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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
  Delaware
    
    51-0002090(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 664 Churchmans Road, Newark, Delaware 19702
  (302) 453  6900  Registrants telephone number, including area code
  Title of each class
    
    Name of each exchange on
which registeredClass A Non-Voting Common Stock
    
    NASDAQ
  o þ
 o þ
 þ o
 þ
  o þ o
 o þ




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2.  PropertiesItem 3.  Legal ProceedingsItem 4.  Submission of Matters to a Vote of Security HoldersPART IIItem 5.  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6.  Selected Financial DataItem 7.  Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A.  Quantitative and Qualitative Disclosure About Market RiskItem 8.   Financial Statements and Supplementary DataItem 9.  Changes in and Disagreements With Accountants on Accounting and Financial DisclosuresItem 9B.  Other InformationPART IIIItem 10.  Directors, Executive Officers and Corporate GovernanceItem 11.  Executive CompensationItem 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13.  Certain Relationships and Related Transactions, and Director IndependenceItem 14.  Principal Accountant Fees and ServicesItem 15.  Exhibits, Financial Statements SchedulesSIGNATURESSubsidiaries of the CompanyConsent of BDO Seidman LLPConsent of KPMG LLPCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive Officer and Chief Financial Officer    Table of Contents  
  
 Item 1. Business.
 General
     Artesian Water
   2




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
    
    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.
     3




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Artesian Water Pennsylvania
  Artesian Wastewater
  6




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Artesian Utility
   Artesian Development
  
 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.
  Our business is subject to seasonal fluctuations, which could affect demand for our water
service and our revenues.
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##### Table of Contents



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.
  Our operating costs could be significantly increased if new or stricter regulatory standards
are imposed by Federal and State Environmental agencies.
  We face competition from other utilities and service providers which might hinder our growth
and reduce our profitability.
  Any future acquisitions we undertake or other actions to further grow our water and wastewater
business may involve risks.
  
    
    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
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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.
  Wastewater operations may entail significant risks.
  Potential terrorist attacks may disrupt our operations and adversely affect our business,
operating results and financial condition.
  Turnover in our management team may adversely affect our operating results.
  
 Item 1B. Unresolved Staff Comments.
  
 Item 2.  Properties.
    9




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Utility plant comprises
 Estimated Useful Life$ In thousands
    
    (In Years)
    
    
    2006Utility plant at original costUtility plant in serviceIntangible plant
    
    
    
    
    
    $
    140Source of supply plant
    
    
    45-85
    
    
    
    14,759Pumping and water treatment plant
    
    
    35-62
    
    
    
    42,495(Artesian Water)Transmission and distribution plantMains
    
    
    81
    
    
    
    145,794Services
    
    
    39
    
    
    
    24,528Storage tanks
    
    
    76
    
    
    
    17,094Meters
    
    
    26
    
    
    
    10,061Hydrants
    
    
    60
    
    
    
    7,633Treatment and Disposal Plant
    
    
    35-62
    
    
    
    4,006(Artesian Wastewater)General plant
    
    
    3-31
    
    
    
    26,456Property held for future use
    
    
    
    
    
    
    1,960Construction work in progress
    
    
    
    
    
    
    6,188301,114Less  accumulated depreciation
    
    
    
    
    
    
    47,932$
    253,182
   
 Item 3.  Legal Proceedings.
  
 Item 4.  Submission of Matters to a Vote of Security Holders.
  
  
 Item 5.  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
 Market
Information for the Companys Common Equity
  10




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DividendHigh
    
    Low
    
    Per Share2005First Quarter
    
    $
    19.63
    
    
    $
    17.35
    
    
    $
    0.1417Second Quarter
    
    
    21.99
    
    
    
    17.43
    
    
    
    0.1450Third Quarter
    
    
    21.93
    
    
    
    19.68
    
    
    
    0.1450Fourth Quarter
    
    
    20.67
    
    
    
    19.29
    
    
    
    0.14882006First Quarter
    
    $
    22.27
    
    
    $
    19.51
    
    
    $
    0.1488Second Quarter
    
    
    22.27
    
    
    
    18.40
    
    
    
    0.1523Third Quarter
    
    
    20.41
    
    
    
    18.03
    
    
    
    0.1523Fourth Quarter
    
    
    19.70
    
    
    
    18.25
    
    
    
    0.1600
  Equity Compensation Plan Information
   Number of securities remainingNumber of securities
    
    
    
    
    
    available for future issuanceto be issued upon
    
    Weighted-average
    
    under equity compensation plansexercise of
    
    exercise price of
    
    (excluding securities reflected inPlan category
    
    outstanding options
    
    outstanding options
    
    column (a))(a)Equity compensation plans approved by security holders
    
    
    595,699
    
    
    $
    13.83
    
    
    
    579,700Equity compensation plans not approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    595,699
    
    
    
    
    
    
    
    579,700
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Comparison
of Cumulative Five Year Total Return
 
 Base
    
    
    INDEXED RETURNSPeriod
    
    
    Years Ending December 31Company Name / Index
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006Artesian Resources Corporation
    
    
    
    100
    
    
    
    
    99.68
    
    
    
    
    145.32
    
    
    
    
    151.07
    
    
    
    
    163.73
    
    
    
    
    168.28S&P 500 Index
    
    
    
    100
    
    
    
    
    77.90
    
    
    
    
    100.25
    
    
    
    
    111.15
    
    
    
    
    116.61
    
    
    
    
    135.03Peer Group
    
    
    
    100
    
    
    
    
    95.67
    
    
    
    
    121.73
    
    
    
    
    140.55
    
    
    
    
    184.51
    
    
    
    
    184.74
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Item 6.  Selected Financial Data.
  In thousands, except per share and operating data
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002STATEMENT OF OPERATIONS DATAOperating revenuesWater sales
    
    $
    44,272
    
    
    $
    41,638
    
    
    $
    37,985
    
    
    $
    35,164
    
    
    $
    33,644Other utility operating revenue
    
    
    1,268
    
    
    
    1,073
    
    
    
    867
    
    
    
    744
    
    
    
    666Non-utility operating revenue
    
    
    1,725
    
    
    
    2,574
    
    
    
    730
    
    
    
    387
    
    
    
    287Sale of land
    
    
    1,322
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating revenues
    
    $
    48,587
    
    
    $
    45,285
    
    
    $
    39,582
    
    
    $
    36,295
    
    
    $
    34,597Operating expensesOperating and maintenance
    
    $
    25,733
    
    
    $
    24,543
    
    
    $
    20,700
    
    
    $
    19,629
    
    
    $
    18,334Depreciation and amortization
    
    
    4,610
    
    
    
    4,365
    
    
    
    4,046
    
    
    
    3,635
    
    
    
    3,392State and federal income taxes
    
    
    3,887
    
    
    
    3,347
    
    
    
    2,892
    
    
    
    2,387
    
    
    
    2,825Property and other taxes
    
    
    2,562
    
    
    
    2,389
    
    
    
    2,070
    
    
    
    2,115
    
    
    
    1,871Total operating expenses
    
    $
    36,792
    
    
    $
    34,644
    
    
    $
    29,708
    
    
    $
    27,766
    
    
    $
    26,422Operating income
    
    $
    11,795
    
    
    $
    10,641
    
    
    $
    9,874
    
    
    $
    8,529
    
    
    $
    8,175Other income, net
    
    
    613
    
    
    
    515
    
    
    
    471
    
    
    
    277
    
    
    
    380Total income before interest charges
    
    $
    12,408
    
    
    $
    11,156
    
    
    $
    10,345
    
    
    $
    8,806
    
    
    $
    8,555Interest charges
    
    $
    6,337
    
    
    $
    6,121
    
    
    $
    5,943
    
    
    $
    4,889
    
    
    $
    4,388Net income
    
    $
    6,071
    
    
    $
    5,035
    
    
    $
    4,402
    
    
    $
    3,917
    
    
    $
    4,167Dividends on preferred stock
    
    
    0
    
    
    
    0
    
    
    
    2
    
    
    
    71
    
    
    
    42Net income applicable to common stock
    
    $
    6,071
    
    
    $
    5,035
    
    
    $
    4,400
    
    
    $
    3,846
    
    
    $
    4,125Net income per share of common stock:Basic
    
    $
    1.00
    
    
    $
    0.84
    
    
    $
    0.75
    
    
    $
    0.66
    
    
    $
    0.78Diluted
    
    $
    0.97
    
    
    $
    0.81
    
    
    $
    0.72
    
    
    $
    0.64
    
    
    $
    0.76Avg. shares of common stock outstandingBasic
    
    
    6,055
    
    
    
    5,984
    
    
    
    5,904
    
    
    
    5,820
    
    
    
    5,301Diluted
    
    
    6,235
    
    
    
    6,182
    
    
    
    6,099
    
    
    
    5,990
    
    
    
    5,418Cash dividends per share of common stock
    
    $
    0.61
    
    
    $
    0.58
    
    
    $
    0.55
    
    
    $
    0.53
    
    
    $
    0.51BALANCE SHEET DATAUtility
plant, at original cost less accumulated depreciation
    
    $
    253,182
    
    
    $
    227,566
    
    
    $
    212,152
    
    
    $
    187,893
    
    
    $
    167,338Total assets
    
    $
    269,360
    
    
    $
    243,854
    
    
    $
    227,380
    
    
    $
    216,324
    
    
    $
    183,072Notes payable
    
    $
    7,906
    
    
    $
    1,786
    
    
    $
    9,213
    
    
    $
    12,499
    
    
    $
    3,163Long-term obligations and
redeemable preferred stock,
including current portions
    
    $
    92,383
    
    
    $
    92,680
    
    
    $
    83,438
    
    
    $
    80,846
    
    
    $
    64,591Stockholders equity
    
    $
    61,800
    
    
    $
    57,813
    
    
    $
    54,943
    
    
    $
    52,691
    
    
    $
    51,176Total capitalization
    
    $
    153,873
    
    
    $
    150,192
    
    
    $
    137,299
    
    
    $
    133,249
    
    
    $
    115,246OPERATING DATAAverage water sales per customer
    
    $
    600
    
    
    $
    575
    
    
    $
    535
    
    
    $
    505
    
    
    $
    495Water pumped (millions of gallons)
    
