FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

For the fiscal year ended December 31, 2000
Commission file number 0-18516

ARTESIAN RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)

State or other jurisdiction of incorporation or organization: Delaware
IRS Employer Identification No.: 51-0002090

Address of principal executive offices: 664 Churchmans Road, Newark, Delaware, Zip Code: 19702

Registrant's telephone number, including area code: 302-453-6900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

X Yes _ 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.

X Yes _ No

The aggregate market value of the non-voting and voting stock held by non-affiliates of the registrant at March 1, 2001 was $38,548,500 and $2,644,299, respectively.

As of March 1, 2001, 1,625,727 shares and 391,824 shares of Class A Non-Voting Common Stock and Class B Common Stock, respectively, were outstanding.

PART I

Item 1. - Business.

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

          We distribute and sell water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware. As of December 31, 2000, we had approximately 65,000 metered customers and served a population of approximately 214,000, representing approximately 28% 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 2000 was approximately $27.1 million, and our percentages of gross water sales revenue by major customer classifications were 60.6% for residential, 29.7% for commercial, industrial, governmental, municipal and utility, and 9.7% for fire protection and other. These percentages have remained fairly constant for the past three years.

          Our current market area is the State of Delaware, which had a population of approximately 784,000 at December 31, 2000. According to the US Census Bureau, Delaware's population has increased 17.6% over the last 10 years, the 13th largest percentage increase among the states. Although New Castle is the most populous of Delaware's three counties, Sussex County, in southern Delaware, has experienced the most significant growth with a population increase of approximately 25.6% over the last ten years. The largest project we are currently undertaking with continued investment in 2001 is the expansion of our system in Sussex County, Delaware, which includes enhancement of supply capabilities and installation of new transmission and distribution facilities with a total cost of $2.1 million. Substantial portions of Delaware, particularly outside of New Castle County, are not served by a public water system and represent potential new exclusive franchised service areas for Artesian Water. We continue to focus resources on developing and serving existing service territories and obtaining new territories throughout the state.

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

          Since 1993, we have been significantly expanding our service territory by acquiring new exclusive service areas in Delaware through grants of CPCNs. This expansion, which has occurred in southern New Castle, Kent and Sussex Counties, has increased our exclusive service area in Delaware by approximately 25% since 1993. The pursuit of new service territory in the State of Delaware by water companies is competitive.

          We have identified sufficient sources of groundwater supply to serve our expanding customer base for the foreseeable future. Our self-supply has increased from 63% of our total water supply in 1992 to approximately 81% in 2000. Since 1992, we have increased our sources of groundwater supply from our own wells by 50%, or nearly nine million gallons per day, and plan to continue development of new sources of groundwater supplies previously identified.

          Our primary sources of water are our wells that pump groundwater from aquifers and other formations. To supplement our groundwater supply, we purchase surface water through interconnections only in the northern service area of our New Castle County system. The purchased surface water is blended with our groundwater supply for distribution to our customers. Nearly 81% of the overall 6.9 billion gallons of water we distributed in all our systems during 2000 came from our groundwater wells, while the remaining 19% came from interconnections with other utilities and municipalities. During 2000, our average rate of water pumped was approximately 15.2 million gallons per day ("mgd") from our groundwater wells and approximately 3.6 mgd was supplied from interconnections. Our peak water supply capacity currently is approximately 43.0 mgd. Our peak water demand in 2000 was approximately 25.3 mgd. We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories.

          We have 79 operating and 41 monitoring wells in our systems. Our northern New Castle County system is interconnected. In the remainder of the state, we have several satellite systems that have not yet been connected by transmission and distribution facilities. We intend to join these systems into larger integrated regional systems through the construction of a transmission and distribution network as development continues and our expansion efforts provide us with contiguous exclusive service territories.

          We have 14 interconnections with four neighboring water utilities and four municipalities that provide us with the ability to purchase or sell water. Interconnection agreements with Chester Water Authority and one municipality have "take or pay" clauses requiring us to take, as of December 31, 2000, minimum draws totaling 1.3 billion gallons annually. We presently use the minimum draws under these agreements. The Chester Water Authority agreement, which expires in 2021, provides for a renewal period of an additional 25 years at our option, subject to the approval of the Susquehanna River Basin Commission. We decided not to renew one interconnection agreement with the municipality, which reduced our overall take or pay requirement by 100 million gallons annually. Our remaining take or pay agreement with that municipality expires and is renewable in December 2001. All of the interconnections provide Artesian Water the ability to sell water to neighboring water utilities or municipalities.

