ARTESIAN RESOURCES CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[x]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2003

or

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from to

Commission file number 0-18516

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

State or other jurisdiction of incorporation or organization:		Delaware

I.R.S. Employer Identification Number:		51-0002090

Address of principal executive officers:		664 Churchmans Road Newark, Delaware 19702

Registrant's telephone number, including area code:		(302) 453 - 6900

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

[x]

Yes

[ ]

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange Act.

[ ]

Yes

[x]

As of September 30, 2003, 3,298,632 shares of Class A Non-Voting Common Stock and 587,680 shares of Class B Common Stock were outstanding.

ARTESIAN RESOURCES CORPORATION
INDEX TO FORM 10-Q

Part I	-	Financial Information:

Item 1	-	Financial Statements	Page(s)

		Consolidated Balance Sheet
		September 30, 2003 and December 31, 2002	3

		Consolidated Statement of Income for the quarters ended	4
		September 30, 2003 and 2002

		Consolidated Statement of Income for
		the nine months ended September 30, 2003 and 2002	5

		Consolidated Statement of Retained Earnings
		for the nine months ended September 30, 2003 and 2002	6

		Consolidated Statement of Cash Flows for the
		nine months ended September 30, 2003 and 2002	6- 7

		Notes to the Consolidated Financial Statements	8-12

Item 2	-	Management's Discussion and Analysis of
		Financial Condition and Results of Operations	13-16

Item 3	-	Quantitative and Qualitative Disclosures about Market Risk	16

Item 4	-	Controls and Procedures	16

Part II	-	Other Information:

Item 1	-	Legal Proceedings	16-17

Item 2	-	Exhibits and Reports on Form 8-K	17

Signatures			18

Index to Exhibits			19

PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS

ARTESIAN RESOURCES CORPORATION CONSOLIDATED BALANCE SHEET (In thousands)
		(unaudited)
		September 30, 2003			December 31, 2002
ASSETS
Utility plant, at original cost less accumulated depreciation		$	178,756		$	167,338
Current assets
Cash and cash equivalents			1,615			874
Accounts receivable, net			3,423			2,743
Receivable, other			-----			3,800
Unbilled operating revenues			2,890			2,718
Materials and supplies-at cost on FIFO basis			792			712
Prepaid property taxes			1,067			651
Prepaid expenses and other			1,815			422
			11,602			11,920
Other assets
Non-utility property (less accumulated depreciation 2003-$74; 2002-$76)				334		308
Other deferred assets			1,268			1,069
			1,602			1,377
Regulatory assets, net			2,303			2,437
	$		194,263		$	183,072
			======			======
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock	$		3,886		$	2,575
Additional paid-in capital			40,861			40,341
Retained earnings			7,547			8,260
Total stockholders' equity			52,294			51,176
Preferred stock-mandatorily redeemable,
net of current portion			-----			100
Long-term debt, net of current portion			64,615			63,970
			116,909			115,246
Current liabilities
Notes payable			6,715			3,163
Current portion of long-term debt			188			421
Current portion of mandatorily redeemable preferred stock			100			100
Accounts payable			3,873			3,119
Overdraft payable			2,538			709
Income taxes payable			----			135
Deferred income taxes			355			----
Interest accrued			179			569
Customer deposits			417			410
Other			1,029			905
			15,394			9,531
Deferred credits and other liabilities
Net advances for construction			18,838			19,457
Postretirement benefit obligation			1,251			1,298
Deferred investment tax credits			851			873
Deferred income taxes			11,198			8,024
			32,138		29,652
Commitments and contingencies
Net contributions in aid of construction			29,822			28,643
		$	194,263		$	183,072
See notes to the consolidated financial statements.			=======			======

ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
(In thousands, except share and per share amounts)
		For the Quarter
		Ended September 30,
		2003		2002
OPERATING REVENUES
Water sales	$	9,021	$	9,197
Other utility operating revenue		164		171
Non-utility revenue		42		92
		9,227		9,460

OPERATING EXPENSES
Utility operating expenses		4,830		4,503
Related party expenses		43		44
Non-utility operating expenses		63		(39)
Depreciation and amortization		904		884
State and federal income taxes		653		1,015
Property and other taxes		529		502
		7,022		6,909

OPERATING INCOME		2,205		2,551
Allowance for funds used during construction		67		83
Other income, net		10		(17)

INCOME BEFORE INTEREST CHARGES		2,282		2,617

INTEREST CHARGES		1,227		1,089

NET INCOME		1,055		1,528
PREFERRED DIVIDEND REQUIREMENT		3		10

NET INCOME APPLICABLE TO COMMON STOCK	$	1,052	$	1,518
		=======		========

NET INCOME PER COMMON SHARE:
Basic	$	0.27	$	0.39*
		=======		========
Diluted	$	0.26	$	0.39*
		=======		========
CASH DIVIDEND PER COMMON SHARE	$	0.1984	$	0.1933*
		=======		========
AVERAGE COMMON SHARES OUTSTANDING:
Basic		3,884,515		3,853,547*
		=======		========
Diluted		3,984,823		3,927,842*
		=======		========
See notes to the consolidated financial statements.
*Restated for the stock split effective May 30, 2003.

ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Unaudited
(In thousands, except share and per share amounts)
		For the Nine Months
		Ended September 30,
		2003		2002
OPERATING REVENUES
Water sales	$	26,373	$	25,215
Other utility operating revenue		564		482
Non-utility revenue		281		151
		27,218		25,848

OPERATING EXPENSES
Utility operating expenses		14,294		13,805
Related party expenses		130		132
Non-utility operating expenses		161		60
Depreciation and amortization		2,640		2,504
State and federal income taxes		1,999		2,053
Property and other taxes		1,548		1,374
		20,772		19,928

OPERATING INCOME		6,446		5,920
Allowance for funds used during construction		169		366
Other income, net		41		15

INCOME BEFORE INTEREST CHARGES		6,656		6,301

INTEREST CHARGES		3,610		3,317

NET INCOME		3,046		2,984
PREFERRED DIVIDEND REQUIREMENT AND
REDEMPTION PREMIUM		69		32

NET INCOME APPLICABLE TO COMMON STOCK	$	2,977	$	2,952
		=======		========
NET INCOME PER COMMON SHARE:
Basic	$	0.77	$	0.86*
		========		========
Diluted	$	0.75	$	0.84*
		========		========
CASH DIVIDEND PER COMMON SHARE	$	0.5950	$	0.5799*
		========		========
AVERAGE COMMON SHARES OUTSTANDING:
Basic		3,875,386		3,424,904*
		========		========
Diluted		3,978,541		3,505,974*
		========		========
See notes to the consolidated financial statements.
*Restated for the stock split effective May 30, 2003.

CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Unaudited
(In thousands)
		For the Nine Months
		Ended September 30,
		2003		2002

Balance, beginning of period	$	8,260	$	7,026
Net income		3,046		2,984
		11,306		10,010
Less: Dividends		2,376		1,979
Common stock-Repurchase		83		128
Stock Split		1,300		----
Balance, end of period	$	7,547	$	7,902
		=======		=======
See notes to the consolidated financial statements.

ARTESIAN RESOURCES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
(In thousands)
		For the Nine Months
		Ended September 30,
		2003		2002
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME	$	3,046	$	2,984
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		2,640		2,389
Deferred income taxes, net		3,507		1,611
Allowance for funds used during construction		(169)		(366)
Changes in assets and liabilities:
Accounts receivable		(680)		(244)
Receivable, other		3,800		----
Unbilled operating revenue		(172)		(633)
Materials and supplies		(80)		(74)
Accrued state and federal income taxes		(135)		(121)
Prepaid property taxes		(415)		(385)
Prepaid expenses and other		(1,393)		(215)
Other deferred assets		(198)		99
Regulatory assets		134		45
Postretirement benefit obligation		(47)		(45)
Accounts payable		754		(1,355)
Interest accrued		(391)		(230)
Customer deposits and other, net		132		(267)

NET CASH PROVIDED BY OPERATING ACTIVITIES		10,333		3,193

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (net of AFUDC)		(14,352)		(15,626)
Investment in AquaStructure		-----		(33)
Proceeds from sale of assets		2		-----

NET CASH USED IN INVESTING ACTIVITIES		(14,350)		(15,659)

CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit agreement		3,551		(2,690)
Overdraft payable		1,829		1,015
Net advances and contributions in aid of construction		995		1,336
Net proceeds from stock transactions		448		15,495
Dividends		(2,376)		(1,979)
Repayment of long-term debt		(233)		(972)
Proceeds from issuance of long-term debt		644		-----
Retirement of preferred stock		(100)		(100)

NET CASH PROVIDED BY FINANCING ACTIVITIES		4,758		12,105

NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS		741		(361)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD		874		1,053

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,615	$	692
		=====		=====
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	3,963	$	3,500
		=====		=====
Income taxes paid	$	150	$	440
		=====		=====
See notes to the consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL

Artesian Resources Corporation ("Artesian Resources" or the "Company") is a non-operating holding company, whose income is derived from the earnings of our four wholly owned subsidiary companies and our one-third interest in AquaStructure Delaware, L.L.C., a Limited Liability Corporation whose primary activity is marketing wastewater services. Artesian Water Company, Inc. ("Artesian Water"), our principal subsidiary, is the oldest and largest public water utility in the State of Delaware and has been providing water service within the state since 1905. We distribute and sell water to residential, commercial, industrial, governmental, municipal and utility customers throughout Delaware. In addition, we provide services to other water utilities, including operations and billing functions, and have contract operation agreements with thirteen private and municipal water providers.

Our other water utility subsidiary, Artesian Water Pennsylvania, Inc., began operations in 2002, providing water service to a residential community, consisting of 41 homes, in Chester County. Our other two subsidiaries, neither of which is regulated, are Artesian Wastewater Management, Inc. ("Artesian Wastewater"), which provides wastewater services in Delaware, and Artesian Development Corporation, whose sole activity has been ownership of an eleven-acre parcel of land.