    
    7,608
    
    
    
    7,468
    
    
    
    7,166
    
    
    
    7,199
    
    
    
    7,198Number of metered customers
    
    
    73,814
    
    
    
    72,383
    
    
    
    70,993
    
    
    
    69,687
    
    
    
    68,049Miles of water main
    
    
    1,051
    
    
    
    1,001
    
    
    
    977
    
    
    
    938
    
    
    
    917
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Item 7.  Managements Discussion and Analysis of Financial Condition and Results of Operations.
 OVERVIEW
        14




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Water Industry
  15




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Strategic Direction
   Regulatory Matters and Inflation
    16




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CRITICAL ACCOUNTING POLICIES
      17




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Results of Operations
 2006 Compared to 2005
 Operating Revenues
  Percentage of Operating Revenues
 2006
    
    2005
    
    2004Residential
    
    
    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
  Commercial
  18




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Industrial
  Government and Other
  Other Utility Operating Revenue
  Non-Utility Operating Revenue
  Operating Expenses
  Percentage of Operating and Maintenance Expenses
 2006
    
    2005
    
    2004Payroll 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
    %
  19




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Other Income, Net
  Interest Charges
  Net Income
  2005 Compared to 2004
 Operating Revenues
  Residential
  Commercial
  Industrial
  20




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Government and Other
  Other Utility Operating Revenue
  Non-Utility Operating Revenue
  Operating Expenses
   Other Income, Net
  Interest Charges
  21




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Net Income
  Liquidity and Capital Resources
 Overview
   Investment in Utility Plant and Systems
    Investment in Utility Plant and Systems
 In thousands
    
    2006
    
    2005
    
    2004Source of supply
    
    $
    2,224
    
    
    $
    100
    
    
    $
    832Treatment and pumping
    
    
    973
    
    
    
    1,660
    
    
    
    6,546Transmission and distribution
    
    
    12,998
    
    
    
    9,515
    
    
    
    13,390General plant and equipment
    
    
    2,581
    
    
    
    1,272
    
    
    
    1,851Developer financed utility plant
    
    
    9,291
    
    
    
    6,604
    
    
    
    5,435Wastewater facilities
    
    
    3,111
    
    
    
    1,236
    
    
    
    844Allowance for Funds Used During Construction, AFUDC
    
    
    (288
    )
    
    
    (223
    )
    
    
    (302
    )Total
    
    $
    30,890
    
    
    $
    20,164
    
    
    $
    28,596
 22




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Financing
       23




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Contractual Cash Obligations
 Payments Due by PeriodLess than
    
    
    2-3
    
    
    4-5
    
    
    After 5In thousands
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalFirst Mortgage Bonds
    
    $
    5,501
    
    
    $
    11,001
    
    
    $
    11,001
    
    
    $
    160,496
    
    
    $
    187,999State revolving fund loans
    
    
    590
    
    
    
    1,180
    
    
    
    1,180
    
    
    
    6,658
    
    
    
    9,608Operating leases
    
    
    142
    
    
    
    151
    
    
    
    61
    
    
    
    1,574
    
    
    
    1,928Unconditional purchase
obligations
    
    
    2,787
    
    
    
    5,581
    
    
    
    5,574
    
    
    
    30,677
    
    
    
    44,619Tank painting contractual obligation
    
    
    374
    
    
    
    749
    
    
    
    549
    
    
    
    
    
    
    
    1,672Total
    
    $
    9,394
    
    
    $
    18,662
    
    
    $
    18,365
    
    
    $
    199,405
    
    
    $
    245,824
  Less thanCommitments
    
    Committed
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    Over 5 YearsLines of Credit
    
    $
    7,906
    
    
    $
    7,906
    
    
    
    
    
    
    
    
    
    
    
    
 Off-Balance Sheet Arrangements
  IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
    24




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,   .
      25




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
    
    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.
  Caution Regarding forward-looking Statements
  
 Item 7A.  Quantitative and Qualitative Disclosure About Market Risk.
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Item 8.   Financial Statements and Supplementary Data.
 CONSOLIDATED BALANCE SHEETS
 December 31,In thousands
    
    2006
    
    2005ASSETSUtility plant, at original cost less accumulated depreciation
    
    $
    253,182
    
    
    $
    227,566Current assetsCash and cash equivalents
    
    
    1,414
    
    
    
    1,359Accounts receivable (less reserve for bad debts 2006 - $225; 2005-$175)
    
    
    3,416
    
    
    
    4,281Unbilled operating revenues
    
    
    2,655
    
    
    
    2,374Materials and supplies  at cost on FIFO basis
    
    
    1,054
    
    
    
    1,008Prepaid property taxes
    
    
    924
    
    
    
    851Prepaid expenses and other
    
    
    782
    
    
    
    53310,245
    
    
    
    10,406Other assetsNon-utility property (less accumulated depreciation 2006 - $152;
2005-$129)
    
    
    307
    
    
    
    316Other deferred assets
    
    
    3,745
    
    
    
    3,6934,052
    
    
    
    4,009Regulatory assets, net
    
    
    1,881
    
    
    
    1,873$
    269,360
    
    
    $
    243,854LIABILITIES AND STOCKHOLDERS EQUITYStockholders equityCommon stock
    
    $
    6,086
    
    
    $
    4,014Additional paid-in-capital
    
    
    45,052
    
    
    
    43,469Retained earnings
    
    
    10,662
    
    
    
    10,330Total stockholders equity
    
    
    61,800
    
    
    
    57,813Long-term debt, net of current portion
    
    
    92,073
    
    
    
    92,379153,873
    
    
    
    150,192Current liabilitiesLines of credit
    
    
    7,906
    
    
    
    1,786Current portion of long-term debt
    
    
    310
    
    
    
    301Accounts payable
    
    
    2,790
    
    
    
    2,790Accrued expenses
    
    
    3,287
    
    
    
    1,948Overdraft payable
    
    
    1,990
    
    
    
    1,417Income tax payable
    
    
    
    
    
    
    111Deferred income taxes
    
    
    284
    
    
    
    269Interest accrued
    
    
    360
    
    
    
    354Customer deposits
    
    
    472
    
    
    
    469Other
    
    
    1,723
    
    
    
    2,79319,122
    
    
    
    12,238Deferred credits and other liabilitiesNet advances for construction
    
    
    24,991
    
    
    
    24,404Postretirement benefit obligation
    
    
    927
    
    
    
    1,097Deferred investment tax credits
    
    
    765
    
    
    
    789Deferred income taxes
    
    
    21,505
    
    
    
    17,78448,188
    
    
    
    44,074Commitments 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
 27




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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Year Ended December 31,In thousands, except per share amounts
    
    2006
    
    
    2005
    
    
    2004Operating revenuesWater sales
    
    $
    44,272
    
    
    $
    41,638
    
    
    $
    37,985Other utility operating revenue
    
    
    1,268
    
    
    
    1,073
    
    
    
    868Non-utility operating revenue
    
    
    1,725
    
    
    
    2,574
    
    
    
    729Sale of land
    
    
    1,322
    
    
    
    
    
    
    
    48,587
    
    
    
    45,285
    
    
    
    39,582Operating expensesUtility operating expenses
    
    
    24,314
    
    
    
    22,233
    
    
    
    20,187Non-utility operating expenses
    
    
    1,419
    
    
    
    2,310
    
    
    
    513Depreciation and amortization
    
    
    4,610
    
    
    
    4,365
    
    
    
    4,046TaxesState and federal incomeCurrently payable
    
    
    162
    
    
    
    111
    
    
    
    Deferred
    
    
    3,725
    
    
    
    3,236
    
    
    
    2,892Property and other
    
    
    2,562
    
    
    
    2,389
    
    
    
    2,07036,792
    
    
    
    34,644
    
    
    
    29,708Operating income
    
    
    11,795
    
    
    
    10,641
    
    
    
    9,874Other income, netAllowance for funds used during construction
    
    
    288
    
    
    
    223
    
    
    
    302Miscellaneous
    
    
    325
    
    
    
    292
    
    
    
    169613
    
    
    
    515
    
    
    
    471Income before interest charges
    
    
    12,408
    
    
    
    11,156
    
    
    
    10,345Interest charges
    
    
    6,337
    
    
    
    6,121
    
    
    
    5,943Net income
    
    
    6,071
    
    
    
    5,035
    
    
    
    4,402Redemption premium on preferred stock
    
    
    
    
    
    
    
    
    
    
    2Net income applicable to common stock
    
    $
    6,071
    
    
    $
    5,035
    
    
    $
    4,400Income per common share:Basic
    
    $
    1.00
    
    
    $
    0.84
    
    
    $
    0.75Diluted
    
    $
    0.97
    
    
    $
    0.81
    
    
    $
    0.72Weighted average common shares outstanding:Basic
    
    
    6,055
    
    
    
    5,984
    
    
    
    5,904Diluted
    
    
    6,235
    
    
    
    6,182
    
    
    
    6,099Cash dividends per share of common stock
    
    $
    0.61
    
    
    $
    0.58
    
    
    $
    0.55
 The
notes are an integral part of the consolidated financial
statements.
 28




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##### Table of Contents



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




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 Common Shares
    
    Common SharesOutstanding
    
    Outstanding
    
    $1 Par Value
    
    $1 Par ValueClass A
    
    Class B
    
    Class A
    
    Class BIn thousands
    
    Non-Voting (1)(4)(5)
    
    Voting(2)(4)
    
    Non-Voting
    
    VotingBalance as of December 31, 2003
    
    
    4,970
    
    
    
    882
    
    
    $
    3,313
    
    
    $
    588Net incomeCash dividends declaredCommon stockPreferred stockIssuance of common stockOfficer bonus
    
    
    2
    
    
    
    
    
    
    
    2Dividend reinvestment plan
    
    
    18
    
    
    
    
    
    
    
    12Employee stock options and awards
    
    
    47
    
    
    
    
    
    
    
    31Employee Retirement Plan(3)
    
    
    15
    
    
    
    
    
    
    
    10Balance as of December 31, 2004
    
    
    5,052
    
    
    
    882
    
    
    
    3,368
    
    
    
    588Net incomeCash dividends declaredCommon stockIssuance of common stockOfficer bonus
    