          Under state laws and regulations, we are required to file applications with the Delaware Department of Natural Resources and Environmental Control for water allocation permits for each of our production wells pumping quantities of water above certain levels. Presently, we have permits for 70 wells, permit applications pending for 4 wells and 13 wells not requiring a permit. Our access to aquifers within our service territory is not exclusive. Water allocation permits control the amount of water which can be drawn from water resources and are granted with specific restrictions on water level draw down limits, annual, monthly and daily pumpage limits, and well field allocation pumpage limits. Our ability to supply the demands of our customers has not been affected by private usage of the aquifers by landowners or the limits imposed by the state. Because of the extensive regulatory requirements relating to the withdrawal of any significant amounts of water from the aquifers, we believe that third party usage of the aquifers within our service territory will not interfere with our ability to meet the present and future demands of our customers.

          At the end of 2000, we were serving customers through 872 miles of transmission and distribution mains. Mains range in diameter from two inches to twenty-four inches, and most of the mains are made of ductile iron, cast iron or transite pipe. Ductile iron is more durable than plastic and we install ductile iron pipes wherever possible. We are installing a more durable type of plastic pipe only near ocean front property in southern Delaware where corrosive conditions of the surrounding ground affect the longevity of ductile iron pipe. We also supply public fire protection service through 3,450 hydrants installed throughout our service territories.

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

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

          We derive about 90% of our self-supplied groundwater from wells located in the Atlantic Coastal Plain. The remaining 10% comes from wells in the Piedmont Providence. We use a variety of treatment methods, including aeration, pH adjustment, chlorination, fluoridation and iron removal, to meet state and federal 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 37 different water treatment facilities. All water supplies that we purchase from neighboring utilities are potable. We believe the costs of treating groundwater are significantly lower than those of treating surface water.

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

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

          We filed for a rate increase in December 2000, but we cannot predict whether the Public Service Commission will approve the requested increase, approve a smaller increase or deny any such request. We currently derive our water service revenues from water consumption upon which base rates are applied, which were last increased as of August 2000, to reflect a change of approximately 4.7%. This increase also authorized a return on equity of 10.44% and an overall rate of return of 9.51%.

          A public water utility operating in Delaware must obtain a Certificate of Public Convenience and Necessity for a service territory to begin or expand its operations, which is granted by DNREC. Currently DNREC grants a CPCN under circumstances where there has been a determination that the water in the proposed service area does not meet the regulations governing drinking water standards of the State Board of Health for human consumption, where the supply is insufficient to meet the projected demand, or where the applicant is in possession of one of the following: (i) a signed service agreement with the developer of a proposed subdivision or development, which subdivision or development has been duly approved by the respective county government; (ii) a petition requesting such service signed by a majority of the landowners of the proposed territory to be served; or (iii) a duly certified copy of a resolution from the governing body of a county or municipality requesting the applicant to provide service to the proposed territory to be served. CPCNs are not transferable, and a water utility must obtain the approval of DNREC to abandon a service territory once granted.

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

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

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

          As a normal by-product of iron removal, our treatment facility at Old County Road generates iron removed from untreated groundwater plus residue from chemicals used in the treatment process. We have contracted with a licensed third party vendor to dispose of the solids produced at the facility. Our other iron removal facilities rely on disposal through county-approved wastewater facilities. Management believes that compliance with existing federal, state or local laws and regulations regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has no material effect upon the business and affairs of Artesian Resources.

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

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

          As of December 31, 2000, we employed 166 full-time and 7 part-time employees, all of whom were non-unionized. Of this number, 20 were officers and managers; 104 were employed as operations personnel, including engineers, technicians, draftsman, maintenance and repair persons, meter readers and utility personnel; and 43 were employed in the accounting, budgeting, information systems, human resources, customer relations, public relations and conservation departments. The remaining six employees were administrative personnel. We believe that our employee relations are good.

Item 2. - Properties.

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

          Artesian Resources and Artesian Development own various parcels of land in New Castle County, Delaware. Artesian Water owns land, transmission and distribution mains, pump facilities, treatment plants, storage tanks and related facilities within New Castle, Kent and Sussex Counties, Delaware. The acreage owned by the Company, not including rights-of-way and easements, totals approximately 676. Substantially all of Artesian Water's utility plant, except utility plant within the town of Townsend, Delaware, is pledged as security for First Mortgage Bonds.

          Of the 676 acres we own, 52 acres of land will be the site of a future well field and iron removal facility in northern New Castle County. Artesian Development owns approximately 12 acres zoned for office buildings located immediately adjacent to our corporate headquarters. Artesian Development has no present plans to purchase new land or develop the acres it owns.

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

Item 3. - Legal Proceedings.