Stock Compensation Plans

At September 30, 2003, the Company had three stock-based compensation plans. The Company applies APB Opinion No. 25 and related interpretations in accounting for compensation expense under its plans. Accordingly, the aggregate compensation cost that has been charged against income for the three plans was $28,400 and $46,100 for the three months ended September 30, 2003 and 2002, respectively, and $47,100 and $67,700 for the nine months ended September 30, 2003 and 2002, respectively. Had compensation cost for the Company's three plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," the Company's net income and net income per common share would have been reduced to the pro-forma amounts indicated below:

		For the Quarter Ended September 30,				For the Nine Months Ended September 30,
		For the Quarter Ended September 30,				For the Nine Months Ended September 30,
		2003		2002		2003		2002
In thousands, except per share data
Net income applicable to common stock
As reported	$	1,052	$	1,518	$	2,977	$	2,952
Add: compensation expense included in net income (net of tax)		17		28		28		41
Deduct: compensation expense using fair value based method (net of tax)		(73)		(78)		(146)		(109)
Pro-forma	$	996	$	1,468	$	2,859	$	2,884
Basic net income per common share
As reported	$	0.27	$	0.39	$	0.77	$	0.86
Pro-forma	$	0.26	$	0.38	$	0.74	$	0.84
Diluted net income per common share
As reported	$	0.26	$	0.39	$	0.75	$	0.84
Pro-forma	$	0.25	$	0.37	$	0.72	$	0.82

NOTE 2 - REGULATORY ASSETS

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


		September 30, 2003					December 31, 2002
			(in thousands)			(in thousands)

Postretirement benefit obligation	$			1,251	$			1,298
Deferred income taxes recoverable in future rates				631				642
Expense of rate proceedings				421				497

	$			2,303	$			2,437
				=====				=====

NOTE 3 - RELATED PARTY TRANSACTIONS

The office building and shop complex utilized by Artesian Water were leased at an average annual rental of $173,000 from the former partners of White Clay Realty who now own the property jointly as tenants in common. Dian C. Taylor, Chair and Chief Executive Officer of Artesian Resources, is a tenant in common and John R. Eisenbrey, Jr., a director of Artesian Resources, is a beneficiary of a tenant in common. The rental of $173,000 is below market rates. In December 2002, Artesian Water filed a condemnation action in the Delaware Superior Court, seeking to acquire title to the office and shop complex leased by Artesian Water, known as 664 Churchmans Road, Newark, Delaware (the "Property"). Artesian Water filed this action under its statutory power of eminent domain against the owner of the Property, White Clay Realty, a Delaware Limited Partnership, and each of the limited partners. The Superior Court ruled that since White Clay Realty had no general partner, the partnership is di ssolved and all of the former partners own the Property jointly as tenants in common. A special committee of the Board of Directors of Artesian Resources, composed entirely of outside directors who have no ownership interest in the Property, made the determination to purchase the Property through the condemnation procedures. Under this procedure, if the acquisition of the Property is approved by the court, the fair market value of the Property will be determined by a panel of commissioners after an evidentiary hearing. Artesian Water's independent appraiser valued the Property to be worth $3,800,000. In December 2002, Artesian Water issued a payment to the Prothonotary for the State of Delaware for $3,800,000. As the court delayed payment until the matter is decided, the amount was refunded to Artesian Water in June 2003. Until a final determination of the condemnation, the parties agreed that Artesian Water may continue to occupy the Property under the terms of the lease with a quarterly rental paymen t of $43,361. Pursuant to a deadline set by the Superior Court, the owners of the Property submitted an independent appraisal that values the Property to be worth $4,800,000. The condemnation case was scheduled for trial on October 20, 2003, wherein the fair market value of the Property would be determined by a panel of three Commissioners after an evidentiary hearing. Prior to the commencement of the trial all parties agreed to settle the case for a purchase price of $4,500,000 to be paid by Artesian Water. The decision to settle on the part of Artesian Water was made by the Special Committee of independent directors and with the recommendation of special counsel to the Special Committee. The settlement was approved by order of the Superior Court on October 20, 2003. The Court also approved applications of two of the tenants in common (neither of whom is an officer or director of Artesian) for their expenses, totaling $50,000, to be paid by Artesian Water, to which applications Artesian Water did not object.

Expenses associated with related party transactions were as follows:

	For the Quarter Ended September 30,							For the Nine Months Ended September 30,

		2003				2002			2003			2002
		(in thousands)							(in thousands)

White Clay Realty	$		43	$			44	$		130	$		132
		====			====				====			====

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

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

		For the Quarter Ended September 30,		For the Nine Months Ended September 30,

	2003		2002	2003	2002
	(in thousands)			(in thousands)
Average common shares outstanding during
the period for Basic computation	3,885		3,854	3,875	3,425
Dilutive effect of employee stock options	100		74	104	81