    
    9
    
    
    
    
    
    
    
    6Dividend reinvestment plan
    
    
    15
    
    
    
    
    
    
    
    10Employee stock options and awards
    
    
    52
    
    
    
    
    
    
    
    35Employee Retirement Plan(3)
    
    
    11
    
    
    
    
    
    
    
    7Balance as of December 31, 2005
    
    
    5,139
    
    
    
    882
    
    
    
    3,426
    
    
    
    588Net incomeCash dividends declaredCommon stockIssuance of common stockStock split
    
    
    
    
    
    
    
    
    
    
    1,721
    
    
    
    294Officer bonus
    
    
    9
    
    
    
    
    
    
    
    6Dividend reinvestment plan
    
    
    15
    
    
    
    
    
    
    
    14Employee stock options and awards
    
    
    12
    
    
    
    
    
    
    
    10Employee Retirement Plan(3)
    
    
    29
    
    
    
    
    
    
    
    27Balance as of December 31, 2006
    
    
    5,204
    
    
    
    882
    
    
    $
    5,204
    
    
    $
    882
 
 (1)
    
    At December 31, 2006, 2005, and 2004, Class A Non-Voting Common Stock had 15,000,000 shares authorized.(2)
    
    At December 31, 2006, 2005, and 2004, Class B Common Stock had 1,040,000 shares authorized.(3)
    
    Artesian Resources registered 500,000 shares of Class A Non-Voting Common Stock available
for purchase through the Artesian Retirement Plan and the Artesian Supplemental Retirement Plan.(4)
    
    Artesian Resources Corporation approved a three for two stock split on May 12, 2006 effected in the form of a 50% stock distribution. Each
shareholder of record on May 30, 2006 received one additional share for each two shares held. All share and per share data for all prior
periods have been restated to give effect to this stock split.(5)
    
    Under the Equity Compensation Plan, effective May 25, 2005 Artesian Resources authorized up to 500,000 shares of Class A Non-Voting Common
Stock for issuance of grants in forms of stock options, stock units, dividend equivalents and other stock-based awards, subject to
adjustment in certain circumstances as discussed in the Plan. The notes are an integral part of the consolidated financial statements. 30




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 AdditionalPaid-in
    
    RetainedIn thousands
    
    Capital
    
    Earnings(2)
    
    Total(2)Balance as of December 31, 2003
    
    $
    41,159
    
    
    $
    7,630
    
    
    $
    52,690Net income
    
    
    
    
    
    
    4,402
    
    
    
    4,402Cash dividends declaredCommon stock
    
    
    
    
    
    
    (3,265
    )
    
    
    (3,265
    )Preferred stock
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Issuance of common stockOfficer bonus
    
    
    48
    
    
    
    
    
    
    
    50Dividend reinvestment plan
    
    
    322
    
    
    
    
    
    
    
    334Employee stock options
    
    
    444
    
    
    
    
    
    
    
    475Employee Retirement Plan(1)
    
    
    249
    
    
    
    
    
    
    
    259Balance as of December 31, 2004
    
    
    42,222
    
    
    
    8,765
    
    
    
    54,943Net income
    
    
    
    
    
    
    5,035
    
    
    
    5,035Cash dividends declaredCommon stock
    
    
    
    
    
    
    (3,470
    )
    
    
    (3,470
    )Issuance of common stockOfficer bonus
    
    
    166
    
    
    
    
    
    
    
    172Dividend reinvestment plan
    
    
    284
    
    
    
    
    
    
    
    294Employee stock options
    
    
    612
    
    
    
    
    
    
    
    647Employee Retirement Plan(1)
    
    
    185
    
    
    
    
    
    
    
    192Balance as of December 31, 2005
    
    
    43,469
    
    
    
    10,330
    
    
    
    57,813Net income
    
    
    
    
    
    
    6,071
    
    
    
    6,071Cash dividends declaredCommon stock
    
    
    
    
    
    
    (3,714
    )
    
    
    (3,714
    )Issuance of common stockStock split
    
    
    
    
    
    
    (2,025
    )
    
    
    (10
    )Officer bonus
    
    
    183
    
    
    
    
    
    
    
    189Dividend reinvestment plan
    
    
    321
    
    
    
    
    
    
    
    335Employee stock options and awards
    
    
    551
    
    
    
    
    
    
    
    561Employee Retirement Plan(1)
    
    
    528
    
    
    
    
    
    
    
    555Balance as of December 31, 2006
    
    $
    45,052
    
    
    $
    10,662
    
    
    $
    61,800
 
 (1)
    
    Artesian Resources registered 500,000 shares of Class A Non-Voting Common Stock available
for purchase through the Artesian Retirement Plan and the Artesian Supplemental Retirement Plan.(2)
    
    Artesian Resources Corporation approved a three for two stock split on May 12, 2006 effected in the form of a 50%
stock distribution. Each shareholder of record on May 30, 2006 received one additional share for each two shares
held. All share and per share data for all prior periods have been restated to give effect to this stock split.(3)
    
    Under the Equity Compensation Plan, effective May 25, 2005, Artesian Resources authorized up to 500,000 shares of
Class A Non-Voting Common Stock for issuance of grants in forms of stock options, stock units, dividend
equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the
Plan. The notes are an integral part of the consolidated financial statements.
 31




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
   Utility Subsidiary Accounting
  Utility Plant
   Utility plant comprises
 EstimatedUsefulLife
    
    
    December 31,In thousands
    
    In Years
    
    
    2006
    
    
    2005Utility plant at original costUtility plant in serviceIntangible plant
    
    
    
    
    
    $
    140
    
    
    $
    140Source of supply plant
    
    
    45-85
    
    
    
    14,759
    
    
    
    14,462Pumping and
water treatment plant (Artesian Water)
    
    
    35-62
    
    
    
    42,495
    
    
    
    39,747Transmission and distribution plantMains
    
    
    81
    
    
    
    145,794
    
    
    
    131,119Services
    
    
    39
    
    
    
    24,528
    
    
    
    22,486Storage tanks
    
    
    76
    
    
    
    17,094
    
    
    
    13,603Meters
    
    
    26
    
    
    
    10,061
    
    
    
    9,412Hydrants
    
    
    60
    
    
    
    7,633
    
    
    
    6,757
 32




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##### Table of Contents



EstimatedUsefulLife
    
    
    December 31,In thousands
    
    In Years
    
    
    2006
    
    
    2005Treatment and
Disposal Plant
(Artesian
Wastewater)
    
    
    35-62
    
    
    
    4,006
    
    
    
    1,932General plant
    
    
    3-31
    
    
    
    26,456
    
    
    
    21,460Property held for future use
    
    
    
    
    
    
    1,960
    
    
    
    4,923Construction work in progress
    
    
    
    
    
    
    6,188
    
    
    
    4,805301,114
    
    
    
    270,846Less  accumulated depreciation
    
    
    
    
    
    
    47,932
    
    
    
    43,280$
    253,182
    
    
    $
    227,566
 Depreciation and Amortization
  Regulatory Assets
  Regulatory assets at December 31, net of amortization, comprise:
 In thousands
    
    2006
    
    
    2005Postretirement benefit obligation
    
    $
    1,027
    
    
    $
    1,097Deferred income taxes recoverable in future rates
    
    
    582
    
    
    
    597Expense of rate proceedings
    
    
    257
    
    
    
    155Other
    
    
    15
    
    
    
    24$
    1,881
    
    
    $
    1,873
 Impairment or Disposal of Long-Lived Assets
  33




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##### Table of Contents



Other Deferred Assets
  Other deferred assets at December 31, net of amortization, comprise:
 In thousands
    
    2006
    
    
    2005Debt issuance expense
    
    $
    2,582
    
    
    $
    2,691Other
    
    
    1,163
    
    
    
    1,002$
    3,745
    
    
    $
    3,693
 Advances for Construction
  Contributions in Aid of Construction
  Income Taxes
    Stock Compensation Plans
  34




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##### Table of Contents



In thousands, except per share data
    
    2005
    
    
    2004Net income applicable to common stockAs reported
    
    $
    5,035
    
    
    $
    4,400Add: compensation expense included in
net income (net of tax)
    
    
    (1
    )
    
    
    89Deduct: compensation expense using
fair value based method (net of tax)
    
    
    (329
    )
    
    
    (275
    )Pro-forma
    
    $
    4,705
    
    
    $
    4,214Basic net income per common shareAs reported
    
    $
    0.84
    
    
    $
    0.75Pro-forma
    
    $
    0.79
    
    
    $
    0.71Diluted net income per common shareAs reported
    
    $
    0.81
    
    
    $
    0.72Pro-forma
    
    $
    0.76
    
    
    $
    0.69
  .
 2006
    
    2005
    
    2004Dividend Yield
    
    
    2.9
    %
    
    
    3.0
    %
    
    
    3.0
    %Expected Volatility
    
    
    .24
    
    
    
    .32
    
    
    
    .32Director and Officer OptionsRisk Free Interest Rate
    
    
    5.03
    %
    
    
    3.97
    %
    
    
    1.04
    %Expected Term
    
    3.26 years
    
    
    3.42 years
    
    
    5 yearsEmployee Options
    
    
    Risk Free Interest Rate
    
    
    
    
    
    
    2.92
    %
    
    
    1.92
    %Expected Term
    
    
    
    
    
    1 year
    
    
    .88 year
   Revenue Recognition and Unbilled Revenues
  Accounts Receivable
  35




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##### Table of Contents



Cash and Cash Equivalents
  Use of Estimates in the Preparation of Consolidated Financial Statements
  Stock Split
 
 Capitalization of the Costs of Computer Software Developed or Obtained for Internal Use
  NOTE 2
 FAIR VALUE OF FINANCIAL INSTRUMENTS
  Current Assets and Liabilities
  36




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##### Table of Contents



Long-term Financial Liabilities
  Fair value of financial
instruments at December 31, comprised:2006
    
    
    2005Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedIn thousands
    
    Amount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueLong-term debt
    
    $
    92,073
    
    
    $
    91,410
    
    
    $
    92,379
    
    
    $
    93,299
  NOTE 3
 INCOME TAXES
    Components of Income Tax Expense
 For the Year Ended December 31,In thousands
    