          On April 30, 1999, Artesian Water filed a petition with the PSC to implement new rates to meet an increased revenue requirement of approximately 10.35%, or $2.7 million on an annualized basis. On September 30, 1999, Artesian Water filed a supplemental rate increase request that reduced the Company's increase from $2.7 million to approximately $2.5 million. Artesian Water was permitted to collect a temporary increase not in excess of $2.5 million on an annualized basis, under bond, until permanent rates are approved by the PSC. The temporary rates became effective on July 1, 1999. Of the amount billed, $1,528,000 was deferred, and in accordance with the PSC settlement order dated August 2000, which approved an increase of approximately $1.3 million or 4.7% in revenues, approximately $1,355,000 was subsequently refunded to customers. The difference of $173,000 is recognized as revenue. In addition, Artesian recognized approximately $65,000 of interest expense on the amounts refunded.

          On December 5, 2000, Artesian Water filed a petition with the PSC to implement new rates to meet an increased revenue requirement of approximately 22.57% or $6.4 million on an annualized basis. Effective February 3, 2001, Artesian Water was permitted to collect a temporary increase of $2.5 million on an annualized basis, subject to refund, until permanent rates are approved by the PSC. We cannot predict whether the PSC will approve the requested increase, a small increase or any such request.

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

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

None.

PART II

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

          Artesian Resources' Class A Non-Voting Common Stock ("Class A Stock") is listed on the NASDAQ National Market and trades under the symbol "ARTNA." On March 1, 2001 there were 695 holders of record of the Class A Stock. The following table sets forth, for the periods indicated, the high and low closing sale prices for the Class A Stock on the NASDAQ National Market and the cash dividends declared per share:

CLASS A NON-VOTING COMMON STOCK

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

          Our Class B Voting Stock ("Class B Stock") is quoted on the OTC Bulletin Board under the symbol "ARTNB.OB". There has been a limited and sporadic public trading market for the Class B Voting Common Stock. As of March 1, 2001, the last reported trade of the Class B Voting Common Stock on the OTC Bulletin Board was at a price of $21.00 per share on December 29, 2000. As of March 1, 2001, we had 231 holders of record of the Class B Voting Common Stock.

WHERE YOU CAN FIND MORE INFORMATION

          We file annual, quarterly and special reports and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any of the reports and other information we file at the SEC's public reference facilities located in Washington at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, in New York at 7 World Trade Center, Suite 1300, New York, New York 10048, and in Chicago at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. Copies of such material can also be obtained from the Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Our SEC filings are also available to the public over the Internet at the SEC's web site that is located at the following address: http://www.sec.gov.

          You may request a free copy of our Annual Report on Form 10-K for the year ended December 31, 2000, other than exhibits, by writing or telephoning us at: Artesian Resources Corporation, 664 Churchmans Road, Newark, Delaware 19702, Attention: Joseph A. DiNunzio, Senior Vice President and Secretary [telephone (302) 453-6900].

Item 6. - Selected Financial Data.

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

Results of Operations

Overview

          Artesian Water, our principal subsidiary, is the oldest and largest public water utility in the State of Delaware and has been providing water service within the state since 1905. We distribute and sell water to residential, commercial, industrial, governmental, municipal and utility customers throughout Delaware. As of December 31, 2000, we had approximately 65,000 metered customers and serviced a population of approximately 214,000, representing approximately 28% of Delaware's total population.

          The Delaware Public Service Commission ("PSC") regulates Artesian Water's rates charged for water service, the sale and issuance of 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. Increases in customers served by Artesian Water also contribute to increases in our operating revenues. Our business is also subject to seasonal fluctuations and the effects of weather.

2000 Compared to 1999

Operating Revenues

          We realized 98.3% of our total revenue in 2000 from the sale of water. Water sales revenue increased $780,000, or 3.0%, for the year ended December 31, 2000 compared to 1999. The increase is primarily due to the increase in rates for water service approved by the PSC in PSC Docket 99-197 on August 30, 2000 and to a 3.64% increase in the number of customers served. In addition, we reflected in revenues, an additional $173,000 of the $720,000 in operating revenues we deferred in 1999 pending the completion of the rate increase proceeding. The remaining $547,000 deferred in 1999, and an additional $808,000 collected under bond in 2000, was refunded to customers with interest. These operating revenues were a result of a temporary increase we had placed into effect on July 1, 1999. In Delaware, utilities are permitted to place rates into effect on a temporary basis pending completion of a rate increase proceeding. If such rates are found to be in excess of rates the Commission finds to be appropriate, the utility must refund the portion found in excess to customers with interest. The increased revenues from the approved rate increase were offset by a decrease in usage per customer. The decrease in our rate of consumption per customer was a result of the unusual frequency of rainfall during the summer of 2000.

