				2006
Utility plant at original cost
Utility plant in service
Intangible plant			—			$	140
Source of supply plant			45-85				14,759
Pumping and water treatment plant			35-62				42,495
(Artesian Water)
Transmission and distribution plant
Mains			81				145,794
Services			39				24,528
Storage tanks			76				17,094
Meters			26				10,061
Hydrants			60				7,633
Treatment and Disposal Plant			35-62				4,006
(Artesian Wastewater)
General plant			3-31				26,456
Property held for future use			—				1,960
Construction work in progress			—				6,188
							301,114
Less — accumulated depreciation							47,932
						$	253,182

In aggregate, we own land, rights-of-way and easements totaling approximately 703 acres, and we have entered into an agreement to purchase an additional 18.5 acres. In January 2007, we entered into an agreement for the use of approximately 460 acres in Sussex County for wastewater disposal in perpetuity. Substantially all of Artesian Water’s utility plant, except utility plant within the town of Townsend, Delaware, is pledged as security for First Mortgage Securities. Of the 703 acres we own, Artesian Development owns approximately 6 acres zoned for office buildings located immediately adjacent to our corporate headquarters.

We believe that our properties are generally maintained in good condition and in accordance with current standards of good water and wastewater works industry practice. We believe that all of our existing facilities adequately meet current necessary production capacities and current levels of utilization.

Item 3. — Legal Proceedings.

There are no material legal proceedings pending at this time to which we or any of our subsidiaries is a party or to which any of our properties is the subject that are material or are expected to have a material effect on our financial position, results of operations or cash flows.

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

There were no matters submitted to a vote of security holders during the fourth quarter of 2006.

PART II

Item 5. — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Artesian Resources’ Class A Non-Voting Common Stock, or “Class A Stock,” is listed on the Nasdaq Global Market and trades under the symbol “ARTNA.” On March 9, 2007, the last closing sale price as reported by NASDAQ was $19.164 per share. On March 9,2007, there were 872 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 and the cash dividends declared per share.

CLASS A NON-VOTING COMMON STOCK

										Dividend
		High				Low				Per Share
2005
First Quarter		$	19.63			$	17.35			$	0.1417
Second Quarter			21.99				17.43				0.1450
Third Quarter			21.93				19.68				0.1450
Fourth Quarter			20.67				19.29				0.1488
2006
First Quarter		$	22.27			$	19.51			$	0.1488
Second Quarter			22.27				18.40				0.1523
Third Quarter			20.41				18.03				0.1523
Fourth Quarter			19.70				18.25				0.1600

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 9, 2007, the last reported trade of the Class B Stock on the OTC Bulletin Board was at a price of $30.00 per share on July 25, 2006. As of March 9, 2007, we had 190 holders of record of the 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, 2006 under the Company’s shareholder approved stock plans.

Equity Compensation Plan Information

Number of securities remaining

Number of securities

available for future issuance

to be issued upon

Weighted-average

under equity compensation plans

exercise of

exercise price of

(excluding securities reflected in

Plan category

outstanding options

outstanding options

column (a))

(a)

Equity compensation plans approved by security holders

595,699

$

13.83

579,700

Equity compensation plans not approved by security holders

—

—

Total

595,699

579,700

The following graph compares the percentage change in cumulative shareholder return on the company’s common stock with the Standard & Poor’s 500 Index and Peer Group since December 2001 (assuming a $100 investment on December 31, 2001, and the reinvestment of any dividends).

				Base					INDEXED RETURNS
				Period					Years Ending December 31
	Company Name / Index			2001					2002					2003					2004					2005					2006
	Artesian Resources Corporation				100					99.68					145.32					151.07					163.73					168.28
	S&P 500 Index				100					77.90					100.25					111.15					116.61					135.03
	Peer Group				100					95.67					121.73					140.55					184.51					184.74

The Peer Group includes American States Water Company, Aqua America, Inc., BIW LTD, California Water Service Group, Connecticut Water Service, Inc., Middlesex Water Company, Pennichuck Corporation, SJW Corporation, Southwest Water Company, and York Water Company.

Item 6. — Selected Financial Data.

The selected consolidated financial data for each of the years in the 5-year period ended December 31, 2006 are derived from the audited financial statements of the Company. The following data should be read in conjunction with the financial statements and related notes and also with Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Annual Report on Form 10-K.

In thousands, except per share and operating data		2006				2005				2004				2003				2002
STATEMENT OF OPERATIONS DATA
Operating revenues
Water sales		$	44,272			$	41,638			$	37,985			$	35,164			$	33,644
Other utility operating revenue			1,268				1,073				867				744				666
Non-utility operating revenue			1,725				2,574				730				387				287
Sale of land			1,322				—				—				—				—
Total operating revenues		$	48,587			$	45,285			$	39,582			$	36,295			$	34,597
Operating expenses
Operating and maintenance		$	25,733			$	24,543			$	20,700			$	19,629			$	18,334
Depreciation and amortization			4,610				4,365				4,046				3,635				3,392
State and federal income taxes			3,887				3,347				2,892				2,387				2,825
Property and other taxes			2,562				2,389				2,070				2,115				1,871
Total operating expenses		$	36,792			$	34,644			$	29,708			$	27,766			$	26,422
Operating income		$	11,795			$	10,641			$	9,874			$	8,529			$	8,175
Other income, net			613				515				471				277				380
Total income before interest charges		$	12,408			$	11,156			$	10,345			$	8,806			$	8,555
Interest charges		$	6,337			$	6,121			$	5,943			$	4,889			$	4,388
Net income		$	6,071			$	5,035			$	4,402			$	3,917			$	4,167
Dividends on preferred stock			0				0				2				71				42
Net income applicable to common stock		$	6,071			$	5,035			$	4,400			$	3,846			$	4,125
Net income per share of common stock:
Basic		$	1.00			$	0.84			$	0.75			$	0.66			$	0.78
Diluted		$	0.97			$	0.81			$	0.72			$	0.64			$	0.76
Avg. shares of common stock outstanding
Basic			6,055				5,984				5,904				5,820				5,301
Diluted			6,235				6,182				6,099				5,990				5,418
Cash dividends per share of common stock		$	0.61			$	0.58			$	0.55			$	0.53			$	0.51
BALANCE SHEET DATA
Utility plant, at original cost less accumulated depreciation		$	253,182			$	227,566			$	212,152			$	187,893			$	167,338
Total assets		$	269,360			$	243,854			$	227,380			$	216,324			$	183,072
Notes payable		$	7,906			$	1,786			$	9,213			$	12,499			$	3,163
Long-term obligations and redeemable preferred stock, including current portions		$	92,383			$	92,680			$	83,438			$	80,846			$	64,591
Stockholders’ equity		$	61,800			$	57,813			$	54,943			$	52,691			$	51,176
Total capitalization		$	153,873			$	150,192			$	137,299			$	133,249			$	115,246
OPERATING DATA
Average water sales per customer		$	600			$	575			$	535			$	505			$	495
Water pumped (millions of gallons)			7,608				7,468				7,166				7,199				7,198
Number of metered customers			73,814				72,383				70,993				69,687				68,049
Miles of water main			1,051				1,001				977				938				917

Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

Our profitability is primarily attributable to the sale of water by Artesian Water, which comprises 91.1% of total operating revenues, the amount of which is subject to seasonal fluctuations, particularly during summer when water demand may vary with rainfall and temperature. In the event temperatures during the typically warmer months are cooler than expected, or rainfall is greater than expected, the demand for water may decrease and our revenues may be adversely affected. We believe the effects of weather are short term and do not materially affect the execution of our strategic initiatives.

Our water sales revenues were affected in 2006, 2005, and 2004 by rate increases associated with two separate base rate applications with the Delaware Public Service Commission (PSC). In February 2004, we requested an increase in rates of 24%. We recognized revenues reflecting a temporary increase of $2.5 million on an annual basis between April and September 2004, and a second temporary increase of $3.0 million on an annual basis effective September 2004, for a total of $5.5 million on an annual basis. A portion of the second increase was held in reserve based on an estimated outcome and was not reflected in income. In May 2006, the PSC issued the final order in this case. Based on the PSC decision, Artesian Water’s new rates would generate approximately $4.9 million in additional revenue on an annual basis, or an increase of approximately 13.4% over rates in effect before the implementation of temporary rates in 2004. We were required by law to refund the portion of the temporary rate increase in excess of the 13.4% plus interest to our customers. The refund was completed in December 2006.

In May 2006, Artesian Water filed a petition with the PSC to implement new rates to meet a requested increase in revenue of 23%, or approximately $9.9 million, on an annualized basis. This request was primarily due to the Company’s significant investment in infrastructure, as well as an approximately 92% increase in purchased power expense due to the expiration of price caps imposed in 1999 when deregulation of the electric industry in Delaware was adopted. As permitted by law, in July 2006 we placed into effect temporary rates designed to generate an increase in annual operating revenue of approximately 5.9%, or $2.5 million on an annual basis, until new rates were approved by the PSC.

On December 19, 2006 the PSC approved a Settlement Agreement in this case. The increase in annual revenue requirement under the Settlement Agreement of $6 million will be recovered in two steps. The first step was placed in effect January 1, 2007 to generate approximately $4.8 million in annual revenue. The second step will be designed to generate approximately $1.2 million of annual revenue reflecting the issuance of additional equity not to exceed $20 million. However, should the Company issue less than the projected $20 million in equity, the increase will be adjusted to reflect the change in return associated with the Company’s capital structure.

Artesian Water Pennsylvania, our wholly owned Pennsylvania water utility subsidiary, began operations in 2002, providing water service to a residential community in Chester County, consisting of 39 customers. In 2005, the Pennsylvania Public Utilities Commission approved our application to increase our service area to encompass four specific developments that are expected to add 350 customers over 10 years.

Our other regulated subsidiary, Artesian Wastewater, is an entity that owns wastewater infrastructure and began providing wastewater services in Delaware in July 2005. Our wastewater customers are billed a flat monthly fee, which contributes to providing a revenue stream unaffected by weather. As of December 2006, Artesian Wastewater had 171 customers in five communities.

Our other subsidiaries, neither of which is regulated, are Artesian Utility, which designs and builds wastewater infrastructure, provides contract wastewater services in Delaware and provides contract water and wastewater services outside Delaware; and Artesian Development, whose sole activity, after the sale of approximately four acres in 2006, is the ownership of a six-acre parcel of land. The sale of the four acre parcel of land in September 2006

resulted in a gain on sale of land of approximately $1.3 million.

In addition to services discussed above, Artesian Resources initiated a Service Line Protection Plan, or SLP Plan, in March 2005. The SLP Plan covers all parts, material and labor required to repair or replace participants’ leaking water service lines up to an annual limit. As of December 31, 2006, approximately 12% of our eligible water customers had signed up for the SLP Plan.

On February 1, 2007, Artesian Resources entered an agreement on the terms of purchase with Carpenters Point Water Company (Carpenters Point). Carpenters Point currently serves a 130 home community in Cecil County, Maryland near the Interstate 95 growth corridor between Philadelphia and Baltimore. The proposed acquisition is expected to provide sufficient groundwater supply and elevated water storage to serve additional customers in the undeveloped portions of the Carpenters Point franchise and surrounding area. The purchase is subject to a number of conditions, including the completion of Artesian Resources’ due diligence, execution of definitive agreements and approvals by appropriate state regulatory agencies, including the Maryland Public Service Commission and the Maryland Department of the Environment. If the conditions are satisfied, we expect the acquisition will be completed in 2007.

Cecil County has designated the Interstate 95 corridor as a preferred growth area for business and residential expansion. Recently, the federal Base Re-Alignment and Closure Commission announced the relocation of approximately 14,000 jobs to nearby Aberdeen, Maryland by 2011. The Wilmington Metropolitan Area Planning Commission projects Cecil County will grow at a rate of 86 percent between 2000 and 2030 and the Maryland Department of Planning projects that Cecil County will experience the highest rate of household growth through 2025 of any jurisdiction in the state.

While water sales revenues are our primary source of revenues, we continue to explore and develop relationships with developers and municipalities in order to increase revenues from contract water operations provided by Artesian Water and from wastewater management services provided by both Artesian Wastewater and Artesian Utility. Our contract operations and wastewater management services provide a revenue stream that is not affected by changes in weather patterns.

We plan to continue developing and expanding our contract operations and wastewater services in a manner that complements our growth in water service to new customers. Our anticipated growth in these areas is subject to changes in residential and commercial construction, which may be affected by interest rates, inflation and general housing and economic market conditions. We will continue to focus attention on expanding our contract operations opportunities with municipalities and private water providers in Delaware and surrounding areas.

Ensuring our customers have a dependable supply of safe, high-quality water has been, and will continue to be, our highest priority. In 2003, Delaware passed legislation requiring all water utilities to certify by July 2006 that they have sufficient sources of self-supply to serve their respective systems. We believe we have made the appropriate investment in infrastructure and on March 8, 2005, we filed our certification of self-sufficiency of supply with the PSC. The review was completed on June 20, 2006, and the PSC concluded that we demonstrated that we have sufficient water supply to meet the demands of our customers through 2006. Also on June 20, 2006, Artesian Water provided the City of Wilmington, Delaware (City) with notice of non-renewal of the interconnection agreement with the City upon its December 22, 2006 termination. Artesian Water is no longer required to purchase 200 million gallons annually from the City after December 22, 2006. At 2006 rates, that obligation was approximately $336,000. As required by law, on June 30, 2006, we filed with the PSC a new certification of self-sufficiency for the period through 2009, which is currently under review by the PSC.

Water Industry

The Federal Environmental Protection Agency’s May 2005 report states that the United States’ water industry is comprised of approximately 54,000 community water systems, 84% of which serve less than 3,300 customers. Only 14% of all community water systems are run by investor-owned utilities. There are currently 12 publicly traded water utilities based in the United States. The rest are privately or municipally owned systems. The water industry is capital intensive, with the highest capital investment in plant and equipment per dollar of revenue among all utilities. Increasingly stringent drinking water regulations to meet the requirements of the Safe Drinking Water Act of 1974 have required the water industry to invest in more advanced treatment systems and processes, which require a heightened level of expertise. We are currently in full compliance with the requirements of the Safe Drinking

Water Act. Even though our water utility was founded in 1905, the majority of our investment in infrastructure occurred in the last 30 years.

We believe that Delaware’s generally lower cost of living in the region, availability of development sites in relatively close proximity to the Atlantic Ocean in Sussex County, and attractive financing rates for construction and mortgages have resulted, and will continue to result, in increases to our customer base. According to the US Census Bureau, Delaware’s population increased an estimated 8.9% from 2000 to 2006, as compared to the nationwide growth rate of approximately 6.4%. Substantial portions of Delaware are not served by a public water system. Interest rates for mortgages have fallen from 7.16% on average in December 2001 to 6.18% through December 2006. Long-term interest rates for our recent First Mortgage Bond issuance (see Note 6 to our Financial Statements) reflect a similar trend, as we were able to reduce our overall weighted cost of debt from 7.93% in 2001 to 6.19% at the end of 2006.

Strategic Direction

We believe the effects of weather are short term and do not materially affect the execution of our strategic initiatives. As we anticipated, our initiatives south of the Chesapeake & Delaware Canal, or the “C&D Canal,” that began in 1992 are now providing the greatest portion of our customer growth. This shift in growth is primarily the result of the build out of our service area in northern New Castle County. In 2006, we increased our customer base by 2.0% and increased our service territory by approximately 20.0 square miles, a 10.6% increase. We continued to increase our sources of supply, adding about 1.0 million gallons to our daily production capacity, to assure we have adequate high quality water supply to meet our customer growth expectations.

Our strategy is to focus on total resource management covering a wide spectrum of activities, which include identifying new and dependable sources of supply; developing the wells, treatment plants and delivery systems to get water to the customers; educating customers on the wise use of water; and providing responsible wastewater management to assist with recharge of the aquifers. Our strategy includes focusing our efforts to expand in new regions added to our service territory over the last 10 years, where growth is strong and demand is increasing. These regions have provided approximately 70% of our growth in customers in 2006 and we expect growth to remain strong in these regions. We also foresee significant growth opportunities in our wastewater subsidiaries and will continue to seek strategic partnerships and relationships with developers and municipalities to complement existing agreements for the provision of wastewater service in Delaware and surrounding areas.

Regulatory Matters and Inflation

As of December 31, 2006, we had approximately 73,800 metered water customers, 171 wastewater customers, and served a population of approximately 243,000 (including contract services), representing approximately 29% of Delaware’s total population. Increases in the number of customers served by Artesian Water and Artesian Wastewater contribute to increases in our operating revenues. The PSC regulates both Artesian Water’s and Artesian Wastewater’s rates charged for service, the sale and issuance of 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. In Delaware, utilities are permitted by law to place rates into effect, under bond, on a temporary basis pending completion of a rate increase proceeding. The first temporary increase may be up to the lesser of $2.5 million on an annual basis or 15% of gross water sales. Should the rate case not be completed within seven months, by law, the utility may put the entire requested rate relief, up to 15% of gross water sales, in effect under bond until a final resolution is ordered and placed into effect. If any such rates are found to be in excess of rates the PSC finds to be appropriate, the utility must refund the portion found to be in excess to customers with interest. The timing of our rate increase requests are therefore dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we hope to recover through the rate increase. We can provide no assurances that rate increase requests will be approved by applicable regulatory agencies; and, if approved, we cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase.

Delaware statute permits water utilities to put into effect, on a semi-annual basis, increases related to specific types of distribution system improvements through a Distribution System Improvement Charge or DSIC. This charge is available to water utilities to be implemented between general rate increase applications that normally recognize changes in a water utility’s overall financial position. The DSIC approval process is less costly when compared to

the approval process for general rate increase requests. On November 30, 2005, we requested from the PSC an increase to the DSIC surcharge from 0.35% to 1.17% for bills rendered subsequent to January 1, 2006. The 1.17% surcharge generated approximately $225,000 in revenues between January and June of 2006. As required by law, this charge was set to zero when the temporary rate increase from our general rate case filed in May 2006 was put into effect in July 2006.

In 1999, the General Assembly passed legislation restructuring the electric industry in Delaware. Since the passage of electric restructuring legislation in 1999, electricity prices had been capped for customers of Delmarva Power and the Delaware Electric Cooperative. Those rate caps were lifted in 2005 for customers of the Delaware Electric Cooperative and in May 2006 for Delmarva Power customers. Our electric charges increased in 2005 due to higher billing rates charged by Delaware Electric Cooperative after the cap was removed. In 2006, our electric charges increased further due to the increase from Delmarva Power. Artesian sought to mitigate future increases by signing a two-year fixed price supply contract with Pepco Energy Services.

On April 10, 2006, the PSC made effective new Regulations Docket 15 that governs 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 required contributions are intended to place a greater burden upon new customers to pay for the cost of facilities required to serve them.

We are affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand our service capability. The cumulative effect of inflation results in significantly higher facility costs compared to investments made 20 to 40 years ago, which must be recovered from future cash flows.

CRITICAL ACCOUNTING POLICIES

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

We record water service revenue, including amounts billed to customers on a cycle basis and unbilled amounts, based upon estimated usage from the date of the last meter reading to the end of the accounting period. These estimates are made on an individual customer basis, based on one of three methods (the previous year’s consumption in the same period, the previous billing period’s consumption, or trending) and are adjusted to reflect current changes in water demand on a system-wide basis. While actual usage for individual customers may differ materially from the estimate, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption, as the overall estimate has been adjusted to reflect any change in overall demand on the system for the period.

We record accounts receivable at the invoiced amounts. The reserve for bad debts is the Company’s best estimate of the amount of probable credit losses in our existing accounts receivable, and is determined based on a five-year historical write-off experience. The Company reviews the reserve for bad debts on a quarterly basis. Account balances are written off against the reserve when it is probable the receivable will not be recovered.

We review for impairment of our long-lived assets, including Utility Plant in Service, in accordance with the requirements of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. We also review regulatory assets for the continued application of SFAS No. 71. Our review determines whether there have been changes in circumstances or events that have occurred that require adjustments to the carrying value of these assets. In accordance with SFAS No. 71, adjustments to the carrying value of these assets would be made in instances where the inclusion in the rate-making process is unlikely.

Our regulated utilities record deferred regulatory assets under Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation,” which are costs that may be recovered over various lengths of time as prescribed by the PSC. As the utility incurs certain costs, such as expenses related to rate case

applications, a deferred regulatory asset is created. Adjustments to these deferred regulatory assets are made when the PSC determines whether the expense is recoverable in rates, the length of time over which an expense is recoverable, or, because of changes in circumstances, whether a remaining balance of deferred expense is recoverable in rates charged to customers. Adjustments to reflect changes in recoverability of certain deferred regulatory assets may have a material effect on our financial results.

Results of Operations

2006 Compared to 2005

Operating Revenues

Revenues totaled $48.6 million in 2006 and were 7.3% above revenues in 2005 of $45.3 million, which is primarily due to an increase of $2.6 million, or 6.3% in water sales revenue, and the $1.3 million proceeds from the sale of land by Artesian Development. The increase in water sales revenue reflects a 2.0% increase in the number of customers served, rate increases placed in effect in 2006, and an adjustment in the fourth quarter reflecting the difference between estimated and actual customer refunds associated with the 2004 rate case. We realized 91.1% of our total revenue in 2006 from the sale of water, compared to 91.9% in 2005. The percentage decrease is primarily due to the sale of land by Artesian Development. These increases in revenue were partially offset by a $849,000 decrease in non-utility revenue. Non-utility revenue totaled $1.7 million in 2006 as compared to $2.6 million in 2005. This revenue was primarily derived from the design, construction and operation of wastewater projects. AUDI records non-utility revenue associated with developer financed construction projects based upon the percent-of-completion method. The Company records deferred revenue for the unearned portion until realized or realizable and earned. For the year ended December 31, 2006, $31,000 was charged to unearned revenue based on the stage of completion of the wastewater design and construction projects, as compared to $21,000 for the year ended December 31, 2005.

Percentage of Operating Revenues

		2006				2005				2004
Residential			55.8	%			57.0	%			59.0	%
Commercial			22.2	%			22.6	%			23.7	%
Industrial			0.8	%			0.6	%			0.8	%
Government and Other			12.3	%			11.7	%			12.5	%
Other utility operating revenues			2.6	%			24.0	%			2.2	%
Non-utility operating revenues			3.6	%			5.7	%			1.8	%
Sale of land			2.7	%			0.0	%			0.0	%
Total			100.00	%			100.00	%			100.00	%

Residential

Residential water service revenues in 2006 amounted to $27.1 million, an increase of $1.3 million, or 5.0% over the $25.8 million recorded in 2005, primarily due to a rate increase effective July 2006. The increase in 2006 follows an increase of $2.5 million, or 10.5%, in 2005. The volume of water sold to residential customers increased slightly from 3,911 million gallons in 2005 to 3,934 million gallons in 2006. The number of residential customers served increased by 1,354 or 2.0% in 2006.

Commercial

Revenues from commercial customers in 2006 increased by 5.9%, from $10.2 million in 2005 to $10.8 million in 2006, due to rate increases in 2006. The number of commercial customers served increased by 33, or 0.9%, in 2006. We sold 2,272 million gallons of water to commercial customers in 2006, a marginal increase as compared to 2,221 million gallons sold in 2005.

Industrial

Revenues from industrial customers increased by 38.5%, from $283,000 in 2005 to $392,000. The volume of water sold to industrial customers increased by 51.7%, from 89 million gallons in 2005 to 135 million gallons in 2006, primarily as a result of increased usage by one industrial customer. This customer was required by contract to pay for minimum takes in 2005, and had a significant increase in usage in 2006. Therefore, the volumes of water sold increased more extensively than the revenues between 2006 and 2005.

Government and Other

Government and other revenues in 2006 increased by 13.2%, from $5.3 million in 2005 to $6.0 million in 2006. The increase was primarily driven by revenues derived from fire protection services, which totaled $3.2 and $2.8 million in 2006 and 2005, respectively. This increase in fire protection services revenue resulted from increases in rates.

Other Utility Operating Revenue

Other utility operating revenue, derived from contract operations, antenna leases on water tanks, finance/service charges and wastewater customer service revenues increased 18.2% in 2006, from $1.1 million in 2005 to $1.3 million in 2006. The increase is primarily the result of a 333% increase in wastewater customer service revenues, from $89,000 in 2005 to $385,000 in 2006.

Non-Utility Operating Revenue

Non-utility operating revenue, derived from non-regulated wastewater operations, decreased from $2.6 million in 2005 to $1.7 million in 2006. The decrease reflects lower contract revenues associated with wastewater treatment projects in southern Delaware. Although there are twelve new AUDI developer financed wastewater projects recording revenue in 2006, these projects are of a smaller magnitude than those in 2005. This decrease was partially off-set by an increase in SLP revenues, from $21,000 in 2005 to $246,000 in 2006.

Operating Expenses

Operating expenses, excluding depreciation and taxes, increased approximately $1.2 million, or 4.7%, to $25.7 million in 2006. The increase in operating expenses resulted primarily from increases in payroll and benefits and administrative expenses. Payroll and benefits increased $1.1 million due to increased staffing and pay increases. Administrative expenses increased by approximately $659,000. $450,000 of this increase was as a result of increased power and electric charges due to the May 2006 expiration of price caps imposed in 1999 when deregulation of the electric industry in Delaware was adopted. Additional administrative expense increases occurred in outside services related to the implementation of the geographic information system used in system planning and operations. This system was brought on-line in 2006 and the expense associated with it increased by $100,000 between 2005 and 2006. These increases were off-set by a $891,000 decrease in non-utility operating expenses, primarily the result of smaller developer financed wastewater projects in AUDI.

Percentage of Operating and Maintenance Expenses

		2006				2005				2004
Payroll and Associated Expenses			48.3	%			46.0	%			48.8	%
Purchased Water			12.3	%			12.8	%			14.4	%
Repair and Maintenance			6.3	%			5.9	%			6.6	%
Water Treatment			3.4	%			3.1	%			3.1	%
Administrative			24.2	%			22.7	%			24.6	%
Non-utility Operating			5.5	%			9.5	%			2.5	%
Total			100.00	%			100.00	%			100.00	%

Depreciation and amortization expense increased $245,000, or 5.6%, due to increases in our utility plant in service during 2006. Income tax expense increased $540,000, or 16.1%, due to higher profitability in 2006. Our total

effective income tax rate (ETR) for 2006 and 2005 was 38.9% and 39.9%, respectively. The decrease in the ETR was due to the utilization of net operating losses (NOLs) used for the gain on the sale of land.

Other Income, Net

Other Income increased $98,000, due to higher long-term construction activity subject to AFUDC and recording higher patronage income associated with our investment in CoBank in the first quarter of 2006 than in the first quarter of 2005.

Interest Charges

Interest charges increased $216,000, or 3.5%, in 2006. Interest on our long-term debt increased $146,000, or 2.6%, due to higher long-term debt balances. The average interest rate on our lines of credit also rose from 4.3% in 2005 to 5.4% in 2006, causing interest on our lines of credit to increase by $91,000 in 2006 as compared to 2005.

Net Income

For the year ended December 31, 2006, our net income applicable to common stock increased $1,036,000, or 20.6%, compared to 2005. The increase in net income was primarily due to the implementation of increases in water utility rates to recover investments made in utility plant, as well as the gain on sale of land by Artesian Development.

2005 Compared to 2004

Operating Revenues

Revenues totaled $45.3 million in 2005 and were 14.4% above revenues in 2004 of $39.6 million, which was primarily due to an increase of $3.7 million, or 9.6% in water sales revenue, reflecting more favorable summer weather conditions in 2005, a 2.0% increase in the number of customers served and rate increases placed in effect in 2005 and 2004. The remaining increase in total revenues was due to a $1.8 million increase in non-utility operating revenues primarily due to additional revenues generated by wastewater and contract operations services. We realized 91.9% of our total revenue in 2005 from the sale of water, compared to 96.0% in 2004. The percentage decrease is primarily due to an increase in non-utility contract revenues from Artesian Utility. Non-utility revenue totaled $2,574,000 in 2005 as compared to $729,000 in 2004. This revenue was derived from the design, construction and operation of wastewater projects. The non-utility revenue is recorded based upon the percent-of-completion method. The Company records deferred revenue for the unearned portion until realized or realizable and earned. For the year ended December 31, 2005, $21,000 was charged to unearned revenue based on the stage of completion of the wastewater design and construction projects.

Residential

Residential water service revenues in 2005 amounted to $25.8 million, an increase of $2.5 million, or 10.5% over the $23.4 million recorded in 2004, primarily due to rate increases in effect April and September 2004. The increase in 2005 followed an increase of $1.7 million, or 7.7%, in 2004. The volume of water sold to residential customers increased from 3,680 million gallons in 2004 to 3,911 million gallons in 2005. The number of residential customers served increased by 1,327 or 2.0% in 2005.

Commercial

Revenues from commercial customers in 2005 increased by 9.3%, from $9.4 million in 2004 to $10.2 million in 2005, due to rate increases in 2005. The number of commercial customers served increased 0.9% in 2005 and 2,221 million gallons of water sold to commercial customers in 2005 increased marginally as compared to 2,159 million gallons sold in 2004.

Industrial

Revenues from industrial customers decreased by 8.9%, from $311,000 in 2004 to $283,000 in 2005, due to the loss of two customers. The volume of water sold to industrial customers increased by 30.9%, from 68 million gallons in 2004 to 89 million gallons in 2005, primarily as a result of increased usage by one industrial customer, which during

2004 experienced a plant shut down for retrofitting. This customer was required by contract to pay for a minimum amount of water in 2004, regardless of consumption. This increase in water volume did not result in additional revenue from this customer in 2005 compared to 2004.

Government and Other

Government and other revenues in 2005 increased by 7.2%, from $4.9 million in 2004 to $5.3 million in 2005. The increase was primarily driven by revenues derived from fire protection services, which totaled $2.8 and $2.6 million in 2005 and 2004, respectively. This increase in fire protection services revenue was a result of a rate increase.

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 23.7% in 2005, from $868,000 in 2004 to $1.1 million in 2005. The increase was a result of contract services work, wastewater customer service revenues, and an increase in the number of antenna leases.

Non-Utility Operating Revenue

Non-utility operating revenue, derived from non-regulated wastewater operations, increased from $729,000 in 2004 to $2.6 million in 2005. The increase reflected revenues associated with ten wastewater treatment projects in southern Delaware.

Operating Expenses

Operating expenses, excluding depreciation and taxes, increased approximately $3.8 million, or 18.6%, to $24.5 million in 2005. The increase in operating expenses resulted primarily from increases in non-utility operating expenses, payroll and benefits and administrative expenses. Non-utility operating expenses increased by $1.8 million primarily due to contracted engineering design services and construction costs for new projects for Artesian Utility. Payroll and benefits increased $1.2 million due to increased staffing and pay increases. Administrative expenses increased by approximately $500,000 primarily as a result of fees associated with the implementation of the Sarbanes-Oxley Act of 2002, increased audit fees, and increased power and electric charges. As a percentage of total operating expense, payroll and associated expenses declined; however, actual expense for payroll and associated expenses increased for the reasons stated previously.

Depreciation and amortization expense increased $320,000, or 7.9%, due to increases in our utility plant in service during 2005. Income tax expense increased $455,000, or 15.7%, due to higher profitability in 2005. Our total effective income tax rate for 2005 and 2004 was 39.9% and 39.6%, respectively.

Other Income, Net

Other Income increased $44,000, primarily due to an increase in CoBank dividend income, from $328,000 in 2004 to $400,000 in 2005, as a result of the issuance of our 6.58%, 23 year Series P First Mortgage Bonds. This increase was offset by decline in AFUDC in 2005 as compared to 2004.

Interest Charges

Interest charges increased $178,000, or 3.0%, in 2005. In August 2005, we issued the $25 million Series R First Mortgage Bonds, the proceeds of which were used to retire our $10 million, 7.84%, 10 year Series M First Mortgage Bonds, $5 million, 7.56%, 10 year Series N First Mortgage Bonds and to repay our outstanding lines of credit. The additional net $10 million in long-term debt resulted in an increase in interest expense of $132,000. The amortization of bond issuance costs increased by $36,000 related to the Series R issuance. Interest expense also increased $39,000 to reflect interest due customers upon our estimated refund of temporary rates upon conclusion of the pending rate filing. Interest on our lines of credit decreased $38,000 in 2005 compared to 2004. Although the average interest rate on our line of credit balances increased from 2.4% in 2004 to 4.3% in 2005 as general market rates rose and affected our variable rate, our average outstanding balance was $6.4 million in 2005, compared to $11.8 million in 2004.

Net Income

For the year ended December 31, 2005, our net income applicable to common stock increased $635,000, or 14.4%, compared to 2004. The increase in net income was primarily due to the implementation of increases in water utility rates to recover investments made in utility plant that result in increased depreciation and interest expense. Non-utility operations contributed $104,000 to the increase in net income.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity for 2006 were $12.7 million provided by cash flow from operating activities and $16.8 million from financing activities. The financing activities included $12.3 million in contributions and advances and $6.1 million of net borrowings under our lines of credit agreements. 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. During 2006, our cash flows from operating activities were impacted by the refund of temporary rates plus interest, as required by law, as a result of Artesian Water’s 2004 rate case.

We 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 2007 will be approximately $35.8 million. Our total obligations related to interest and principal payments on indebtedness, rental payments and water service interconnection agreements for 2007 are anticipated to be approximately $9.2 million. We expect to fund our activities for the next year using our available cash balances and bank credit lines, and projected cash generated from operations and the capital markets.

Investment in Utility Plant and Systems

Capital expenditures increased by approximately $10.7 million for the year ended December 31, 2006, or approximately 53%, from $20.2 million in 2005 to $30.9 million in 2006. This increase is the result of completing the Middletown tank project in Southern New Castle County coupled with completing several additional large capital projects in 2006.

Investment in utility plant, excluding advances and contributions in aid of construction received from real estate developers, increased by $8.1 million, or 58.7%, from $13.8 million in 2005 to $21.9 million in 2006. Additionally, development activity also increased with developers financing $9.3 million for the installation of water mains and hydrants serving their developments in 2006, compared to $6.6 million in 2005.

We invested approximately $13.0 million in new transmission and distribution facilities in 2006, including refunds of advances for developer-financed infrastructure. Of the $13.0 million invested, we invested $9.2 million in new infrastructure and $3.8 million in our rehabilitation program for transmission and distribution facilities, replacing aging or deteriorating mains. Additionally, an investment of $3.2 million was made to enhance or improve existing treatment facilities, rehabilitate pumping equipment and install new wells to increase supply capabilities.

Investment in Utility Plant and Systems

In thousands		2006				2005				2004
Source of supply		$	2,224			$	100			$	832
Treatment and pumping			973				1,660				6,546
Transmission and distribution			12,998				9,515				13,390
General plant and equipment			2,581				1,272				1,851
Developer financed utility plant			9,291				6,604				5,435
Wastewater facilities			3,111				1,236				844
Allowance for Funds Used During Construction, AFUDC			(288	)			(223	)			(302	)
Total		$	30,890			$	20,164			$	28,596

We have planned to invest approximately $35.8 million in utility plant in 2007. Developers are expected to finance an additional $16.4 million in utility plant construction. Of the $35.8 million we expect to invest in 2007, approximately $8.8 million will be for new treatment facilities, equipment and wells throughout Delaware to identify, develop, treat and protect sources of water supply to assure uninterrupted service to our customers.

The largest portion of the projected investment in 2007, $13.7 million, will be in transmission and distribution facilities. Approximately $4.9 million of this amount will be invested in the relocations of facilities as a result of government mandates and renewals associated with the rehabilitation of aging infrastructure. The remaining $8.8 million of this investment in new transmission and distribution facilities will be to improve our system hydraulics and address service needs in growth areas of our service territory.

We plan to invest $2.3 million in an expansion project for our Bayville plant in Sussex County, Delaware, $2 million for a storage tank in the Magnolia area in Kent County, Delaware, and $1.5 million each on two water treatment plants, one in Kent County and one in Sussex County.

In addition, we plan to spend approximately $5.6 million in 2007 of a total $11.5 million to construct a new office building to meet our growing space requirements. A further $1.2 million is planned to implement a new accounting system, which will integrate with our newly installed customer billing system, creating an Enterprise Business System. A further $4.0 million will be spent in wastewater projects, including three large wastewater treatment plants in Sussex County, Delaware.

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 $35.8 million will be financed by our operations and external sources, including a combination of capital investment, short-term borrowings under our revolving credit agreements discussed below, as well as an equity issuance. Developers are expected to finance, through contributions in aid of construction, an additional $16.4 million of capital expenditures, which includes the installation of mains and hydrants in new developments.

Our cash flows from operations are primarily derived from water sales revenues and may be materially affected by changes in water sales due to weather and the timing and extent of increases in rates approved by the PSC.

At December 31, 2006, Artesian Water had lines of credit of $20.0 million each with two separate financial institutions totaling $40.0 million to meet temporary cash requirements. These revolving credit facilities are unsecured. As of December 31, 2006, we had $32.1 million of available funds under these lines. The interest rate for borrowings under each of these lines is the London Interbank Offering Rate, or “LIBOR,” plus 1.0% or, at our discretion, the banks’ federal funds rate plus 1.0%. Each bank reviews all of their facilities annually for renewal.

At December 31, 2006, Artesian Utility and Artesian Wastewater had lines of credit with a financial institution for $3.5 million and $1.5 million, respectively, to meet temporary cash requirements. These revolving credit facilities are unsecured. As of December 31, 2006, we had not borrowed funds under these lines. The interest rate for borrowings under each of these lines is the LIBOR plus 1.75%. The bank reviews its facilities annually for renewal.

We may, from time to time, sell our securities to meet capital requirements. The amount and timing of future sales of our securities will depend upon market conditions and our specific needs. Our trust indentures, which set certain criteria for the issuance of new long-term debt, limit long-term debt, including the short-term portion thereof, to 66 2/3% of total capitalization. Our debt to total capitalization, including the short-term portion thereof, was 60.0% at December 31, 2006.

On August 1, 2005, Artesian Water issued $25 million aggregate principal amount of its 5.96%, 23-year Series R First Mortgage Bonds. Artesian Water recorded the total expense of approximately $1.1 million, which included a redemption premium of $865,000, in connection with the issuance of the bonds as a deferred asset. These bonds were issued for Artesian Water to CoBank, a cooperative bank, and the proceeds were used on August 1, 2005, to retire all of Artesian Water’s outstanding $10 million aggregate principal amount of 7.84%, 10-year, Series M First Mortgage Bonds and $5 million aggregate principal amount of 7.56%, 10-year, Series N First Mortgage Bonds, and to satisfy the $865,000 redemption premium required as a result of the early retirement of the Series M and Series N First Mortgage Bonds. The remainder of the bond proceeds were used to pay down Artesian Water’s short-term line

of credit, which was used to finance investments in utility plant and equipment. Artesian Water is amortizing the redemption premium over the life of its 5.96%, 23-year Series R First Mortgage Bonds as an interest expense.

Contractual Cash Obligations

		Payments Due by Period
		Less than				2-3				4-5				After 5
In thousands		1 Year				Years				Years				Years				Total
First Mortgage Bonds		$	5,501			$	11,001			$	11,001			$	160,496			$	187,999
State revolving fund loans			590				1,180				1,180				6,658				9,608
Operating leases			142				151				61				1,574				1,928
Unconditional purchase obligations			2,787				5,581				5,574				30,677				44,619
Tank painting contractual obligation			374				749				549				—				1,672
Total		$	9,394			$	18,662			$	18,365			$	199,405			$	245,824

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.

						Less than
Commitments		Committed				1 Year				1-3 Years				4-5 Years				Over 5 Years
Lines of Credit		$	7,906			$	7,906				—				—				—

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, including any arrangements with any structured finance, special purpose or variable interest entities.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board, FASB, issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB No.115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company expects to adopt this statement effective January 1, 2008 and does not expect it to have a material effect on the financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current year Financial Statements” (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective as of the end of Artesian’s 2006 fiscal year, allowing a one-time transitional cumulative effect adjustment to beginning retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. The adoption of this statement did not have a material impact on our financial condition or results of operations.

In September 2006, the Financial Accounting Standards Board, FASB, issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, an amendment of FASB Statements No.

87, “Employers’ Accounting for Pensions”; No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”; No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”; and No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. This statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur. Employers, such as Artesian, with publicly traded equity securities are required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company adopted this statement effective December 31, 2006. The adoption of this statement did not have a material impact on our financial condition or results of operations for 2006. According to our actuarial report, the funded status of our defined benefit postretirement plan was calculated contemplating FAS 158 and the obligation is recorded at that amount. There was no Other Comprehensive Income impact because we record a regulatory asset as provided by FAS 71.

In September 2006, FASB issued Statement No. 157, “Fair Value Measurements”. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements; however, the statement does not require any new fair value measurements. This statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those years. The Company expects to adopt this statement effective January 1, 2008 and does not expect it to have a material effect on the financial statements.

In June 2006, FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, an interpretation of FASB Statement No. 109 “Accounting for Income Taxes”. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financials statements in accordance with FASB Statement No. 109. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation allows an enterprise to recognize economic benefits resulting from positions taken in income tax returns, as long as a more likely than not approach is taken. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company expects to adopt this statement effective January 1, 2007 and is currently evaluating its effect on the financial statements.

In March 2006, FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets”. This statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in some situations. It also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. This statement is effective for fiscal years beginning after September 15, 2006. The Company expects to adopt this statement effective January 1, 2007 and does not expect it to have a material effect on the financial statements.

In February 2006, FASB issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments”. This statement amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. This statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company expects to adopt this statement effective January 1, 2007 and does not expect it to have a material effect on the financial statements.

In December 2004, the FASB issued Statement No. 123 (revised 2004), Statement No. 123(R), “Share-Based Payment.” This Statement is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. This Statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. According to the FASB, this Statement is effective as

of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, during the first quarter of 2005, the Securities and Exchange Commission approved a new rule, Staff Accounting Bulletin 107, that delayed the adoption of this standard to the beginning of the next fiscal year, instead of the next reporting period that began after June 15, 2005. The rule does not change the accounting required by Statement No. 123(R), but recognizes that preparers will need to use considerable judgment when valuing employee stock options under this statement. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Proforma disclosure is no longer an alternative upon adopting SFAS 123(R). SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

	•		A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123(R) for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date; or
	•		A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123(R) for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

We implemented SFAS 123(R) in the first quarter of 2006. We used the modified prospective method and estimated the fair value of each option grant using the Black-Scholes-Merton option pricing model.

Caution Regarding forward-looking Statements

Statements in this Annual Report on Form 10-K which express our “belief,” “anticipation” or “expectation,” as well as other statements which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and the Private Securities Litigation Reform Act of 1995. Statements regarding our goals, priorities, growth and expansion plans for our water and wastewater subsidiaries, customer base growth opportunities in Cecil County, Maryland, our belief regarding our capacity to provide water services for the foreseeable future to our customers, our belief relating to our compliance and the cost to achieve compliance with relevant governmental regulations, the impact of weather on our operations and the execution of our strategic initiatives, our expectation relating to the adoption of recent accounting pronouncements, contract operations opportunities, legal proceedings, our properties, our expectations regarding the acquisition of Carpenters Point, deferred tax assets, increases to purchased water and electricity expense, adequacy of our available sources of financing, the expected recovery of expenses related to our long-term debt, our expectation to be in compliance with financial covenants in our debt instruments, plans to increase our wastewater treatment operations and other revenue streams less affected by weather, appropriate investment in infrastructure regarding the filing of the certification of sufficient sources of self-supply, expected contributions in 2007 to our postretirement benefit plan, and our liquidity needs are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected. Certain factors as discussed under Item 1A -Risk Factors, such as changes in weather, changes in our contractual obligations, changes in government policies, the timing and results of our rate requests, changes in economic and market conditions generally, and other matters could cause results to differ materially from those in the forward-looking statements. While the Company may elect to update forward-looking statements, we specifically disclaim any obligation to do so and you should not rely on any forward-looking statement as representation of the Company’s views as of any date subsequent to the date of the filing of this Annual Report on Form 10-K.

Item 7A. — Quantitative and Qualitative Disclosure About Market Risk.
None.

Item 8. — Financial Statements and Supplementary Data.

CONSOLIDATED BALANCE SHEETS

		December 31,
In thousands		2006				2005
ASSETS
Utility plant, at original cost less accumulated depreciation		$	253,182			$	227,566
Current assets
Cash and cash equivalents			1,414				1,359
Accounts receivable (less reserve for bad debts 2006 - $225; 2005-$175)			3,416				4,281
Unbilled operating revenues			2,655				2,374
Materials and supplies — at cost on FIFO basis			1,054				1,008
Prepaid property taxes			924				851
Prepaid expenses and other			782				533
			10,245				10,406
Other assets
Non-utility property (less accumulated depreciation 2006 - $152; 2005-$129)			307				316
Other deferred assets			3,745				3,693
			4,052				4,009
Regulatory assets, net			1,881				1,873
		$	269,360			$	243,854
LIABILITIES AND STOCKHOLDERS’ EQUITY
Stockholders’ equity
Common stock		$	6,086			$	4,014
Additional paid-in-capital			45,052				43,469
Retained earnings			10,662				10,330
Total stockholders’ equity			61,800				57,813
Long-term debt, net of current portion			92,073				92,379
			153,873				150,192
Current liabilities
Lines of credit			7,906				1,786
Current portion of long-term debt			310				301
Accounts payable			2,790				2,790
Accrued expenses			3,287				1,948
Overdraft payable			1,990				1,417
Income tax payable			—				111
Deferred income taxes			284				269
Interest accrued			360				354
Customer deposits			472				469
Other			1,723				2,793
			19,122				12,238
Deferred credits and other liabilities
Net advances for construction			24,991				24,404
Postretirement benefit obligation			927				1,097
Deferred investment tax credits			765				789
Deferred income taxes			21,505				17,784
			48,188				44,074
Commitments and contingencies (Note 10)
Net contributions in aid of construction			48,177				37,350
		$	269,360			$	243,854

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

CONSOLIDATED STATEMENTS OF OPERATIONS

		For the Year Ended December 31,
In thousands, except per share amounts		2006				2005				2004
Operating revenues
Water sales		$	44,272			$	41,638			$	37,985
Other utility operating revenue			1,268				1,073				868
Non-utility operating revenue			1,725				2,574				729
Sale of land			1,322				—				—
			48,587				45,285				39,582
Operating expenses
Utility operating expenses			24,314				22,233				20,187
Non-utility operating expenses			1,419				2,310				513
Depreciation and amortization			4,610				4,365				4,046
Taxes
State and federal income
Currently payable			162				111				—
Deferred			3,725				3,236				2,892
Property and other			2,562				2,389				2,070
			36,792				34,644				29,708
Operating income			11,795				10,641				9,874
Other income, net
Allowance for funds used during construction			288				223				302
Miscellaneous			325				292				169
			613				515				471
Income before interest charges			12,408				11,156				10,345
Interest charges			6,337				6,121				5,943
Net income			6,071				5,035				4,402
Redemption premium on preferred stock			—				—				2
Net income applicable to common stock		$	6,071			$	5,035			$	4,400
Income per common share:
Basic		$	1.00			$	0.84			$	0.75
Diluted		$	0.97			$	0.81			$	0.72
Weighted average common shares outstanding:
Basic			6,055				5,984				5,904
Diluted			6,235				6,182				6,099
Cash dividends per share of common stock		$	0.61			$	0.58			$	0.55

CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Year Ended December 31,
In thousands		2006				2005				2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	6,071			$	5,035			$	4,402
Adjustments to reconcile net cash provided by operating activities:
Depreciation and amortization			4,609				4,364				4,046
Deferred income taxes, net			3,711				3,104				2,908
Allowance for funds used during construction			(288	)			(223	)			(302	)
Stock compensation			322				—				—
Sale of land			(1,322	)			—				—
Changes in assets and liabilities:
Accounts receivable, net of reserve for bad debts			865				(475	)			(1,398	)
Income tax receivable			—				—				841
Unbilled operating revenues			(281	)			(3	)			373
Materials and supplies			(46	)			(75	)			(131	)
Prepaid property taxes			(73	)			(86	)			(54	)
Prepaid expenses and other			(248	)			32				12
Other deferred assets			(51	)			(240	)			(66	)
Regulatory assets			(7	)			230				19
Accounts payable			—				620				52
Accrued expenses			1,339				(83	)			158
State and federal income taxes			(113	)			111				—
Interest accrued			7				—				87
Customer deposits and other, net			(1,602	)			1,634				550
Postretirement benefit obligation			(170	)			(72	)			(63	)
Net cash provided by operating activities			12,723				13,873				11,434
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (net of AFUDC)			(30,890	)			(20,164	)			(28,596	)
Proceeds from sale of assets			33				6				11
Proceeds from sale of land			1,330
Investments from unconsolidated affiliates			37				—				(4	)
Net cash used in investing activities			(29,490	)			(20,158	)			(28,589	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under lines of credit agreements			6,120				(7,427	)			(3,286	)
Increase (decrease) in overdraft payable			573				(394	)			475
Net advances and contributions in aid of construction			12,334				7,496				5,912
Proceeds from issuance of long-term debt			—				25,000				2,929
Increase in restricted funds			—				502				13,716
Increase (decrease) in deferred debt issuance costs			41				(827	)			(12	)
Net proceeds from issuance of common stock			1,766				1,304				1,117
Dividends			(3,714	)			(3,470	)			(3,267	)
Principal repayments of long-term debt			(298	)			(15,757	)			(240	)
Redemption of preferred stock			—				—				(100	)
Net cash provided by financing activities			16,822				6,427				17,244
Net increase in cash and cash equivalents			55				142				89
Cash and cash equivalents at beginning of year			1,359				1,217				1,128
Cash and cash equivalents at end of year		$	1,414			$	1,359			$	1,217
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	4,542			$	6,001			$	5,771
Income taxes paid		$	261			$	—			$	—

See Note 1 (Stock Split) for a discussion of non-cash financing activity.
The notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

		Common Shares				Common Shares
		Outstanding				Outstanding				$1 Par Value				$1 Par Value
		Class A				Class B				Class A				Class B
In thousands		Non-Voting (1)(4)(5)				Voting(2)(4)				Non-Voting				Voting
Balance as of December 31, 2003			4,970				882			$	3,313			$	588
Net income
Cash dividends declared
Common stock
Preferred stock
Issuance of common stock
Officer bonus			2								2
Dividend reinvestment plan			18								12
Employee stock options and awards			47								31
Employee Retirement Plan(3)			15								10
Balance as of December 31, 2004			5,052				882				3,368				588
Net income
Cash dividends declared
Common stock
Issuance of common stock
Officer bonus			9								6
Dividend reinvestment plan			15								10
Employee stock options and awards			52								35
Employee Retirement Plan(3)			11								7
Balance as of December 31, 2005			5,139				882				3,426				588
Net income
Cash dividends declared
Common stock
Issuance of common stock
Stock split											1,721				294
Officer bonus			9								6
Dividend reinvestment plan			15								14
Employee stock options and awards			12								10
Employee Retirement Plan(3)			29								27
Balance as of December 31, 2006			5,204				882			$	5,204			$	882

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

30

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

		Additional
		Paid-in				Retained
In thousands		Capital				Earnings(2)				Total(2)
Balance as of December 31, 2003		$	41,159			$	7,630			$	52,690
Net income							4,402				4,402
Cash dividends declared
Common stock							(3,265	)			(3,265	)
Preferred stock							(2	)			(2	)
Issuance of common stock
Officer bonus			48								50
Dividend reinvestment plan			322								334
Employee stock options			444								475
Employee Retirement Plan(1)			249								259
Balance as of December 31, 2004			42,222				8,765				54,943
Net income							5,035				5,035
Cash dividends declared
Common stock							(3,470	)			(3,470	)
Issuance of common stock
Officer bonus			166								172
Dividend reinvestment plan			284								294
Employee stock options			612								647
Employee Retirement Plan(1)			185								192
Balance as of December 31, 2005			43,469				10,330				57,813
Net income							6,071				6,071
Cash dividends declared
Common stock							(3,714	)			(3,714	)
Issuance of common stock
Stock split							(2,025	)			(10	)
Officer bonus			183								189
Dividend reinvestment plan			321								335
Employee stock options and awards			551								561
Employee Retirement Plan(1)			528								555
Balance as of December 31, 2006		$	45,052			$	10,662			$	61,800

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The audited Consolidated Financial Statements are presented in accordance with the requirements of Form 10-K and consequently include all the disclosures required in the financial statements included in the Company’s annual report on Form 10-K.

The consolidated financial statements include the accounts of Artesian Resources Corporation and its wholly owned subsidiaries, including its principal operating company, Artesian Water. Appropriate eliminations have been made for all inter-company transactions and account balances.

Utility Subsidiary Accounting

The accounting records of Artesian Water and Artesian Wastewater Management are maintained in accordance with the uniform system of accounts as prescribed by the Delaware Public Service Commission or the PSC. The accounting records of Artesian Water Pennsylvania, Inc. are maintained in accordance with the uniform system of accounts as prescribed by the Pennsylvania Public Utility Commission or the PAPUC. All three subsidiaries follow the provisions of Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation,” which provides guidance for companies in regulated industries.

Utility Plant

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

In accordance with a rate order issued by the PSC, Artesian Water accrues an Allowance for Funds Used During Construction or AFUDC. AFUDC, which represents the cost of funds devoted to construction projects through the date the project is placed in service, is capitalized as part of construction work in progress. The rate used for the AFUDC calculation is based on Artesian Water’s weighted average cost of debt and the rate of return on equity authorized by the PSC. The rate used to capitalize AFUDC in 2006, 2005, and 2004 was 7.8%, 8.0%, and 7.8%, respectively.

Utility plant comprises:

		Estimated
		Useful
		Life				December 31,
In thousands		In Years				2006				2005
Utility plant at original cost
Utility plant in service
Intangible plant			—			$	140			$	140
Source of supply plant			45-85				14,759				14,462
Pumping and water treatment plant (Artesian Water)			35-62				42,495				39,747
Transmission and distribution plant
Mains			81				145,794				131,119
Services			39				24,528				22,486
Storage tanks			76				17,094				13,603
Meters			26				10,061				9,412
Hydrants			60				7,633				6,757

		Estimated
		Useful
		Life				December 31,
In thousands		In Years				2006				2005
Treatment and Disposal Plant (Artesian Wastewater)			35-62				4,006				1,932
General plant			3-31				26,456				21,460
Property held for future use			—				1,960				4,923
Construction work in progress			—				6,188				4,805
							301,114				270,846
Less – accumulated depreciation							47,932				43,280
						$	253,182			$	227,566