    2006
    
    
    2005
    
    
    2004State income taxesCurrent
    
    $
    42
    
    
    $
    
    
    
    $
    Deferred
    
    
    741
    
    
    
    733
    
    
    
    366Total state income tax expense
    
    $
    783
    
    
    $
    733
    
    
    $
    366
 For the Year Ended December 31,2006
    
    
    2005
    
    
    2004Federal income taxesCurrent
    
    $
    120
    
    
    $
    111
    
    
    $
    Deferred
    
    
    2,984
    
    
    
    2,503
    
    
    
    2,526Total federal income tax expense
    
    $
    3,104
    
    
    $
    2,614
    
    
    $
    2,526
 37




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##### Table of Contents



Reconciliation of effective tax rate:
 For the Year Ended December 31,2006
    
    
    2006
    
    
    2005
    
    
    2005
    
    
    2004
    
    
    2004In thousands
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Reconciliation of effective tax rateIncome before federal and state
income taxes
    
    $
    9,993
    
    
    
    100.0
    
    
    $
    8,383
    
    
    
    100.0
    
    
    $
    7,294
    
    
    
    100.0Amount computed at statutory rate
    
    
    3,398
    
    
    
    34.0
    
    
    
    2,850
    
    
    
    34.0
    
    
    
    2,480
    
    
    
    34.0Reconciling itemsState income tax-net of federal tax
benefit
    
    
    466
    
    
    
    4.7
    
    
    
    481
    
    
    
    5.8
    
    
    
    418
    
    
    
    5.7Other
    
    
    23
    
    
    
    0.2
    
    
    
    16
    
    
    
    0.1
    
    
    
    (6
    )
    
    
    (0.1
    )Total income tax expense and effective rate
    
    $
    3,887
    
    
    
    38.9
    
    
    $
    3,347
    
    
    
    39.9
    
    
    $
    2,892
    
    
    
    39.6
 Deferred income taxes at December 31, 2006, 2005, and 2004 were comprised of the following:
 For the Year Ended December 31,In thousands
    
    2006
    
    
    2005
    
    
    2004Deferred tax assets related to:Federal alternative minimum tax credit carry
forwards
    
    $
    1,941
    
    
    $
    1,822
    
    
    $
    1,691Federal and state operating loss carry forwards
    
    
    5,384
    
    
    
    7,105
    
    
    
    8,884Bad debt allowance
    
    
    83
    
    
    
    70
    
    
    
    93Valuation allowance
    
    
    (121
    )
    
    
    (323
    )
    
    
    (482
    )Stock options
    
    
    145
    
    
    
    145
    
    
    
    241Other
    
    
    247
    
    
    
    281
    
    
    
    58Total deferred tax assets
    
    $
    7,679
    
    
    $
    9,100
    
    
    $
    10,485Deferred tax liabilities related to:Property plant and equipment basis differences
    
    $
    (28,766
    )
    
    $
    (26,512
    )
    
    $
    (24,739
    )Expenses of rate proceedings
    
    
    (102
    )
    
    
    (62
    )
    
    
    (115
    )Property taxes
    
    
    (368
    )
    
    
    (338
    )
    
    
    (304
    )Other
    
    
    (232
    )
    
    
    (241
    )
    
    
    (251
    )Total deferred tax liabilities
    
    $
    (29,468
    )
    
    $
    (27,153
    )
    
    $
    (25,409
    )Net deferred tax liability
    
    $
    (21,789
    )
    
    $
    (18,053
    )
    
    $
    (14,924
    )
 Deferred taxes, which are classified into a net current and non-current balance, are presented in the balance
sheet as follows:
 Current deferred tax liability
    
    $
    (284
    )
    
    $
    (269
    )
    
    $
    (150
    )Non-current deferred tax liability
    
    
    (21,505
    )
    
    
    (17,784
    )
    
    
    (14,774
    )Net deferred tax liability
    
    $
    (21,789
    )
    
    $
    (18,053
    )
    
    $
    (14,924
    )
 38




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NOTE 4
 PREFERRED STOCK
  NOTE 5
 COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
   NOTE 6
 DEBT
      39




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##### Table of Contents



Long-term debt consists of:
 December 31,In thousands
    
    2006
    
    
    2005First mortgage bondsSeries O, 8.17%, due December 29, 2020
    
    $
    20,000
    
    
    $
    20,000Series P, 6.58%, due January 31, 2018
    
    
    25,000
    
    
    
    25,000Series Q, 4.75%, due December 1, 2043
    
    
    15,400
    
    
    
    15,400Series R, 5.96%, due December 31, 2028
    
    
    25,000
    
    
    
    25,00085,400
    
    
    
    85,400State revolving fund loans4.48%, due August 1, 2021
    
    
    3,558
    
    
    
    3,7213.57%, due September 1, 2023
    
    
    1,319
    
    
    
    1,3743.64%, due May 1, 2024
    
    
    2,106
    
    
    
    2,1856,983
    
    
    
    7,280Sub-total
    
    
    92,383
    
    
    
    92,680Less: current maturities (principal amount)
    
    
    310
    
    
    
    301Total long-term debt
    
    $
    92,073
    
    
    $
    92,379
 Payments of principal due during the next five years and thereafter:
 In thousands
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    ThereafterFirst Mortgage bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    85,400State revolving
fund loan
    
    
    310
    
    
    
    323
    
    
    
    336
    
    
    
    350
    
    
    
    364
    
    
    
    5,300Total payments
    
    $
    310
    
    
    $
    323
    
    
    $
    336
    
    
    $
    350
    
    
    $
    364
    
    
    $
    90,700
 NOTE 7
 NON-UTILITY OPERATING REVENUE AND EXPENSES
   40




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Non-utility operating expenses are as follows:
 In thousands
    
    2006
    
    
    2005
    
    
    2004Artesian Utility
    
    $
    1,205
    
    
    $
    2,184
    
    
    $
    495Artesian Resources
    
    
    211
    
    
    
    116
    
    
    
    17Artesian Development
    
    
    3
    
    
    
    10
    
    
    
    1Total
    
    $
    1,419
    
    
    $
    2,310
    
    
    $
    513
 NOTE 8
 STOCK COMPENSATION PLANS
    41




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##### Table of Contents



2006
    
    
    
    
    
    
    2005
    
    
    
    
    
    
    2004Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average2006
    
    
    Exercise
    
    
    2005
    
    
    Exercise
    
    
    2004
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PricePlan optionsOutstanding at beginning of year
    
    
    571,686
    
    
    $
    13.294
    
    
    
    498,432
    
    
    $
    11.266
    
    
    
    472,187
    
    
    $
    10.207Granted
    
    
    33,750
    
    
    $
    21.113
    
    
    
    125,611
    
    
    $
    19.679
    
    
    
    78,181
    
    
    $
    16.020Exercised
    
    
    (9,577
    )
    
    $
    7.283
    
    
    
    (51,796
    )
    
    $
    9.62
    
    
    
    (46,806
    )
    
    $
    8.208Canceled
    
    
    (160
    )
    
    $
    18.463
    
    
    
    (561
    )
    
    $
    13.605
    
    
    
    (5,130
    )
    
    $
    14.112Outstanding at end of year
    
    
    595,699
    
    
    $
    13.832
    
    
    
    571,686
    
    
    $
    13.294
    
    
    
    498,432
    
    
    $
    11.266Options exercisable at year end
    
    
    561,949
    
    
    $
    13.395
    
    
    
    569,733
    
    
    $
    13.288
    
    
    
    461,074
    
    
    $
    11.060Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    21.113
    
    
    
    
    
    
    $
    19.679
    
    
    
    
    
    
    $
    17.915
  The following tables summarize information about employee and director stock options outstanding at
December 31, 2006:
 Options Outstanding
 Range of
    
    Shares Outstanding
    
    Weighted Average
    
    Weighted AverageExercise Price
    
    at December 31, 2006
    
    Remaining Life
    
    Exercise Price$6.900
- $13.300
    
    
    330,199
    
    
    3.79 Years
    
    $
    10.267$14.849 - $21.113
    
    
    265,500
    
    
    8.25 Years
    
    $
    18.267
 Options Exercisable
 Range of
    
    Shares Exercisable
    
    Weighted AverageExercise Price
    
    at December 31, 2006
    
    Exercise Price$6.900-$13.300
    
    
    330,199
    
    
    $
    10.267$14.849-$21.113
    
    
    231,750
    
    
    $
    17.851
  NOTE 9
 EMPLOYEE BENEFIT PLANS
 401(k) Plan
 ,
 42




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Postretirement Benefit Plan
    Supplemental Pension Plan
   43




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Benefit Obligations and Funded Status
 Year EndingDecember 31In thousands
    
    2006
    
    
    2005Change in Accumulated Postretirement Benefit ObligationAccumulated
Postretirement Benefit Obligation at the Beginning of the Year
    
    $
    909
    
    
    $
    946Service Cost
    
    
    
    
    
    
    Interest Cost
    
    
    52
    
    
    
    54Actuarial (Gain) or Loss
    
    
    4
    
    
    
    10Benefits Paid
    
    
    (106
    )
    
    
    (104
    )Plan Participants Contributions
    
    
    3
    
    
    
    4Accumulated Postretirement Benefit Obligation at the End of the Year
    
    
    862
    
    
    
    910Change in Plan AssetsFair Value of Plan Assets at the Beginning of the Year
    
    
    
    
    
    
    Benefits Paid
    
    
    (105
    )
    
    
    (104
    )Employer Contributions
    
    
    102
    
    
    
    100Plan Participants Contributions
    
    
    3
    
    
    
    4Fair Value of Assets at the End of the Year
    
    
    
    
    
    
    Net Amount RecognizedFunded Status
    
    
    (862
    )
    
    
    (910
    )Unrecognized Transition Obligation (Asset)
    
    
    60
    
    
    
    68Unrecognized Net (Gain) or Loss
    
    
    (225
    )
    
    
    (255
    )Net Amount Recognized:
    
    
    (1,027
    )
    
    
    (1,097
    )Amounts Recognized in the Statement of Financial PositionAccrued Benefit Liability
    
    
    (1,027
    )
    
    
    (1,097
    )Net Amount Recognized
    
    $
    (1,027
    )
    