Operating Expenses

          Operating expenses, excluding depreciation and taxes, increased $710,000, or 4.8%, primarily due to increased payroll and related expenses, increased purchased water expenditures of $111,000 and an increase of $75,000 in transportation expenses related to fuel. These increases were partially offset by a $130,000 reduction in legal expenses due, in part, to the hiring of in-house counsel. The ratio of operating expense, excluding depreciation and taxes, to total revenue was 55.9% for the year ended December 31, 2000, compared to 54.9% for the year ended December 31, 1999. Payroll and related expenses increased $689,000, or 8.7%, primarily due to the addition of new employees, increases in annual merit compensation and, for the second consecutive year, a 17% increase in medical insurance premiums.

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

Interest Charges

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

Net Income

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

1999 Compared to 1998

Operating Revenues

          We realized 98.3% of our total revenue in 1999 from the sale of water. Water sales revenue increased $1,214,000, or 4.8%, for the year ended December 31, 1999 compared to 1998. The increase was primarily due to a temporary rate increase placed in effect on July 1, 1999, and to a 3.2% increase in the number of customers served. In addition to the revenue reported as operating revenues, we deferred approximately 56%, or $720,000, of the temporary increase placed into effect which represented the difference between our requested increase and the Commission staff's filed position with regard to our rate increase.

Operating Expenses

          Operating expenses increased $417,000, or 2.9%, primarily due to increased payroll and related expenses and increased regulatory expenses, including rate case related expenditures. The ratio of operating expense to total revenue was 54.9% for the year ended December 31, 1999 compared to 56.0% for the year ended December 31, 1998. Payroll and related expenses increased $538,000, or 8.3%, primarily due to the addition of new employees and increases in annual merit and incentive compensation and the results of a 17% increase in medical insurance premiums. Rate case expenses increased approximately $105,000, or 29.0%, due to the write-off of $165,000 in unrecoverable rate case expenses from our 1997 rate increase request. Power expense increased $58,000 due to the addition of new wells and treatment facilities. Expense related to the write-off of uncollectable accounts increased approximately $52,000 primarily due to increases in rates and growth in customer base. Purchased water expense decreased approximately $176,000 primarily due to mandatory drought restrictions placed in effect in August 1999 which led to a reduced purchase water requirement from our supply from Chester Water Authority. In addition, our expense for painting tanks decreased $263,000, as we could not take any of our tanks out of service during 1999 to paint while our service area was experiencing a severe drought. Our legal expense increased $64,000 primarily due to real estate and other general corporate governance matters.

          Depreciation and amortization expense increased $234,000, or 10.7%, due to increases in our utility plant in service. Income tax expense increased $152,000, or 8.4%, due to increased profitability in 1999. Our total effective income tax rate for 1999 was 39.8% compared to 39.9% for 1998.

Interest Charges

          Interest charges increased approximately $136,000, or 4.3%, primarily due to the $111,000, in interest expense related to the $4.5 million note issued to Ellis and Helena Taylor in exchange for the purchase by Artesian of 24,165 shares of Class A Non-Voting Common Stock and 126,353 shares of Class B Common Stock.

Net Income

          For the year ended December 31, 1999, our net income applicable to common stock increased by $271,000, or 10.3%, compared to the same period in 1998. The increase in net income was primarily due to a temporary rate increase placed in effect in July 1999 and the addition of new customers. Reductions in purchased water and tank painting expenses also contributed to the increase in net income for the year.

Liquidity & Capital Resources

Overview

          Our primary sources of liquidity for 2000 were $20.0 million in proceeds from the issuance of Artesian Water's $20.0 million First Mortgage Bonds, Series O, 8.17%, approximately $7.0 million of which was used to redeem and retire our First Mortgage Bonds, Series K, 10.17% and $4.0 million provided by cash flow from operating activities. Cash flow from operating activities was primarily provided by our utility operations, and was impacted by the timeliness and adequacy of rate increases and weather conditions.

          We rely on our sources of liquidity for investments in our utility plant and systems and to meet our various payment obligations. We currently estimate that our aggregate investments in our utility plant and systems in 2001 will be approximately $20.3 million. Our total obligations related to dividend and sinking fund payments on preferred stock, interest and principal payments on indebtedness, rental payments and water service interconnection agreements for 2001 are anticipated to be approximately $8.1 million.