    $
    (1,097
    )Weighted Average Assumptions at the End of the YearDiscount Rate
    
    
    6.00
    %
    
    
    6.00
    %Assumed Health Care Cost Trend RatesHealth Care Cost Trend Rate Assumed for Next Year
    
    
    11.00
    %
    
    
    11.00
    %Ultimate Rate
    
    
    5.00
    %
    
    
    5.00
    %Year that the Ultimate Rate is Reached
    
    
    2013
    
    
    
    2012
 Net Periodic Benefit Cost
 Year EndingDecember 31In thousands
    
    2006
    
    
    2005
    
    
    2004Interest Cost
    
    $
    51
    
    
    $
    54
    
    
    $
    57Amortization of Net (Gain) or Loss
    
    
    (27
    )
    
    
    (34
    )
    
    
    (37
    )Amortization of Transition Obligation/(Asset)
    
    
    9
    
    
    
    9
    
    
    
    9Total Net Periodic Benefit Cost
    
    $
    33
    
    
    $
    29
    
    
    $
    29Weighted Average AssumptionsDiscount Rate
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.00
    %Assumed Health Care Cost Trend RatesHealth Care
Cost Trend Rate Assumed for Current Year
    
    
    11.00
    %
    
    
    11.00
    %
    
    
    12.00
    %Ultimate Rate
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    5.00
    %Year that the Ultimate Rate is Reached
    
    
    2012
    
    
    
    2011
    
    
    
    2010
 Impact of One-Percentage-Point Change in Assumed Health Care Cost Trend Rates
 Increase
    
    
    DecreaseEffect on Service Cost & Interest Cost
    
    $
    3
    
    
    $
    (3
    )Effect on Postretirement Benefit Obligation
    
    $
    44
    
    
    $
    (40
    )
  44




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Contributions
  In thousands
    
    Other Benefits2007
    
    $
    1002008
    
    
    1002009
    
    
    1002010
    
    
    1002011
    
    
    1002012-2016
    
    
    500
 NOTE 10
        In thousands2007
    
    $
    1832008
    
    
    972009
    
    
    762010
    
    
    422011
    
    
    432012 through 2042
    
    
    1,809$
    2,250
 45




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In thousands2007
    
    $
    2,8102008
    
    
    2,8362009
    
    
    2,8282010
    
    
    2,8282011
    
    
    2,8282012 through 2021
    
    
    28,304$
    42,434
   In thousands2007
    
    
    3742008
    
    
    3752009
    
    
    3742010
    
    
    3752011
    
    
    174$
    1,672
  In thousands
    
    (unaudited)2007
    
    $
    1,2002008
    
    
    2,3802009
    
    
    2,9502010
    
    
    2,0002011
    
    
    1,400$
    9,930
  46




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NOTE 11
 GEOGRAPHIC CONCENTRATION OF CUSTOMERS
   NOTE 12
 RATE PROCEEDINGS
      47




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NOTE 13
 SALE OF LAND
  NOTE 14
 NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE
   Years Ended December 31,In thousands
    
    2006
    
    
    2005
    
    
    2004Average common shares outstanding during the
period for Basic computation
    
    
    6,055
    
    
    
    5,984
    
    
    
    5,904Dilutive effect of employee stock options
    
    
    180
    
    
    
    198
    
    
    
    195Average common shares outstanding during the
period for Diluted computation
    
    
    6,235
    
    
    
    6,182
    
    
    
    6,099
  NOTE 15
 SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
  In thousands (except
    
    First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth Quarterper share data)
    
    2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005Operating revenues
    
    $
    10,489
    
    
    $
    9,902
    
    
    $
    12,014
    
    
    $
    11,502
    
    
    $
    14,194
    
    
    $
    12,380
    
    
    $
    11,891
    
    
    $
    11,501Operating income
    
    $
    2,053
    
    
    $
    2,007
    
    
    $
    2,889
    
    
    $
    2,707
    
    
    $
    4,181
    
    
    $
    3,164
    
    
    $
    2,672
    
    
    $
    2,764Net income
applicable to
common stock
    
    $
    995
    
    
    $
    954
    
    
    $
    1,360
    
    
    $
    1,204
    
    
    $
    2,607
    
    
    $
    1,679
    
    
    $
    1,109
    
    
    $
    1,198Income per common
shareBasic
    
    $
    0.17
    
    
    $
    0.16
    
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    0.43
    
    
    $
    0.28
    
    
    $
    0.18
    
    
    $
    0.20Diluted
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.22
    
    
    $
    0.19
    
    
    $
    0.42
    
    
    $
    0.27
    
    
    $
    0.17
    
    
    $
    0.19
 48




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NOTE 16
 IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
   ,   .
   49




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##### Table of Contents




    
    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.
  50




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51




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
      
 52




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##### Table of Contents



Item 9.
 Changes in and Disagreements With Accountants on Accounting and Financial Disclosures.
  Item 9A.  Controls and Procedures.
    Managements Report on Internal Control Over Financial Reporting
   Change in Internal Control over Financial Reporting
   CHIEF EXECUTIVE OFFICER:
    
    
    
    CHIEF FINANCIAL OFFICER:/s/ DIAN C. TAYLOR

Dian C. Taylor
    
    
    
    /s/ DAVID B. SPACHT

David B. Spacht
 53




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Item 9B.
 Other Information.
  54




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Report of Independent Registered Public Accounting Firm
 
       
  55




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##### Table of Contents



Item 10.
 Directors, Executive Officers and Corporate Governance.
 Name
    
    Age
    
    PositionDian C. Taylor
    
    
    61
    
    
    Director since 1991  Chair of the Board
since July 1993, and Chief Executive
Officer and President of Artesian
Resources Corporation and its subsidiaries
since September 1992. Ms. Taylor has been
employed by the Company since August 1991.
She was formerly a consultant to the
Small Business Development Center at the
University of Delaware from February 1991
to August 1991 and Owner and President of
Achievement Resources Inc. from 1977 to
1991. Achievement Resources, Inc.
specialized in strategic planning,
marketing, entrepreneurial and human
resources development consulting. Ms.
Taylor was a marketing director for SMI,
Inc. from 1982 to 1985. Ms. Taylor is the
sister of Norman H. Taylor, Jr. and the
aunt of John R. Eisenbrey, Jr. and
Nicholle R. Taylor. She serves on the
Executive and Strategic Planning, Budget
and Finance Committees.Kenneth R. Biederman
    
    
    63
    
    
    Director since 1991  Professor of Finance
at the College of Business and Economics
of the University of Delaware, Lerner
College of Business and Economics since
May 1996. Interim Dean of the College of
Business and Economics of the University
of Delaware from February 1999 to June
2000. Dean of the College of Business and
Economics of the University of Delaware
from 1990 to 1996. Currently a Director
of the Mid -Atlantic Farm Credit
Association. Director of Chase Manhattan
Bank USA from 1993 to 1996. Formerly a
financial and banking consultant from 1989
to 1990 and President of Gibraltar Bank
from 1987 to 1989. Previously Chief
Executive Officer and Chairman of the
Board of West Chester Savings Bank;
Economist and former Treasurer of the
State of New Jersey and Staff Economist
for the United States Senate Budget
Committee. He serves on the Executive;
Audit; Strategic Planning, Budget and
Finance; Human Resources and Compensation
Committees.John R. Eisenbrey, Jr.
    
    
    51
    
    
    Director since 1993  Owner and President
of Bear Industries, Inc., a privately held
contracting firm, for more than twenty-two
years. Mr. Eisenbrey is also co-owner and
President of Peninsula Masonry Inc. Mr.
Eisenbrey is the nephew of Dian C. Taylor
and Norman H. Taylor, Jr. and the cousin
of Nicholle R. Taylor. He serves on the
Audit; Human Resources Committee; Building
and Compensation Committees.Norman H. Taylor, Jr.
    
    
    67
    
    
    Director since 2001, Manager of
Construction, Facilities, Communications
and Transportation of Artesian Water
Company, Inc. since July 1997. Mr. Taylor
has been employed by Artesian Water
Company, Inc. since 1965 and has held
various operational and supervisory
positions within the Company. Mr. Taylor
is the brother of Dian C. Taylor, the
uncle of John R. Eisenbrey, Jr. and the
father of Nicholle R. Taylor. He serves
on the Budget Committee.William C. Wyer
    
    
    60
    
    
    Director since 1991  Business Consultant
with Wyer Group, Inc. since September
2005. Previously, Mr. Wyer served as
Managing Director of Wilmington
Renaissance Corporation (formerly
Wilmington 2000) from January 1998 to
August 2005. Wilmington Renaissance
Corporation is a private organization
seeking to revitalize the City of
Wilmington, Delaware. Mr. Wyer has served
as a Director and member of the Audit
Committee of Nations Motor Bank, FSB since
August 2001. President
 56




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##### Table of Contents



of All Nation Life
Insurance and Senior Vice President of
Blue Cross/Blue Shield of Delaware from
September 1995 to January 1998. Managing
Director of Wilmington 2000 from May 1993
to September 1995. Formerly President of
Wyer Group, Inc. from 1991 to 1993 and
Commerce Enterprise Group from 1989 to
1991, both of which are
management-consulting firms specializing
in operations reviews designed to increase
productivity, cut overhead and increase
competitiveness, and President of the
Delaware State Chamber of Commerce from
1978 to 1989. He serves on the Executive;
Audit; Strategic Planning, Budget and
Finance; Human Resources and Compensation
Committees.Joseph A. DiNunzio
    
    
    44
    
    
    Senior Vice President and Corporate
Secretary of Artesian Resources
Corporation and its Subsidiaries since
March 2000. Mr. DiNunzio served as Vice
President and Secretary of Artesian
Resources Corporation and its Subsidiaries
since January 1995. Mr. DiNunzio has been
employed by the Company since 1989 and has
held various executive and management
level positions within the Company. Prior
to joining Artesian, Mr. DiNunzio was
employed by PriceWaterhouseCoopers LLP
from 1984 to 1989.Bruce P. Kraeuter
    
    
    57
    
    
    Vice President of Engineering and
Planning. Mr. Kraeuter has served as an
officer since March 1995. He currently
serves as an officer of Artesian Resources
Corporation, Artesian Water Company, Inc.,
Artesian Wastewater Management, Inc.,
Artesian Utility Development, Inc. and
Artesian Water Pennsylvania, Inc. Mr.
Kraeuter has been employed by the Company
since July 1989 and has held various
executive and operational positions within
the Company. Mr. Kraeuter served as
Senior Engineer with the Water Resources
Agency for New Castle County, Delaware
from 1974 to 1989.John J. Schreppler, II
    
    
    50
    
    
    Vice President, Assistant Secretary and
General Counsel of Artesian Resources
Corporation and its Subsidiaries since
July 2000. Prior to joining the Company,
he practiced law in Wilmington, Delaware
as John J. Schreppler, II P.A. from
February 1999, and before that as a
partner in The Bayard Firm from 1988 to
1999.David B. Spacht
    
    
    47
    
    
    Vice President, Chief Financial Officer
and Treasurer of Artesian Resources
Corporation and its Subsidiaries since
January 1995. The Company has employed
Mr. Spacht since 1980 and he has held
various executive and management level
positions within the Company.Nicholle R. Taylor
    
    
    39
    
    
    Vice President. Ms. Taylor has served as
an officer since May 2004. She currently
serves as an officer of Artesian Resources
Corporation and its Subsidiaries. Ms.
Taylor has been employed by the Company
since 1991 and has held various management
level and operational positions within the
Company. Ms. Taylor is the daughter of
Norman H. Taylor, Jr., the niece of Dian
C. Taylor and the cousin of John R.
Eisenbrey, Jr.John M. Thaeder
    
    
    49
    
    
    Vice President of Operations. Mr. Thaeder
has served as an officer since February
1998. He currently serves as an officer
of Artesian Resources Corporation,
Artesian Water Company, Inc., Artesian
Wastewater Management, Inc., Artesian
Water Pennsylvania, Inc. and Artesian
Utility Development, Inc. Prior to
joining the Company, Mr. Thaeder was
employed by Hydro Group, Inc. from 1996 to
1998 as Southeastern District Manager of
Sales and Operations from Maryland to
Florida. During 1995 and 1996, Mr.
Thaeder was Hydro Groups Sales Manager of
the Northeast Division with sales
responsibilities from
 57




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Maine to Florida.
From 1988 to 1995, he served as District
Manager of the Layne Well and Pump
Division of Hydro Group.
 Corporate Governance
   Director Compensation
  Director Compensation Table  2006
 Fees Earned or
    
    OptionPaid in
    
    AwardsCash
    
    ($)
    
    TotalName
    
    ($)
    
    (1)
    
    ($)Kenneth R. Biederman
    
    
    43,150
    
    
    
    16,412
    
    
    
    59,562John R. Eisenbrey, Jr.
    
    
    46,650
    
    
    
    16,412
    
    
    
    63,062Norman H. Taylor, Jr.
    
    
    33,400
    
    
    
    16,412
    
    
    
    49,812William C. Wyer
    
    
    48,400
    
    
    
    16,412
    
    
    
    64,812
 
 (1)
    
    On May 12, 2006, each Director received an option grant of 6,750 shares of Class A Non-voting
Common stock at an exercise price of that days fair market value (last reported sale price on
that date), exercisable in one year from the date of grant and with a term of ten years. The
dollar amount recognized for financial statement reporting purposes with respect to the fiscal
year, computed in accordance with Statement of Financial Accounting Standard No. 123R, based
upon the assumptions made in the valuation as described in Note 1 of the 2006 Financial
Statements is reflected in the Option Awards column in the table above. The aggregate
number of option awards outstanding at December 31, 2006 for each Directors is: Option Shares Outstanding atDecember 31, 2006Kenneth R. Biederman
    
    
    72,000John R. Eisenbrey, Jr.
    
    
    48,889Norman H. Taylor, Jr.
    
    
    45,000William C. Wyer
    
    
    69,500
 58




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Independence
  Audit Committee
  Compensation Committee
  Consideration of Director Candidates
  Code of Ethics
  59




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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
  
 Item 11.  Executive Compensation.
 Compensation Discussion and Analysis
       60




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Compensation Committee Report
  
 61




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Summary Compensation Table for 2006:
 Stock
    
    
    
    All OtherName and Principal
    
    
    
    
    
    Bonus
    
    Awards
    
    Option Awards
    
    Compensa-tionPosition
    
    Year
    
    Salary ($)
    
    ($)
    
    ($)(1)
    
    ($)(2)
    
    ($)(1),(3)(4),(5)
    
    Total ($)Dian C. Taylor, Chair,
    
    2006
    
    320,369
    
    1,330
    
    47,400
    
    16,412(2)
    
    118,127
    
    503,638CEO & PresidentDavid B. Spacht, Vice
    
    2006
    
    178,308
    
    4,150
    
    23,700
    
    N/A
    
    41,310
    
    247,468President, Chief
Financial Officer &
TreasurerJoseph A. DiNunzio,
    
    2006
    
    231,631
    
    700
    
    23,700
    
    N/A
    
    41,541
    
    297,571Sr. Vice President &
SecretaryBruce P. Kraeuter, Vice
    
    2006
    
    185,385
    
    1,330
    
    23,700
    
    N/A
    
    38,842
    
    249,257President of
Engineering &
PlanningJohn M. Thaeder, Vice
    
    2006
    
    192,308
    
    700
    
    23,700
    
    N/A
    
    33,970
    
    250,678President of Operations
 
 (1)
    
    On April 26, 2006, the Compensation Committee awarded stock bonuses to executive officers
under the 2005 Equity Compensation Plan as reflected in the Bonus column above, along with a
cash payment to reimburse for the payment of taxes resulting from the stock bonus, which cash
payment is included in the All Other Compensation column above. The shares awarded were
valued at the closing share price on the date of award. The number of Class A Non-voting
Common stock shares, as adjusted for a three for two stock split on June 30, 2006, and cash
awarded were: Shares
    
    Reimbursementfor TaxDian C. Taylor
    
    2,250
    
    $33,065David B. Spacht
    
    1,125
    
    $18,457Joseph A. DiNunzio
    
    1,125
    
    $17,238Bruce P. Kraeuter
    
    1,125
    
    $18,418John M. Thaeder
    
    1,125
    
    $18,377
 
 (2)
    
    On May 12, 2006, Ms. Dian C. Taylor received an option grant of 6,750 shares of Class A
Non-voting Common stock at an exercise price of that days fair market value (last reported
sale price on that date), exercisable in one year from the date of grant and with a term of
ten years. The dollar amount recognized for financial statement reporting purposes with
respect to the fiscal year, computed in accordance with Statement of Financial Accounting
Standard No. 123, based upon the assumptions made in the valuation as described in Note 1 of
the 2006 Financial Statements is reflected in the Stock Options column in the table above.(3)
    
    In addition to the cash payment to reimburse for the payment of taxes resulting from stock
bonuses granted to executive officers as noted above, the All Other Compensation column in
the table above includes:Under the defined contribution 401(k) Plan, the Company contributes two percent of an
eligible employees gross earnings. The Company also matches fifty percent of the first six
percent of the employees gross earnings that the employee contributes to the 401(k) Plan.
In addition, all employees hired before April 26, 1994 and under the age of sixty at that
date are eligible for additional contributions to the 401(k) Plan. 62




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Employees over the age of sixty at that date receive Company paid medical, dental and life
insurance benefits upon retirement. The Company will not provide such benefits to any other
current or future employees. Company contributions to the 401(k) Plan under terms available
to all other employees based upon their years of service and plan eligibility were made in
the amounts of: Dian C. Taylor
    
    $
    29,054David B. Spacht
    
    $
    19,613Joseph A. DiNunzio
    
    $
    21,586Bruce P. Kraeuter
    
    $
    18,538John M. Thaeder
    
    $
    9,615
 
 (4)
    
    Executive officers are reimbursed for eligible medical expenses not otherwise covered by the
Companys medical insurance plan under the Officers Medical Reimbursement Plan. Amounts
reimbursed are included in the All Other Compensation column in the table above. Ms. Taylor
received reimbursements of $15,821.(5)
    
    Also included in the All Other Compensation column in the table above are amounts
received by Ms. Taylor as compensation for attendance at meetings of the Board and its
committees totaling $28,150, security provided at her personal residence totaling $10,728
and personal use of a company-owned vehicle.Messrs. Kraueter and Thaeder are also provided with the personal use of a company-owned
vehicle. 63




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##### Table of Contents



Grants of Plan-Based Awards Table  2006
 All Other
    
    All Other Option
    
    ExerciseStock Awards:
    
    Awards:
    
    or Base
    
    GrantNumber of
    
    Number of
    
    Price of
    
    Date FairShares of
    
    Securities
    
    Option
    
    Value of Stock &Stock or Units
    
    Underlying
    
    Awards
    
    Option AwardsName
    
    Grant Date
    
    (#)
    
    Options (#)
    
    ($/share)
    
    ($)Dian C. Taylor
    
    April 26, 2006
    
    2,250
    
    N/A
    
    
    
    47,400May 12, 2006
    
    N/A
    
    6,750
    
    21.113
    
    25,710David B. Spacht
    
    April 26, 2006
    
    1,125
    
    N/A
    
    
    
    23,700Joseph A. DiNunzio
    
    April 26, 2006
    
    1,125
    
    N/A
    
    
    
    23,700Bruce P. Kraeuter
    
    April 26, 2006
    
    1,125
    
    N/A
    
    
    
    23,700John M. Thaeder
    
    April 26, 2006
    
    1,125
    
    N/A
    
    
    
    23,700
  (i)
    
    The expiration of the 90-day period after Ms. Taylor ceases to
provide service to the Company, if the termination of service is for
any reason other than Disability, death or Cause (as defined in the
award);(ii)
    
    The expiration of the one-year period after Ms. Taylor ceases
to provide service to the Company on account of her Disability;(iii)
    
    The expiration of the one-year period after Ms. Taylor
ceases to provide service to the Company, if she dies while providing
service to the Company or within 90 days after the she ceases to
provide such services on account of a termination described in (i)
above; or(iv)
    