Investment in Utility Plant and Systems

          Capital expenditures decreased by approximately $1.0 million for the year ended December 31, 2000 or approximately 6.5%, from $15.3 million in 1999 to $14.4 million in 2000. Investment in utility plant, excluding advances and contributions in aid of construction received from real estate developers, increased by $600,000, or 4.9%, from $12.2 million in 1999 to $12.8 million in 2000. Developers financed $1.6 million for the installation of water mains and hydrants serving their developments, compared to $3.1 million financed by developers in 1999. We invested over $5.8 million in new transmission and distribution facilities. We invested an additional $2.0 million in improvements to existing treatment facilities, rehabilitation of pumping equipment and installation of new wells to increase supply capabilities. Of this amount, the largest single investment in existing infrastructure was the installation of a carbon treatment system at our Llangollen well field, which by December 31, 2000 totaled approximately $550,000.

          We invested $3.6 million as part of our replacement and renewal program, relocation of existing mains as a result of government-mandated roadway construction, and our installation of new services. We also invested $1.4 million in general plant and equipment, such as fleet vehicles, computer equipment and tools, and refunds paid to developers for investments that they made in infrastructure to service developments in our service territory.

          We plan to invest approximately $20.3 million in utility plant in 2001. Developers are expected to finance an additional $3.0 million in utility plant construction. The largest portion of projected investment is primarily a result of our efforts to identify, develop and treat sources of water supply to assure uninterrupted service to our customers. We expect to invest approximately $7.3 million in new treatment facilities, equipment and wells throughout Delaware. Projects include approximately $1.5 million of investment at our Llangollen well field and facilities, where additional wells and carbon treatment are being added to our Aquifer Storage and Recovery system to ensure our customers have an adequate source of high quality supply during periods of heavy demand. In addition, we expect to construct a new production well at our Artisan's village well field and treatment facility at a cost of approximately $892,000. We continue to vigilantly monitor our sources of supply and adjust treatment processes to provide the highest quality water meeting not only primary but also secondary water quality standards set by the State. We expect to invest approximately $1.2 million for iron removal at three of our existing well fields to ensure compliance with state secondary drinking water quality standards. We project an investment of approximately $3.65 million for new sources of supply, new treatment facilities, the rehabilitation of existing wells and treatment facilities to meet peak day demands, fire protection needs and growth in our service area.

           As part of our total utility plant investment, we expect to invest over $9.6 million in transmission and distribution facilities. We project approximately $4.9 million will be invested in the relocations of facilities as a result of government mandates and renewals associated with the rehabilitation of aging infrastructure. We will also invest approximately $4.8 million in new transmission and distribution facilities to improve our system hydraulics and address service needs in growth areas of our service territory.

          The remaining $3.4 million of expected utility plant investment represents expenditures for our general plant and equipment, such as fleet vehicles, computer equipment and tools, and refunds paid to developers for investments that they made in infrastructure to service developments in our service territory.

Financing

          We have several sources of liquidity to finance our investment in utility plant and other fixed assets. We estimate that approximately $20.3 million will be financed by our operations and external sources, including a combination of capital investment and short-term borrowings under our revolving credit agreements discussed below. Developers will finance through advances and contributions in aid of construction the remaining $3.0 million of capital expenditures, which include the installation of mains and hydrants in new developments. We filed an application with the Delaware Public Service Commission on December 5, 2000, to increase annualized water sales revenues by approximately $6.4 million. Our sources of liquidity provided by operations may be materially impacted in FY 2001 depending on the final outcome of the rate application.

          On December 29, 2000, Artesian Water issued $20.0 million in First Mortgage Bonds, Series O, 8.17% (the "Series O Bonds"), in a private offering. Concurrent with the issuance, Artesian Water redeemed and retired the $7.0 million First Mortgage Bonds, Series K, 10.17%, due March 1, 2009. We paid an early retirement fee of $280,000, which has been deferred and, pending approval by the Public Service Commission, will be amortized over the life of the Series O Bonds. We have requested recognition of this expense in our recent rate application in PSC Docket 00-647.

          At December 31, 2000, Artesian Water had lines of credit with three separate financial institutions totaling $35.0 million to meet its temporary cash requirements. These revolving credit facilities are unsecured. As of December 31, 2000, we had $28.7 million of available funds under these lines. The interest rate for borrowings under each of these lines is the London Interbank Offering Rate plus 1.0% or the banks' federal funds rate plus 1.0%, at our discretion. All the facilities are reviewed annually by each bank for renewal.

          On January 31, 2001, Artesian Water Company, Inc. entered into a financing agreement with the Delaware Department of Health and Social Services to borrow funds totaling not more than $4,307,144 from the State's Revolving Loan Fund under an unsecured General Obligation Note. Artesian Water Company, Inc. agreed to repay the note, along with a fixed rate of interest of 4.48%, ratably over twenty years, payable on a semiannual basis. The effective rate of the loan, including expenses related to the closing, is 4.57%.

          We may, from time to time, sell Artesian securities to meet capital requirements. The amount and timing of future sales of our securities will depend upon market conditions and our specific needs.

Impact of Recent Accounting Pronouncements

          In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which established accounting and reporting standards for derivative instruments and hedging activities. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133-an amendment of FASB Statement 133," which deferred the effective date of this standard to financial years beginning after June 15, 2000. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which addresses and amends SFAS No. 133 for a limited number of issues which cause implementation difficulties for entities applying SFAS No. 133. We plan to adopt this statement effective January 1, 2001. Our adoption of this statement should not have a material impact on our financial condition or results of operation.

Cautionary Statement

          Statements in this Annual Report which express our "belief", "anticipation", "projection" or "expectation," as well as other statements which are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected. Certain factors, such as competitive market pressures, material changes in demand from larger customers, changes in weather, availability of labor, changes in government policies, levels of rate relief granted and changes in economic conditions, could cause results to differ materially from those in the forward-looking statements.

Item 8. - Financial Statements and Supplementary Data.

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

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

(1) At December 31, 2000, 1999, and 1998, Class A Non-Voting Common Stock had 3,500,000 shares authorized.
(2) At December 31, 2000, 1999, and 1998, Class B Common Stock had 1,040,000 shares authorized.
(3) Artesian Resources Corporation issued 325,000 shares of Class A Non-Voting Common Stock on April 13, 1999.
(4) Artesian Resources registered 200,000 shares of Class A Non-Voting Common Stock available for purchase through the Artesian Retirement Plan and the Artesian Supplemental Retirement Plan.

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

          In accordance with a rate order issued by the PSC, Artesian Water accrues an Allowance for Funds Used During Construction ("AFUDC"). AFUDC, which represents the cost of funds devoted to construction projects through the date the project is placed in service, is capitalized as part of construction work in progress. The rate used for the AFUDC calculation is based on Artesian Water's weighted average cost of debt and the rate of return on equity authorized by the PSC. The rate used to capitalize AFUDC in 2000, 1999 and 1998 was 9.3%, 9.4%, and 9.5%, respectively.

Utility plant comprises:

Depreciation and Amortization -- For financial reporting purposes, depreciation is provided using the straight-line method at rates based on estimated economic useful lives that range from 5 to 85 years. Composite depreciation rates for utility plant were 2.14%, 2.15% and 2.11%, for the years ended December 31, 2000, 1999, and 1998, respectively. In a rate order issued by the PSC, the Company was directed effective January 1, 1998 to begin using a revised depreciation rate for utility plant. In rate orders issued by the PSC, Artesian Water was directed effective May 28, 1991 and August 25, 1992 to offset depreciation on utility property funded by Contributions in Aid of Construction ("CIAC") and Advances for Construction (" Advances"), respectively, against CIAC and Advances. Other deferred assets are amortized using the straight-line method over applicable lives that range from two to twenty years.

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

Regulatory assets at December 31, net of amortization, comprised:

Other Deferred Assets-- Certain expenses are deferred and amortized using the straight-line method over various time periods ranging from 2 to 25 years. In 1992, Artesian Water entered a ten-year agreement for a water service interconnection with the Chester (Pennsylvania) Water Authority ("Chester"). The interconnection was placed in service during October 1992 at a total cost of $1.5 million and is being amortized over a 10-year period as approved by the PSC.

Other deferred assets at December 31, net of amortization, comprised:

Advances for Construction-- Water mains, services and hydrants or cash advances to reimburse Artesian Water its costs to construct water mains, services and hydrants, are contributed to Artesian Water by customers, real estate developers and builders in order to extend water service to their properties. The value of these contributions is recorded as Advances for Construction. Artesian Water makes refunds on these advances over a specific period of time based on operating revenues generated by the specific plant or as new customers are connected to the mains. After all refunds are made, any remaining balance is transferred to CIAC.

Contributions in Aid of Construction-- CIAC includes the non-refundable portion of advances for construction and direct contributions of water mains, services and hydrants or cash to reimburse Artesian Water its costs to construct water mains, services and hydrants by customers, real estate developers and builders in order to extend water service to their properties.

Income Taxes-- Deferred income taxes are provided in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" on all differences between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements based on the enacted tax rates to be in effect when such temporary differences are expected to reverse.

          The Tax Reform Act of 1986 mandated that Advances and CIAC received subsequent to December 31, 1986, generally are taxable incomes to Artesian Water. For Advances, Artesian Water was directed by the PSC to pay the related taxes and collect amounts equal to the taxes paid from the developer. For CIAC, Artesian Water was directed to pay the taxes instead of the developer contributing the taxes. The 1996 Tax Act provides an exclusion from taxable income for CIAC and Advances received after June 12, 1996 by Artesian Water that are not included in rate base for ratemaking purposes.