    The date on which Ms. Taylor ceases to provide service to the
Company for Cause. In addition, notwithstanding the prior provisions,
if Ms. Taylor engages in conduct that constitutes Cause after her
employment or service terminates, the Option shall immediately
terminate.
 64




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##### Table of Contents



Outstanding Equity Awards at Fiscal Year-End Table  2006
 Option AwardsNumber of SecuritiesNumber ofSecurities
    
    
    Underlying
    
    Option
    
    OptionUnderlying Unexercised
    
    
    Unexercised Options
    
    Exercise
    
    ExpirationName
    
    Options(#) Exercisable
    
    
    (#) Unexercisable
    
    Price($)
    
    DateDian C. Taylor
    
    
    6,750
    
    
    0
    
    6.900
    
    5/28/20076,750
    
    
    0
    
    7.613
    
    5/27/20086,750
    
    
    0
    
    8.500
    
    5/18/20096,750
    
    
    0
    
    9.275
    
    5/31/20106,750
    
    
    0
    
    9.760
    
    5/30/20116,750
    
    
    0
    
    12.400
    
    6/5/20126,750
    
    
    0
    
    13.300
    
    5/21/20136,750
    
    
    0
    
    16.134
    
    5/26/201411,250
    
    
    0
    
    19.700
    
    12/20/20150
    
    
    6,750 (1)
    
    21.113
    
    5/12/2016David B. Spacht
    
    
    1,741
    
    
    0
    
    7.613
    
    5/27/20085,425
    
    
    0
    
    9.333
    
    5/18/20096,750
    
    
    0
    
    10.278
    
    5/31/20106,750
    
    
    0
    
    10.845
    
    5/30/20116,750
    
    
    0
    
    12.400
    
    6/5/20126,750
    
    
    0
    
    14.849
    
    5/21/20136,750
    
    
    0
    
    16.134
    
    5/26/201411,250
    
    
    0
    
    19.700
    
    12/20/2015Joseph A. DiNunzio
    
    
    6,750
    
    
    0
    
    7.613
    
    5/27/20085,625
    
    
    0
    
    9.333
    
    5/18/20096,750
    
    
    0
    
    10.278
    
    5/31/201011,250
    
    
    0
    
    10.845
    
    5/30/20116,750
    
    
    0
    
    12.400
    
    6/5/20126,750
    
    
    0
    
    14.849
    
    5/21/20136,750
    
    
    0
    
    16.134
    
    5/26/201411,250
    
    
    0
    
    19.700
    
    12/20/2015Bruce P. Kraeuter
    
    
    6,750
    
    
    0
    
    7.613
    
    5/27/20083,750
    
    
    0
    
    9.333
    
    5/18/20096,750
    
    
    0
    
    10.278
    
    5/31/20106,750
    
    
    0
    
    10.845
    
    5/30/20116,750
    
    
    0
    
    12.400
    
    6/5/20126,750
    
    
    0
    
    14.849
    
    5/21/20136,750
    
    
    0
    
    16.134
    
    5/26/201411,250
    
    
    0
    
    19.700
    
    12/20/2015John M. Thaeder
    
    
    4,500
    
    
    0
    
    7.613
    
    5/27/20082,669
    
    
    0
    
    9.333
    
    5/18/20096,750
    
    
    0
    
    10.278
    
    5/31/20106,750
    
    
    0
    
    10.845
    
    5/30/20116,750
    
    
    0
    
    12.400
    
    6/5/20126,750
    
    
    0
    
    14.849
    
    5/21/20136,750
    
    
    0
    
    16.134
    
    5/26/201411,250
    
    
    0
    
    19.700
    
    12/20/2015
 
 (1)
    
    The option grant for 6,750 will vest on May 12, 2007. 65




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Option Exercises and Stock Vested Table  2006
 Option Awards
    
    
    Stock AwardsNumber of
    
    
    Value
    
    
    Number of
    
    
    ValueShares Acquired
    
    
    Realized on
    
    
    Shares Acquired
    
    
    Realized onName
    
    on Exercise (#)
    
    
    Exercise ($)
    
    
    on Vesting (#)
    
    
    Vesting ($)Dian C. Taylor
    
    
    0
    
    
    
    0
    
    
    
    2,250
    
    
    
    47,400David B. Spacht
    
    
    3,152
    
    
    
    47,623
    
    
    
    1,125
    
    
    
    23,700Joseph A. DiNunzio
    
    
    0
    
    
    
    0
    
    
    
    1,125
    
    
    
    23,700Bruce P. Kraeuter
    
    
    150
    
    
    
    1,560
    
    
    
    1,125
    
    
    
    23,700John M. Thaeder
    
    
    576
    
    
    
    6,090
    
    
    
    1,125
    
    
    
    23,700
 
 Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  Class A Non-Voting
    
    
    Class B CommonCommon Stock(1)
    
    
    Stock(1)Shares
    
    
    Percent(2)
    
    
    Shares
    
    
    Percent(2)Dian C. Taylor(3)
    
    
    139,537
    
    
    
    2.6
    
    
    
    157,722
    
    
    
    17.9664 Churchmans Road
Newark, Delaware 19702Kenneth R. Biederman (3)(4)
    
    
    76,125
    
    
    
    1.4John R. Eisenbrey, Jr. (3)(5)(6)
    
    
    87,890
    
    
    
    1.7
    
    
    
    45,707
    
    
    
    5.215 Albe Drive
Newark, Delaware 19702Norman H. Taylor, Jr. (3) (7)
    
    
    76,658
    
    
    
    1.5
    
    
    
    274,472
    
    
    
    31.11597 Porter Road
Bear, Delaware 19701William C. Wyer(3)
    
    
    72,250
    
    
    
    1.4Joseph A. DiNunzio (3) (8)
    
    
    75,693
    
    
    
    1.4
    
    
    
    103
 66




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##### Table of Contents



Class A Non-Voting
    
    
    Class B CommonCommon Stock(1)
    
    
    Stock(1)Shares
    
    
    Percent(2)
    
    
    Shares
    
    
    Percent(2)Bruce P. Kraeuter (3)
    
    
    77,972
    
    
    
    1.5David B. Spacht (3)
    
    
    59,271
    
    
    
    1.1
    
    
    
    189John M. Thaeder (3)
    
    
    63,411
    
    
    
    1.2
    
    
    
    1,350Louisa
Taylor Welcher (9)
    
    
    52,442
    
    
    
    1.0
    
    
    
    136,006
    
    
    
    15.4219 Laurel Avenue
Newark, DE 19711Directors and Executive
    
    
    799,078
    
    
    
    13.9
    
    
    
    485,934
    
    
    
    55.1Officers as a Group (11
Individuals)(3)
 
 (1)
    
    The nature of ownership consists of sole voting and investment power unless otherwise
indicated. The amount also includes all shares issuable to such person or group upon the
exercise of options held by such person or group to the extent such options are
exercisable within 60 days after February 21, 2007.(2)
    
    The percentage of the total number of shares of the class outstanding is shown where that
percentage is one percent or greater. Percentages for each person are based on the
aggregate number of shares of the applicable class outstanding as of February 21, 2007,
and all shares issuable to such person upon the exercise of options held by such person,
to the extent such options are exercisable within 60 days of that date.(3)
    
    Includes options to purchase shares of the Companys Class A Stock, as follows: Ms. Taylor
(62,250 shares); Mr. Biederman (62,250 shares); Mr. Eisenbrey (42,139 shares); Mr. Taylor
(38,250 shares); Mr. Wyer (58,750 shares); Mr. DiNunzio (61,875 shares); Mr. Kraeuter
(55,500 shares); Mr. Spacht (52,165 shares); and Mr. Thaeder (42,457 shares).(4)
    
    13,875 shares were pledged as collateral for Mr. Biedermans margin account.(5)
    
    39,611 shares were pledged by Mr. Eisenbrey, Jr. as collateral for a loan.(6)
    
    Includes 780 shares of the Class B Stock owned by a trust, of which Mr. Eisenbrey, Jr. is
a trustee and has a beneficial ownership interest, and 1,555 shares of the Class B Stock
held in custodial accounts for Mr. Eisenbrey, Jr.s daughters.(7)
    
    Includes 1,615 shares of the Class B Stock and 452 shares of the Class A Stock owned by
Mr. Taylors wife for which Mr. Taylor disclaims beneficial ownership.(8)
    
    Includes 30 shares of the Class A Stock held in custodial accounts for Mr. DiNunzios sons.(9)
    
    Includes 144 shares of the Class B Stock held jointly by Ms. Welchers husband and son,
and 359 shares of the Class A Stock held by Ms. Welchers husband for which Ms. Welcher
disclaims beneficial ownership. 67




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##### Table of Contents



Item 13.  Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14.  Principal Accountant Fees and Services.
 Fees Billed by Independent Registered Public Accounting Firm
   (In thousands)
    
    2006
    
    
    2005Audit Fees
    
    $
    
    
    
    $
    298Audit-Related Fees
    
    
    17
    
    
    
    46Tax Fees
    
    
    
    
    
    
    30All Other Fees
    
    
    
    
    
    
    Total Fees
    
    $
    17
    
    
    $
    374
  (In thousands)
    
    2006
    
    
    2005Audit Fees
    
    $
    370
    
    
    $
    55Audit-Related Fees
    
    
    
    
    
    
    30Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    Total Fees
    
    $
    370
    
    
    $
    85
  Audit Fees:
 Audit-Related Fees
 Tax Fees:
 68




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##### Table of Contents



All Other Fees:
   69




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##### Table of Contents



Item 15.  Exhibits, Financial Statements Schedules.
 Page(s)*The following documents are filed as part of this report:(1) Financial Statements:Reports of Independent Registered Public Accountants
    
    
    52 - 53Consolidated Balance Sheets at December 31, 2006 and 2005
    
    
    28Consolidated
Statements of Operations for the three years ended December 31,
2006
    
    
    29Consolidated
Statements of Cash Flows for the three years ended December 31, 2006
    
    
    30Consolidated Statements of Changes in Stockholders Equity for the
three years
ended December 31, 2006
    
    
    31 - 32Notes to Consolidated Financial Statements
    
    
    33 - 51(2) Financial Statement Schedule:Schedule II: Valuation and Qualifying Accounts
    
    
    79(3) Exhibits: see the exhibit list below
    
    
    72 - 73
 
 *
    
    Page number shown refers to page number in this Report on Form 10-K 70




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##### Table of Contents



EXHIBIT LISTExhibitNumber

    Description3.1
    
    Restated Certificate of Incorporation of the Company effective April 28, 2004 incorporated by reference to
Exhibit 3.1 filed with the Companys Form 10-Q for the quarterly period ended March 31, 2004.3.2
    
    By-laws of the Company effective March 26, 2004 incorporated by reference to Exhibit 3.3 filed with the
Companys Form 10-Q for the quarterly period ended March 31, 2004.4.1
    
    Eighteenth Supplemental Indenture dated as of August 1, 2005, between Artesian Water Company, Inc., subsidiary
of the Company, and Wilmington Trust Company, as Trustee.
Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005.4.2
    
    Seventeenth supplemental Indenture dated as of December 1, 2003 between Artesian Water Company, Inc.,
subsidiary of the Company, and the Wilmington Trust Company, as Trustee.
Incorporated by reference to Exhibit 4.1 filed with the Companys Annual Report on Form 10-K for the year
ended December 31, 2003.4.3
    
    Sixteenth supplemental Indenture dated as of January 31, 2003 between Artesian Water Company, Inc.,
subsidiary of the Company, and the Wilmington Trust Company, as Trustee.
Incorporated by reference to Exhibit 4.2 filed with the Companys Annual Report on Form 10-K for the year
ended December 31, 2003.4.4
    
    Fifteenth supplemental Indenture dated as of December 1, 2000 between Artesian Water Company, Inc.,
subsidiary of the Company, and the Wilmington Trust Company, as Trustee.
Incorporated by reference to Exhibit 4.1 filed with the Companys Form 10-Q for the quarterly period ended
March 31, 2002.4.5
    
    Thirteenth and Fourteenth Indentures dated as of June 17, 1997 between Artesian Water
Company, Inc., subsidiary of the Company, and the Wilmington Trust Company, as Trustee.
Incorporated by reference to Exhibit 4 filed with the Companys Form 10-Q for the quarterly period
ended June 30, 1997.4.6
    
    Twelfth Supplemental Indenture dated as of December 5, 1995 between Artesian Water
Company, Inc. subsidiary of the Company and Wilmington Trust Company, as Trustee.
Incorporated by reference to Exhibit 4(a) filed with the Companys Annual Report
on Form 10-K for the year ended December 31, 1995.4.7
    
    Eleventh Supplemental Indenture dated as of February 16, 1993 between Artesian Water
Company, Inc., subsidiary of the Company and Principal Mutual Life Insurance Company.
Incorporated by reference to Exhibit 4(a) filed with the Companys Annual Report on Form
10-K for the year ended December 31, 1992.4.8
    
    Tenth Supplemental Indenture dated as of April 1, 1989 between Artesian Water Company,
Inc., subsidiary of the Company, and Wilmington Trust Company, as Trustee. Incorporated
by reference to Exhibit 4 (a) filed with the Companys Registration Statement on Form 10
filed April 30, 1990 and as amended by Form 8-K filed on June 19, 1990.10.1
    
    Agreement of Sale between Artesian Development Corporation and The Commonwealth Group, dated as of August 5,
2005. Incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005.
 71




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##### Table of Contents



ExhibitNumber
    Description10.2
    
    Artesian Resources Corporation 2005 Equity Compensation Plan. Incorporated by reference to Exhibit 4.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. **10.3
    
    Amended and Restated Artesian Resources Corporation 1992 Non-Qualified Stock Option Plan, as amended.
Incorporated by reference to Exhibit 10.4 filed with the Companys Form 10-Q for the quarterly period ended
June 30, 2003.**10.4
    
    Artesian Resources Corporation Cash and Stock Bonus Compensation Plan for Officers incorporated by reference
to Exhibit 10(d) filed with the Companys Annual Report on Form 10-K for the year ended December 31, 1993.**10.5
    
    Artesian Resources Corporation Incentive Stock Option Plan. Incorporated by reference to Exhibit 10(e) filed
with the Companys Annual Report on Form 10-K for the year ended December 31, 1995.**10.6
    
    Officers Medical Reimbursement Plan dated May 27, 1992. Incorporated by reference to Exhibit 10.6 filed with
the Companys Annual Report on Form 10-K/A for the year ended December 31, 2001.**21
    
    Subsidiaries of the Company as of December 31, 2006.23.1
    
    Consent of BDO Seidman LLP23.2
    
    Consent of KPMG LLP24.1
    
    Power of Attorney (included on signature page).31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 **
    
    Compensation plan or arrangement required to be filed or incorporated as an exhibit. 72




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##### Table of Contents



Date: March 16, 2007
    
    By: /s/ DAVID B. SPACHT

David B. Spacht, Vice President, ChiefFinancial Officer and Treasurer
  Signature
    
    Title
    
    DatePrincipal Executive Officer:/s/ DIAN C. TAYLORDian C. Taylor
    
    President and Chief Executive Officer
    
    March 16, 2007Principal Financial and Accounting Officer:/s/ DAVID B. SPACHTDavid B. Spacht
    
    Vice President, Chief Financial Officer
    
    March 16, 2007and TreasurerDirectors:/s/ DIAN C. TAYLORDian C. Taylor
    
    Director
    
    March 16, 2007/s/ NORMAN H. TAYLOR, JR.Norman H. Taylor, Jr.
    
    Director
    
    March 16, 2007/s/ KENNETH R. BIEDERMANKenneth R. Biederman
    
    Director
    
    March 16, 2007/s/ WILLIAM C. WYERWilliam C. Wyer
    
    Director
    
    March 16, 2007/s/ JOHN R. EISENBREY, JR.John R. Eisenbrey, Jr.
    
    Director
    
    March 16, 2007
 73




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##### Table of Contents



ExhibitNumber
    
    Description3.1
    
    Restated Certificate of Incorporation of the Company effective April 28, 2004 incorporated by reference to Exhibit 3.1
filed with the Companys Form 10-Q for the quarterly period ended March 31, 2004.3.2
    
    By-laws of the Company effective March 26, 2004 incorporated by reference to Exhibit 3.3 filed with the Companys Form 10-Q
for the quarterly period ended March 31, 2004.4.1
    
    Eighteenth Supplemental Indenture dated as of August 1, 2005, between Artesian Water Company, Inc., subsidiary of the
Company, and Wilmington Trust Company, as Trustee.
Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2005.4.2
    
    Seventeenth supplemental Indenture dated as of December 1, 2003 between Artesian Water Company, Inc., subsidiary of the
Company, and the Wilmington Trust Company, as Trustee.
Incorporated by reference to Exhibit 4.1 filed with the Companys Annual Report on Form 10-K for the year ended December
31, 2003.4.3
    
    Sixteenth supplemental Indenture dated as of January 31, 2003 between Artesian Water Company, Inc.,
subsidiary of the Company, and the Wilmington Trust Company, as Trustee.
Incorporated by reference to Exhibit 4.2 filed with the Companys Annual Report on Form 10-K for the year ended December
31, 2003.4.4
    
    Fifteenth supplemental Indenture dated as of December 1, 2000 between Artesian Water Company, Inc.,
subsidiary of the Company, and the Wilmington Trust Company, as Trustee.
Incorporated by reference to Exhibit 4.1 filed with the Companys Form 10-Q for the quarterly period ended March 31, 2002.4.5
    
    Thirteenth and Fourteenth Indentures dated as of June 17, 1997 between Artesian Water
Company, Inc., subsidiary of the Company, and the Wilmington Trust Company, as Trustee.
Incorporated by reference to Exhibit 4 filed with the Companys Form 10-Q for the quarterly period
ended June 30, 1997.4.6
    
    Twelfth Supplemental Indenture dated as of December 5, 1995 between Artesian Water
Company, Inc. subsidiary of the Company and Wilmington Trust Company, as Trustee.
Incorporated by reference to Exhibit 4(a) filed with the Companys Annual Report
on Form 10-K for the year ended December 31, 1995.4.7
    
    Eleventh Supplemental Indenture dated as of February 16, 1993 between Artesian Water
Company, Inc., subsidiary of the Company and Principal Mutual Life Insurance Company.
Incorporated by reference to Exhibit 4(a) filed with the Companys Annual Report on Form
10-K for the year ended December 31, 1992.4.8
    
    Tenth Supplemental Indenture dated as of April 1, 1989 between Artesian Water Company,
Inc., subsidiary of the Company, and Wilmington Trust Company, as Trustee. Incorporated
by reference to Exhibit 4 (a) filed with the Companys Registration Statement on Form 10
filed April 30, 1990 and as amended by Form 8-K filed on June 19, 1990.10.1
    
    Agreement of Sale between Artesian Development Corporation and The Commonwealth Group, dated as of August 5, 2005.
Incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2005.10.2
    
    Artesian Resources Corporation 2005 Equity Compensation Plan. Incorporated by reference to Exhibit 4.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. **
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##### Table of Contents



ExhibitNumber
    
    Description10.3
    
    Amended and Restated Artesian Resources Corporation 1992 Non-Qualified Stock Option Plan, as amended. Incorporated by
reference to Exhibit 10.4 filed with the Companys Form 10-Q for the quarterly period ended June 30, 2003.**10.4
    
    Artesian Resources Corporation Cash and Stock Bonus Compensation Plan for Officers incorporated by reference to Exhibit
10(d) filed with the Companys Annual Report on Form 10-K for the year ended December 31, 1993.**10.5
    
    Artesian Resources Corporation Incentive
Stock Option Plan. Incorporated by reference
to Exhibit 10(e) filed with the Companys
Annual Report on Form 10-K for the year ended
December 31, 1995.**10.6
    
    Officers Medical
Reimbursement Plan
dated May 27, 1992.
Incorporated by
reference to
Exhibit 10.6 filed
with the Companys
Annual Report on
Form 10-K/A for the
year ended December
31, 2001.**21
    
    Subsidiaries of the Company as of December 31, 2006.23.1
    
    Consent of BDO Seidman LLP23.2
    
    Consent of KPMG LLP24.1
    
    Power of Attorney (included on signature page).31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 **
    
    Compensation plan or arrangement required to be filed or incorporated as an exhibit. 75