          Investment tax credits were deferred through 1986 and are recognized as a reduction of deferred income tax expense over the estimated economic useful lives of the related assets.

Revenue Recognition and Unbilled Revenues-- Water service revenue for financial statement purposes includes 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.

Cash and Cash Equivalents-- For purposes of the Consolidated Statement of Cash Flows, Artesian Resources considers all temporary cash investments with a maturity of three months or less to be cash equivalents. Artesian Water utilizes its bank's controlled disbursement service to reduce the use of its line of credit by funding checks as they are presented to the bank for payment rather than at issuance. If the checks currently outstanding but not yet funded exceed the cash balance on Artesian Water's books, the net liability is recorded as a current liability on the balance sheet in the Overdraft Payable account.

Use of Estimates in the Preparation of Consolidated Financial Statements-- The consolidated financial statements were prepared in conformity with generally accepted accounting principles, which require management to make estimates that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's estimate.

NOTE 2

FAIR VALUE OF FINANCIAL INSTRUMENTS

          The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Current Assets and Liabilities-- For those current assets and liabilities that are considered financial instruments, the carrying amounts approximate fair value because of the short maturity of those instruments.

Long-term Financial Liabilities-- The fair value of Artesian Resources' long-term debt and mandatorily redeemable preferred stock as of December 31, 2000 and 1999, determined by discounting their future cash flows using current market interest rates on similar instruments with comparable maturities, are approximately as shown below.

Fair value of financial instruments at December 31, comprised:

          The fair value of Advances cannot be reasonably estimated due to the inability to accurately estimate future refunds expected to be paid over the life of the contracts. Refund payments are based on the water sales to new customers in the particular development constructed. Future refunds expected to be paid would have to be estimated on a per contract basis using the past history of refund payments. The fair value of Advances would be less than the carrying amount because these financial instruments are non-interest bearing.

NOTE 3

INCOME TAXES

          Deferred income taxes reflect temporary differences between the valuation of assets and liabilities for financial and tax reporting.

          At December 31, 2000 for state income tax purposes, Artesian Resources had recorded a deferred tax asset of $685,000 to reflect separate company net operating loss carryforwards aggregating approximately $7,878,000. These net operating loss carryforwards will expire if unused between 2001 and 2020. Artesian Resources has recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to the expiration of the state net operating loss carryforwards. The valuation allowance increased from $671,000 in 1999 to $685,000 in 2000 as a result of additional net operating losses that are expected to expire unutilized.

          At December 31, 1997, for federal income tax purposes, there was a consolidated net operating loss carryforward of approximately $575,000, which was utilized in its entirety in 1998. At December 31, 2000, for federal income tax purposes, there were minimum tax credit carryforwards aggregating approximately $908,000 resulting from the payment of alternative minimum tax in current and prior years. These minimum tax credit carryforwards may be carried forward indefinitely to offset future regular federal income taxes. Artesian Resources has not recorded a valuation allowance for these federal tax carryforwards, because the Company believes it is more likely than not that such benefits will be realized.

Deferred income taxes at December 31, 2000 and 1999 were comprised of the following:

Deferred taxes, which are classified into a net current and noncurrent balance, are presented in the balance sheet as follows:

NOTE 4

PREFERRED STOCK

          Artesian Resources has two classes of preferred stock outstanding. The 7% Prior Preferred stock (on which dividends are cumulative) is redeemable at Artesian Resources' option at $30.00 per share plus accrued dividends. The 9.96% Series Cumulative Prior Preferred stock has annual mandatory redemption requirements and is redeemable at Artesian Resources' option at various declining prices ranging from $25.56 through January 31, 2001, to $25.00 after February 1, 2003. Under mandatory sinking fund provisions, redemptions will aggregate $100,000 (4,000 shares) annually in 2001 through 2004. The Company also has 100,000 shares of $1.00 par value Series Preferred stock authorized but unissued. See the Consolidated Statements of Stockholders' Equity.

          There are 80,000 authorized shares of the 9.96% Series Cumulative Prior Preferred stock with a par value of $25 per share, of which 16,000 and 20,000 shares were outstanding as of December 31, 2000 and 1999, respectively. Cash dividends paid in 2000 and 1999 were $42,000 and $52,000, respectively.

NOTE 5

COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL

          The Class A Non-Voting Common Stock ("Class A Stock") of Artesian Resources trades on the NASDAQ National Market under the symbol ARTNA. The Class B Common Stock of Artesian Resources trades on the NASDAQ Bulletin Board under the symbol ARTNB.

          In 1999, Artesian Resources issued 325,000 shares of Class A Stock at $25.00 per share. Net proceeds from the offering were used to reduce debt incurred to finance investment in utility plant.

          Contributions to the Tax Reduction Act Employees' Stock Ownership Plan (PAYSOP) by Artesian Resources for the purchase of its Class B Common stock on behalf of employees were limited to dividend reinvestments in 1997 and 1996. In 1997 the PAYSOP was merged into the Company's 401(k) plan. Under Artesian Resources' dividend reinvestment plan, stockholders were issued 9,727, 12,560 and 12,876 shares at fair market value for the reinvestment of $233,000, $283,000 and $242,000 of their cash dividends for the years 2000, 1999 and 1998, respectively.

NOTE 6

DEBT

          Artesian Water has available unsecured lines of credit, with no financial covenant restrictions, totaling $35.0 million at December 31, 2000, which are renewable annually at the banks' discretion. Borrowings under the lines of credit bear interest based on the London Interbank Offering Rate (LIBOR) plus 1.0% for 30, 60, 90, or 180 days or the banks' Federal Funds Rate plus 1.0%, at the option of Artesian Water.

          At December 31, 2000, 1999, and 1998, Artesian Water had $6.3 million, $7.6 million and $7.7 million outstanding under these lines at weighted average interest rates of 7.5%, 6.3% and 6.0%, respectively. The maximum amount outstanding was $18.8 million, $11.6 million and $9.1 million in 2000, 1999, and 1998, respectively. The twelve month average amount outstanding was approximately $12.8 million, $7.1 million and $6.0 million, at weighted average annual interest rates of 7.2%, 6.0% and 6.0% in 2000, 1999, and 1998, respectively.

          On December 29, 2000, Artesian Water issued a $20.0 million, 8.17%, twenty year Series O First Mortgage Bond to redeem the Series K $7.0 million First Mortgage Bond and to pay down the lines of credit. On December 29, 2020 the Series O First Mortgage Bond matures.

          On June 17, 1997, Artesian Water issued a $10.0 million, 7.84%, ten year Series M First Mortgage Bond and borrowed $2.5 million against a $5.0 million, ten year Series N First Mortgage Bond to repay the outstanding balance on the lines of credit. On September 18, 1997, Artesian Water borrowed the remaining $2.5 million on the Series N First Mortgage Bond. The $5.0 million, ten year Series N First Mortgage Bond has a fixed interest rate of 7.56%. On February 1, 2003, the Series L First Mortgage Bond matures. No other repayments or sinking fund deposits on first mortgage bonds are required over the next five years. As of December 31, 2000 and 1999, substantially all of Artesian Water's utility plant was pledged as security for the First Mortgage Bonds. In addition, the trust indentures contain covenants which limit long-term debt, including the current portion thereof, to 66 2/3% of total capitalization including the current portion of the long-term debt, and which, in certain circumstances, could restrict the payment of cash dividends. As of December 31, 2000, however, no dividend restrictions were imposed under these covenants.

          On May 4, 1999, Artesian repurchased 126,353 shares of Class B Common Stock and 24,165 shares of Class A Non-Voting Common Stock from Helena C. Taylor and Ellis D. Taylor in exchange for a promissory note (the "Note") in the principal amount of $4,450,000 representing the purchase price of the stock, with a discounted present value of $4,307,000. The Note is payable quarterly, on a calendar basis, over a four year period and in sixteen equal principal installments of $278,125 commencing on June 30, 1999. The outstanding balance on the Note bears interest in an amount computed based on the quarterly dividend the Taylors would have received on the Stock transferred to Artesian but not yet paid for by Artesian. In addition, the principal installment is adjusted on a quarterly basis to reflect changes in the book value per common share of the Company as reported in its most recent quarterly financial statement distributed to stockholders prior to the quarterly payment. Such amounts, if any, represent contingent purchase price of the stock and will be charged to retained earnings. At December 31, 2000, Artesian had $2,503,000 outstanding under this promissory note.

           On January 31, 2001, Artesian Water Company, Inc. entered into a financing agreement with the Delaware Department of Health and Social Services to borrow funds totaling not more than $4,307,144 from the State's Revolving Loan Fund under an unsecured General Obligation Note. The note bears interest of 4.48%, and is payable ratably over twenty years. The effective rate of the loan, including expenses related to the closing, is 4.57%. The Company intends to use the proceeds of this revolving loan to repay outstanding short-term debt. As such, the Company has reclassified $4,307,144 from notes payable to long-term debt on the balance sheet.

Long-term debt consists of: