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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 June 30, 2004
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 0-422
MIDDLESEX WATER COMPANY
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-1114430
(State of incorporation) (IRS employer identification no.)
1500 Ronson Road, Iselin NJ 08830
(Address of principal executive offices, including zip code)
(732) 634-1500
(Registrant's telephone number, including area code)
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.
Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
Yes [X] No [_]
The number of shares outstanding of each of the registrant's classes of common
stock, as of July 31, 2004: Common Stock, No Par Value: 11,310,894 shares
outstanding.
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INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements:
Condensed Consolidated Statements of Income 1
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statement of Cash Flows 3
Condensed Consolidated Statements of Capital Stock
and Long-term Debt 4
Condensed Consolidated Statements Comprehensive Income 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures of Market Risk 19
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURE 23
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30, Twelve Months Ended June 30,
2004 2003 2004 2003 2004 2003
----------------------------- --------------------------- ----------------------------
Operating Revenues $ 17,769,913 $ 15,997,966 $ 33,645,646 $ 30,979,339 $ 66,777,521 $ 63,157,387
------------ ------------ ------------- ------------ ------------ ------------
Operating Expenses:
Operations 9,357,580 7,793,242 18,261,671 15,604,871 35,322,899 30,785,511
Maintenance 808,459 805,824 1,670,967 1,781,678 3,418,402 3,311,488
Depreciation 1,449,469 1,338,617 2,885,699 2,618,797 5,629,629 4,973,517
Other Taxes 2,026,107 1,961,134 3,971,301 3,869,262 7,917,957 7,818,102
Income Taxes 1,018,643 991,545 1,526,002 1,621,278 3,141,942 3,881,661
----------- ------------ ------------- ------------ ------------ ------------
Total Operating Expenses 14,660,258 12,890,362 28,315,640 25,495,886 55,430,829 50,770,279
----------- ------------ ------------- ------------ ------------ ------------
Operating Income 3,109,655 3,107,604 5,330,006 5,483,453 11,346,692 12,387,108
Other Income:
Allowance for Funds Used During Construction 80,721 65,199 130,282 157,805 288,396 275,499
Other Income 117,759 22,247 137,565 42,191 226,873 235,968
Other Expense (26,440) (48,554) (29,676) (67,724) (51,883) (122,019)
----------- ------------ ------------- ------------ ------------ ------------
Total Other Income, net 172,040 38,892 238,171 132,272 463,386 389,448
Interest Charges 1,391,364 1,342,690 2,644,206 2,587,038 5,284,198 5,148,581
----------- ------------ ------------- ----------- ------------ ------------
Net Income 1,890,331 1,803,806 2,923,971 3,028,687 6,525,880 7,627,975
Preferred Stock Dividend Requirements 63,696 63,696 127,393 127,393 254,786 254,786
----------- ------------ ------------- ----------- ------------ ------------
Earnings Applicable to Common Stock $ 1,826,635 $ 1,740,110 $ 2,796,578 $ 2,901,294 $ 6,271,094 $ 7,373,189
----------- ------------ ------------- ----------- ------------ ------------
Earnings per share of Common Stock:
Basic $ 0.17 $ 0.17 $ 0.26 $ 0.28 $ 0.59 $ 0.71
Diluted $ 0.16 $ 0.17 $ 0.26 $ 0.28 $ 0.59 $ 0.71
Average Number of
Common Shares Outstanding :
Basic 11,068,164 10,459,263 10,823,630 10,419,105 10,676,299 10,374,727
Diluted 11,411,304 10,802,403 11,166,770 10,762,245 11,019,439 10,717,867
Cash Dividends Paid per Common Share $ 0.1650 $ 0.1613 $ 0.3300 $ 0.3225 $ 0.6565 $ 0.6413
1
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
2004 2003
------------- -------------
UTILITY PLANT: Water Production $ 78,289,118 $ 77,265,782
Transmission and Distribution 176,741,184 174,455,437
General 19,888,034 19,776,293
Construction Work in Progress 7,947,220 2,798,070
------------- -------------
TOTAL 282,865,556 274,295,582
Less Accumulated Depreciation 49,621,934 47,510,797
------------- -------------
UTILITY PLANT -NET 233,243,622 226,784,785
------------- -------------
NONUTILITY ASSETS - NET 4,279,649 4,147,685
CURRENT ASSETS: Cash and Cash Equivalents 3,037,476 3,005,610
Accounts Receivable 6,467,897 5,682,608
Unbilled Revenues 4,107,992 3,234,788
Materials and Supplies (at average cost) 1,635,052 1,419,142
Prepayments 1,210,277 1,009,304
------------- -------------
TOTAL CURRENT ASSETS 16,458,694 14,351,452
DEFERRED CHARGES Unamortized Debt Expense 3,207,660 3,272,783
AND OTHER ASSETS: Preliminary Survey and Investigation Charges 1,061,837 1,380,771
Regulatory Assets 8,568,256 8,216,117
Operations Contracts Fees Receivable 699,806 699,806
Restricted Cash 3,001,730 3,825,420
Other 484,422 513,116
------------- -------------
TOTAL DEFERRED CHARGES AND OTHER ASSETS 17,023,711 17,908,013
------------- -------------
TOTAL ASSETS $ 271,005,676 $ 263,191,935
------------- -------------
CAPITALIZATION AND LIABILITIES
CAPITALIZATION: Common Stock, No Par Value $ 71,163,717 $ 56,924,028
Retained Earnings 21,553,123 22,668,348
Accumulated Other Comprehensive Income,
net of tax 47,607 50,808
------------- -------------
TOTAL COMMON EQUITY 92,764,447 79,643,184
------------- -------------
Preferred Stock 4,063,062 4,063,062
Long-term Debt 98,284,081 97,376,847
------------- -------------
TOTAL CAPITALIZATION 195,111,590 181,083,093
CURRENT Current Portion of Long-term Debt 1,067,325 1,067,258
LIABILITIES: Notes Payable 4,500,000 12,500,000
Accounts Payable 5,447,149 4,777,400
Taxes Accrued 6,816,858 6,258,739
Interest Accrued 1,632,611 1,810,639
Unearned Revenues and Advanced Service Fees 834,117 602,854
Other 728,289 678,596
------------- -------------
TOTAL CURRENT LIABILITIES 21,026,349 27,695,486
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 6)
DEFERRED CREDITS: Customer Advances for Construction 11,356,023 11,711,846
Accumulated Deferred Investment Tax Credits 1,735,874 1,775,183
Accumulated Deferred Income Taxes 14,388,501 14,125,970
Employee Benefit Plans 5,062,765 5,086,988
Regulatory Liability - Cost of Utility Plant
Removal 5,088,993 4,830,308
Other 860,168 909,498
------------- -------------
TOTAL DEFERRED CREDITS 38,492,324 38,439,793
CONTRIBUTIONS IN AID OF CONSTRUCTION 16,375,413 15,973,563
------------- -------------
TOTAL CAPITALIZATION AND LIABILITIES $ 271,005,676 $ 263,191,935
------------- -------------
See Notes to Condensed Consolidated Financial Statements.
2
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, Twelve Months Ended June 30,
2004 2003 2004 2003
--------------- -------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,923,971 $ 3,028,687 $ 6,525,880 $ 7,627,975
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 3,020,567 2,766,817 5,887,613 5,359,782
Provision for Deferred Income Taxes 39,170 76,187 269,902 222,919
Allowance for Funds Used During Construction (130,282) (157,805) (288,396) (275,499)
Changes in Assets and Liabilities:
Accounts Receivable (785,289) (265,775) (173,820) (18,060)
Unbilled Revenues (873,204) (688,955) (237,946) (204,993)
Materials & Supplies (215,910) (222,584) (222,131) (234,286)
Prepayments (200,973) (557,302) 162,417 (85,865)
Other Assets (222,368) 139,282 (85,848) 45,348
Operations Contracts Receivable -- -- (699,806) (4,191)
Accounts Payable 669,749 1,596,050 1,334,130 (417,816)
Accrued Taxes 559,769 1,136,144 (242,560) 261,016
Accrued Interest (178,028) 55,005 (36,672) (123,490)
Employee Benefit Plans (24,223) 409,651 (626,623) 703,357
Unearned Revenue & Advanced Service Fees 231,263 (124,908) 542,436 (86,385)
Other Liabilities 289 (94,803) (141,339) (894,124)
----------- ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,814,501 7,095,691 11,967,237 11,875,688
----------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (9,035,216) (8,336,615) (20,272,806) (15,781,620)
Cash Surrender Value & Other Investments (57,864) -- (524,154) (4,438)
Restricted Cash 823,690 902,689 2,242,159 2,403,241
Investment in Associated Companies -- -- -- (20,618)
Proceeds from Real Estate Dispositions -- 344,972 187,950 344,972
Preliminary Survey & Investigation Charges 318,934 (435,138) 471,769 (580,028)
Other Assets 25,859 982 (22,387) 19,406
----------- ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (7,924,597) (7,523,110) (17,917,469) (13,619,085)
----------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (177,444) (160,428) (901,443) (526,855)
Proceeds from Issuance of Long-term Debt 1,084,745 10,624,932 1,665,536 10,692,282
Net Short-term Bank Borrowings (Repayments) (8,000,000) (8,675,000) (4,475,000) (3,650,000)
Deferred Debt Issuance Expenses (11,859) (184,807) (21,536) (95,417)
Common Stock Issuance Expense (303,222) -- (406,506) (3,688)
Restricted Cash -- 132 (11) 219,720
Proceeds from Issuance of Common Stock 14,239,689 2,078,949 15,770,599 2,901,703
Payment of Common Dividends (3,608,581) (3,356,579) (7,043,256) (6,647,915)
Payment of Preferred Dividends (127,393) (127,393) (254,786) (254,786)
Construction Advances and Contributions-Net 46,027 72,193 1,871,637 609,921
----------- ------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,141,962 271,999 6,205,234 3,244,965
----------- ------------ ------------ ------------
NET CHANGES IN CASH AND CASH EQUIVALENTS 31,866 (155,420) 255,002 1,501,568
----------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,005,610 2,937,894 2,782,474 1,280,906
----------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,037,476 $ 2,782,474 $ 3,037,476 $ 2,782,474
----------- ------------ ------------ ------------
*Excludes Allowance for Funds Used During Construction
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Cash Paid for Interest $ 2,895,502 $ 2,480,233 $ 5,477,147 $ 5,011,608
Interest Capitalized $ (130,282) $ (157,805) $ (288,396) $ (275,499)
Income Taxes $ 1,435,500 $ 819,897 $ 3,087,603 $ 3,434,397
----------- ------------ ------------ ------------
See Notes to Condensed Consolidated Financial Statements.
3
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
(Unaudited)
June 30, December 31,
2004 2003
-------------- ------------
Common Stock, No Par Value
Shares Authorized - 20,000,000
Shares Outstanding - 2004 - 11,309,496 $ 71,163,717 $ 56,924,028
2003 - 10,566,937
Retained Earnings 21,553,123 22,668,348
Accumulated Other Comprehensive Income, net of tax 47,607 50,808
-------------- ------------
TOTAL COMMON EQUITY 92,764,447 79,643,184
-------------- ------------
Cumulative Preference Stock, No Par Value:
Shares Authorized - 100,000
Shares Outstanding - None
Cumulative Preferred Stock, No Par Value
Shares Authorized - 140,497
Convertible:
Shares Outstanding, $7.00 Series - 14,881 1,562,505 1,562,505
Shares Outstanding, $8.00 Series - 12,000 1,398,857 1,398,857
Nonredeemable:
Shares Outstanding, $7.00 Series - 1,017 101,700 101,700
Shares Outstanding, $4.75 Series - 10,000 1,000,000 1,000,000
------------- ------------
TOTAL PREFERRED STOCK 4,063,062 4,063,062
------------- ------------
Long-term Debt
8.05%, Amortizing Secured Note, due December 20, 2021 3,100,780 3,136,531
6.25%, Amortizing Secured Note, due May 22, 2028 10,045,000 10,255,000
4.22%, State Revolving Trust Note, due December 31, 2022 374,775 192,281
3.60%, State Revolving Trust Note, due May 1, 2025 1,640,879 580,792
4.00%, State Revolving Trust Bond, due September 1, 2021 820,000 820,000
0.00%, State Revolving Fund Bond, due September 1, 2021 679,778 690,833
First Mortgage Bonds:
5.20%, Series S, due October 1, 2022 12,000,000 12,000,000
5.25%, Series T, due October 1, 2023 6,500,000 6,500,000
6.40%, Series U, due February 1, 2009 15,000,000 15,000,000
5.25%, Series V, due February 1, 2029 10,000,000 10,000,000
5.35%, Series W, due February 1, 2038 23,000,000 23,000,000
0.00%, Series X, due September 1, 2018 794,923 807,956
4.25%, Series Y, due September 1, 2018 965,000 965,000
0.00%, Series Z, due September 1, 2019 1,761,705 1,792,435
5.25%, Series AA, due September 1, 2019 2,175,000 2,175,000
0.00%, Series BB, due September 1, 2021 2,133,566 2,168,277
4.00%, Series CC, due September 1, 2021 2,360,000 2,360,000
5.10%, Series DD, due January 1, 2032 6,000,000 6,000,000
------------ ------------
SUBTOTAL LONG-TERM DEBT 99,351,406 98,444,105
------------ ------------
Less: Current Portion of Long-term Debt (1,067,325) (1,067,258)
------------ ------------
TOTAL LONG-TERM DEBT $ 98,284,081 $ 97,376,847
------------ ------------
See Notes to Condensed Consolidated Financial Statements.
4
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
2004 2003 2004 2003 2004 2003
----------- ----------- ----------- --------- ----------- -----------
Net Income $ 1,890,331 $ 1,803,806 $ 2,923,971 $ 3,028,687 $ 6,525,880 $ 7,627,975
Other Comprehensive Income:
Change in Value of Equity Investments,
Net of Income Tax (3,201) -- (3,201) -- 47,607 --
----------- ----------- ----------- --------- ----------- -----------
Other Comprehensive Income (3,201) -- (3,201) -- 47,607 --
----------- ----------- ----------- --------- ----------- -----------
Comprehensive Income $ 1,887,130 $ 1,803,806 $ 2,920,770 $ 3,028,687 $ 6,573,487 $ 7,627,975
=========== =========== =========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
MIDDLESEX WATER COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Organization - Middlesex Water Company (Middlesex) is the parent company and
sole shareholder of Tidewater Utilities, Inc. (Tidewater), Pinelands Water
Company, Pinelands Wastewater Company, Utility Service Affiliates, Inc. (USA),
Utility Service Affiliates (Perth Amboy) Inc. (USA-PA) and Bayview Water
Company. Southern Shores Water Company, LLC and White Marsh Environmental
Systems, Inc. are wholly-owned subsidiaries of Tidewater. The financial
statements for Middlesex and its wholly owned subsidiaries (the Company) are
reported on a consolidated basis. All significant intercompany accounts and
transactions have been eliminated.
The consolidated notes within the 2003 Form 10-K/A-2 are applicable to these
financial statements and, in the opinion of the Company, the accompanying
unaudited condensed consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
financial position as of June 30, 2004 and the results of operations for the
three, six, and twelve month periods ended June 30, 2004 and 2003, and cash
flows for the six and twelve month periods ended June 30, 2004 and 2003.
Information included in the Balance Sheet as of December 31, 2003, has been
derived from the Company's audited financial statements for the year ended
December 31, 2003. Certain reclassifications of prior period data have been
made to conform with current presentation.
Recent Accounting Pronouncements - In May 2004, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position (FSP) 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (FSP 106-2). FSP 106-2 provides guidance on the
accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (Medicare Drug Act) for employers who sponsor
postretirement health care plans that provide prescription drug benefits. FSP
106-2 also requires those employers to provide certain disclosures regarding
the effect of the federal subsidy provided by the Medicare Drug Act. The
Medicare Drug Act generally permits plan sponsors that provide retiree
prescription drug benefits that are "actuarially equivalent" to the benefits
of Medicare Part D to be eligible for a non-taxable federal subsidy. FSP 106-2
is effective for the first interim or annual period beginning after June 15,
2004.
Middlesex's retirees health benefit plan currently includes a prescription
drug benefit that is provided to retired employees. It is anticipated that
implementation of the new requirements will have a positive impact on the
Company's results of operations and cash flows, although the magnitude of the
impact cannot be determined with any degree of certainty at this time.
In March 2004, the Emerging Issues Task Force (EITF) reached consensus on EITF
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments" (EITF 03-1). EITF 03-1 further defines the meaning of
an "other-than-temporary impairment" and its application to debt and equity
securities. Impairment occurs when the fair value of a security is less than
its cost basis. When such a condition exists, the investor is required to
evaluate whether the impairment is other-than-temporary as defined in EITF 03-
1. When an impairment is other-than-temporary, the security must be written
down to its fair value. EITF 03-1 also requires additional annual quantitative
and qualitative disclosures for available for sale and held to maturity
impaired investments that are not other-than temporarily impaired. The Company
does not expect any material effects from the adoption of EITF 03-1 on its
financial statements.
6
Rate Matters - Effective May 27, 2004, Middlesex Water Company received approval
from the New Jersey Board of Public Utilities (BPU) for a 9.5%, or $4.3 million
increase in its water rates. This increase represents a portion of the Company's
November 2003 request for a total rate increase of 17.8% to cover the costs of
its increased capital investment, as well as maintenance and operating expenses.
Effective June 24, 2004, Pinelands Water Company and Pinelands Wastewater
Company received approval from the BPU for a combined overall rate increase of
approximately $131,000. This increase represents a portion of the Company's
December 2003 request for a total rate increase of approximately $250,000 to
help offset the increasing costs associated with capital improvements, and the
operation and maintenance of their systems.
Tidewater filed for a 24% base rate increase with the Delaware Public Service
Commission (PSC) on April 26, 2004. In the rate application, Tidewater has
projected that its net investment in rate base since April 30, 2002 through
September 30, 2004 will grow by $24.0 million to $47.9 million. These
expenditures are necessary to keep pace with double digit growth in customer
base, improvements to water treatment, fire protection and to interconnect
systems for service reliability and back-up. Tidewater has requested that the
new rates be implemented in phases, and was granted an initial 15% interim
rate increase effective on June 25, 2004. We cannot predict whether the PSC
will approve, deny or reduce the amount of our requests. If the ultimate
outcome of the PSC decision is less than the 15% interim rate increase
implemented on June 25, 2004, Tidewater will be required to refund the
difference, with interest, to its customers.
Stock Based Compensation - As permitted by SFAS No. 123, "Accounting for
Stock- Based Compensation" (SFAS No. 123), the Company elected to account for
its stock-based compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Had compensation costs for the
Company's restricted stock plan been determined based on the methodology
prescribed in SFAS No. 123, there would have been no effect on its results of
operations or cash flows.
Note 2 - Capitalization
Common Stock - We filed with the United States Securities and Exchange
Commission a registration statement on Form S-3 covering the offering of
700,000 shares of our common stock. The common stock offering was priced at
$19.80 and sold on May 6, 2004. The majority of the net proceeds of
approximately $13.3 million were used to repay most of our outstanding short-
term borrowings. During the six months ended June 30, 2004, there were 42,559
common shares (approximately $1.0 million) issued under the Company's Dividend
Reinvestment and Common Stock Purchase Plan.
Long-Term Debt - On March 24, 2004, Tidewater received approval from the PSC
to borrow $0.8 million to fund a portion of its multi-year capital program.
Subsequent to the PSC approval, Tidewater closed on a Delaware State Revolving
Fund (SRF) loan of $0.8 million. The Delaware SRF program will allow, but does
not obligate, Tidewater to draw down against a General Obligation Note for
three specific projects. Tidewater will be charged an annual fee, which is a
combination of interest charges and administrative fees, of 3.30% on the
outstanding principal amount. All unpaid principal and fees must be paid on or
before March 1, 2026.
Middlesex received approval from the BPU to issue up to $18.0 million of first
mortgage bonds through the New Jersey Environmental Infrastructure Trust under
the New Jersey SRF program. That debt financing is expected to close in early
November 2004.
7
Note 3 - Earnings Per Share
Basic earnings per share (EPS) are computed on the basis of the weighted
average number of shares outstanding. Diluted EPS assumes the conversion of
both the Convertible Preferred Stock $7.00 Series and the Convertible
Preferred Stock $8.00 Series.
(In Thousands Except for per Share Amounts)
Three Months Ended
June 30,
2004 2003
Basic: Income Shares Income Shares
- ------ ------- ------ ------ ------
Net Income $ 1,890 11,068 $ 1,804 10,459
Preferred Dividend (64) (64)
------- ------ ------- ------
Earnings Applicable to Common Stock $ 1,826 11,068 $ 1,740 10,459
Basic EPS $ 0.17 $ 0.17
Diluted:
- --------
Earnings Applicable to Common Stock $ 1,826 11,068 $ 1,740 10,459
$7.00 Series Dividend 26 179 26 179
$8.00 Series Dividend 24 164 24 164
------ ------ ------- ------
Adjusted Earnings Applicable to
Common Stock $ 1,876 11,411 $ 1,790 10,802
Diluted EPS $ 0.16 $ 0.17
Six Months Ended
June 30,
2004 2003
Basic: Income Shares Income Shares
- ------ ------- ------ ------- ------
Net Income $ 2,924 10,824 $ 3,028 10,419
Preferred Dividend (127) (127)
------- ------ ------ ------
Earnings Applicable to Common Stock $ 2,797 10,824 $ 2,901 10,419
Basic EPS $ 0.26 $ 0.28
Diluted:
- --------
Earnings Applicable to Common Stock $ 2,797 10,824 $ 2,901 10,419
$7.00 Series Dividend 52 179 52 179
$8.00 Series Dividend 48 164 48 164
------ ------ ------- ------
Adjusted Earnings Applicable to
Common Stock $ 2,897 11,167 $ 3,001 10,762
Diluted EPS $ 0.26 $ 0.28
8
Twelve Months Ended
June 30,
2004 2003
Basic: Income Shares Income Shares
- ------ ------- ------ ------- ------
Net Income $ 6,526 10,676 $ 7,628 10,375
Preferred Dividend (255) (255)
------ ------ ------- ------
Earnings Applicable to Common Stock $ 6,271 10,676 $ 7,373 10,375
Basic EPS $ 0.59 $ 0.71
Diluted:
Earnings Applicable to Common Stock $ 6,271 10,676 $ 7,373 10,375
$7.00 Series Dividend 104 179 104 179
$8.00 Series Dividend 96 164 96 164
------ ------ ------- ------
Adjusted Earnings Applicable to
Common Stock $ 6,471 11,019 $ 7,573 10,718
Diluted EPS $ 0.59 $ 0.71
Note 4 - Business Segment Data
The Company has identified two reportable segments. One is the regulated
business of collecting, treating and distributing water on a retail and
wholesale basis to residential, commercial, industrial and fire protection
customers in parts of New Jersey and Delaware. It also operates a regulated
wastewater system in New Jersey. The Company is subject to regulations as to
its rates, services and other matters by the States of New Jersey and Delaware
with respect to utility services within these States. The other segment is the
non-regulated contract services for the operation and maintenance of municipal
and private water and wastewater systems in New Jersey and Delaware. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the Consolidated Notes to the
Financial Statements in the Company's Annual Report for the period ended
December 31, 2003 filed on Form 10-K/A-2. Inter-segment transactions relating
to operational costs are treated as pass through expenses. Finance charges on
inter-segment loan activities are based on interest rates that are below what
would normally be charged by a third party lender. These inter- segment
transactions are eliminated in the Company's consolidated financial
statements.
9
(Dollars in Thousands)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
Operations by Segments: 2004 2003 2004 2003 2004 2003
- ----------------------- --------- -------- --------- -------- -------- ---------
Revenues:
Regulated $ 15,099 $ 14,118 $ 28,490 $ 27,067 $ 57,130 $ 55,277
Non - Regulated 2,701 1,904 5,216 3,948 9,768 7,939
Inter-segment Elimination (30) (24) (60) (36) (120) (59)
--------- --------- -------- -------- -------- --------
Consolidated Revenues $ 17,770 $ 15,998 $ 33,646 $ 30,979 $ 66,778 $ 63,157
--------- --------- -------- -------- -------- --------
Operating Income:
Regulated $ 3,040 $ 3,026 $ 5,113 $ 5,299 $ 10,827 $ 11,904
Non - Regulated 70 82 217 184 520 483
--------- --------- -------- -------- -------- --------
Consolidated Operating Income $ 3,110 $ 3,108 $ 5,330 $ 5,483 $ 11,347 $ 12,387
--------- --------- -------- -------- -------- --------
Net Income:
Regulated $ 1,856 $ 1,783 $ 2,781 $ 2,920 $ 6,153 $ 7,260
Non - Regulated 34 21 143 109 373 368
--------- --------- -------- -------- -------- --------
Consolidated Net Income $ 1,890 $ 1,804 $ 2,924 $ 3,029 $ 6,526 $ 7,628
--------- --------- -------- -------- -------- --------
Capital Expenditures:
Regulated $ 6,053 $ 4,304 $ 8,915 $ 7,775 $ 20,142 $ 14,860
Non - Regulated 46 235 120 561 131 922
--------- --------- -------- -------- -------- --------
Total Capital Expenditures $ 6,099 $ 4,539 $ 9,035 $ 8,336 $ 20,273 $ 15,782
--------- --------- -------- -------- -------- --------
As of As of
June 30, December 31,
2004 2003
--------- ---------
Assets:
Regulated $ 266,955 $ 259,689
Non - Regulated 5,825 5,223
Inter-segment Elimination (1,774) (1,720)
--------- ---------
Consolidated Assets $ 271,006 $ 263,192
--------- ---------
Note 5 - Short-term Borrowings
The Board of Directors has authorized lines of credit for up to an aggregate
of $40.0 million. As of June 30, 2004, the Company has established revolving
lines of credit aggregating $33.0 million that have varying expiration dates
through the remainder of 2004. At June 30, 2004, the outstanding borrowings
under these credit lines were $4.5 million at a weighted average interest rate
of 1.91%. As of that date, the Company had borrowing capacity of $28.5 million
under its credit lines.
The weighted average daily amounts of borrowings outstanding under the
Company's credit lines and the weighted average interest rates on those
amounts were $8.2 million and $18.6 million at 1.58% and 1.89% for the three
months ended June 30, 2004 and 2003, respectively. The weighted average daily
amounts of borrowings outstanding under the Company's credit lines and the
weighted average interest rates on those amounts were $10.7 million and $16.6
million at 1.57% and 2.02% for the six months ended June 30, 2004 and 2003,
respectively.
10
Note 6 - Commitments and Contingent Liabilities
A lawsuit was filed in 1998 against the Company for damages involving the
break of both a Company water line and an underground electric power cable
containing both electric lines and petroleum based insulating fluid. The
electric utility also asserted claims against the Company. The lawsuit was
settled in 2003 by agreement to submit plaintiff's claim for approximately
$1.1 million damages to binding arbitration, in which the agreed maximum
exposure of the Company is $0.3 million. While we are unable to predict the
outcome of the arbitration, we believe that we have substantial defenses. We
have not recorded any liability for the claim.
Another claim is pending involving a construction subcontractor, the Company's
general contractor and the Company concerning a major construction project. The
dispute relates to work required to be performed under a construction contract
and related subcontracts and includes payment issues and timing/delay issues.
The matter was instituted in 2001 and is pending in Superior Court, Middlesex
County, New Jersey. We have estimated our maximum exposure in this litigation to
be $4.3 million. We believe that we have substantial defenses to a number of the
asserted claims. It is reasonably possible that we may be responsible for some
portion of the amount claimed, but significantly less than the maximum. We are
unable, however, to determine this amount. Any amount in this matter, which is
determined to be due from us, will be recorded as an addition to utility plant
in service, subject to recovery in rates charged to our customers. However, the
outcome could have a material adverse effect on the Company's financial
statements if rate recovery of any related costs is not allowed by the BPU.
Note 7 - Employee Retirement Benefit Plans
Pension - The Company has a noncontributory defined benefit pension plan,
which covers substantially all employees with more than 1,000 hours of
service. In addition, the Company maintains an unfunded supplemental pension
plan for its executives. Based on the 2004 pension plan valuation, the Company
made cash contributions of $0.5 million during the current year, which is a
decrease from the $1.0 million estimate disclosed at December 31, 2003. The
Company does not anticipate the need for additional cash contributions at this
time.
Post-retirement Benefits Other Than Pensions - The Company has a post-
retirement benefit plan other than pensions for substantially all of its
retired employees. Coverage includes healthcare and life insurance. Retiree
contributions are dependent on credited years of service. Based on the 2004
postretirement benefit plan valuation, the Company expects to make total cash
contributions of $1.2 million during the current year, which is an increase
from the $1.0 million estimate disclosed at December 31, 2003. The Company
made contributions of $0.1 million during the second quarter of 2004.
11
The following table sets forth information relating to the Company's periodic
costs for its retirement plans.
(Dollars in Thousands)
Pension Benefits Other Benefits
---------------- --------------
Three Months Ended June 30,
2004 2003 2004 2003
--------- -------- ------- -----
Service Cost $ 186 $ 171 $ 106 $ 66
Interest Cost 346 339 145 121
Expected Return on Assets (372) (318) (53) (44)
Amortization of Unrecognized Losses -- -- 73 36
Amortization of Unrecognized Prior Service Cost 23 23 -- --
Amortization of Transition Obligation -- -- 34 34
-------- -------- ------- ------
Net Periodic Benefit Cost $ 183 $ 215 $ 305 $ 213
-------- -------- ------- ------
Pension Benefits Other Benefits
---------------- --------------
Six Months Ended June 30,
2004 2003 2004 2003
-------- -------- ------- -----
Service Cost $ 373 $ 342 $ 213 $ 131
Interest Cost 693 678 290 242
Expected Return on Assets (746) (636) (107) (87)
Amortization of Unrecognized Losses -- -- 146 72
Amortization of Unrecognized Prior Service Cost 46 46 -- --
Amortization of Transition Obligation -- -- 68 68
-------- ------- ------- -------
Net Periodic Benefit Cost $ 366 $ 430 $ 610 $ 426
-------- ------- ------- -------
Pension Benefits Other Benefits
---------------- --------------
Twelve Months Ended June 30,
2004 2003 2004 2003
-------- -------- ------- -----
Service Cost $ 715 $ 704 $ 344 $ 242
Interest Cost 1,371 1,328 532 474
Expected Return on Assets (1,382) (1,277) (194) (150)
Amortization of Unrecognized Losses -- -- 218 127
Amortization of Unrecognized Prior Service Cost 92 92 -- --
Amortization of Transition Obligation -- 1 135 135
-------- -------- ------- -------
Net Periodic Benefit Cost $ 796 $ 848 $ 1,035 $ 828
-------- -------- ------- -------
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements of the Company included
elsewhere herein and with the company's Annual Report on Form 10-K/A-2 for the
fiscal year ended December 31, 2003.
Forward-Looking Statements
Certain statements contained in this quarterly report are "forward-looking
statements" within the meaning of federal securities laws. The Company intends
that these statements be covered by the safe harbors created under those laws.
These statements include, but are not limited to:
- statements as to expected financial condition, performance, prospects
and earnings of the Company;
- statements regarding strategic plans for growth;
- statements regarding the amount and timing of rate increases and other
regulatory matters;
- statements regarding expectations and events concerning capital
expenditures;
- statements as to the Company's expected liquidity needs during fiscal
2004 and beyond and statements as to the sources and availability of
funds to meet its liquidity needs;
- statements as to expected rates, consumption volumes, service fees,
revenues, margins, expenses and operating results;
- statements as to the Company's compliance with environmental laws and
regulations and estimations of the materiality of any related costs;
- statements as to the safety and reliability of the Company's equipment,
facilities and operations;
- statements as to financial projections;
- statements as to the ability of the Company to pay dividends;
- statements as to the Company's plans to renew municipal franchises and
consents in the territories it serves;
- expectations as to the cost of cash contributions to fund the Company's
pension plan, including statements as to anticipated rates of return on
plan assets;
- statements as to trends; and
- statements regarding the availability and quality of our water supply.
These forward-looking statements are subject to risks, uncertainties and other
factors that could cause actual results to differ materially from future
results expressed or implied by the forward-looking statements. Important
factors that could cause actual results to differ materially from anticipated
results and outcomes include, but are not limited to:
- the effects of general economic conditions;
- increases in competition in the markets served by the Company;
- the ability of the Company to control operating expenses and to achieve
efficiencies in its operations;
- the availability of adequate supplies of water;
- actions taken by government regulators, including decisions on base
rate increase requests;
- weather variations and other natural phenomena;
- acts of war or terrorism; and
- other factors discussed elsewhere in this quarterly report.
13
Many of these factors are beyond the Company's ability to control or predict.
Given these uncertainties, readers are cautioned not to place undue reliance
on any forward-looking statements, which only speak as of the date of this
quarterly report. The Company does not undertake any obligation to release
publicly any revisions to these forward-looking statements to reflect events
or circumstances after the date of this quarterly report or to reflect the
occurrence of unanticipated events, except as may be required under applicable
securities laws.
For an additional discussion of factors that may affect the Company's business
and results of operations, see Risk Factors in our Prospectus filed on Form
424(b)(4) dated May 7, 2004.
Overview
The Company has operated as a water utility in New Jersey since 1897, and in
Delaware, through our wholly-owned subsidiary, Tidewater, since 1992. We are
in the business of collecting, treating, distributing and selling water for
domestic, commercial, municipal, industrial and fire protection purposes. We
also operate a New Jersey municipal water and wastewater system under contract
and provide wastewater services in New Jersey and Delaware through our
subsidiaries. We are regulated as to rates charged to customers for water and
wastewater services in New Jersey and for water services in Delaware, as to
the quality of water service we provide and as to certain other matters. Our
USA, USA-PA and White Marsh subsidiaries are not regulated utilities.
Our New Jersey water utility system (the "Middlesex System") provides water
services to approximately 58,000 retail customers, primarily in central New
Jersey. The Middlesex System also provides water service under contract to
municipalities in central New Jersey with a total population of approximately
267,000. Through our subsidiary, USA-PA, we operate the water supply system
and wastewater system for the City of Perth Amboy, New Jersey. Our other New
Jersey subsidiaries, Pinelands Water and Pinelands Wastewater, provide water
and wastewater services to residents in Southampton Township, New Jersey.
Our Delaware subsidiaries, Tidewater and Southern Shores, provide water
services to approximately 24,000 retail customers in New Castle, Kent, and
Sussex Counties, Delaware. Our other Delaware subsidiary, White Marsh, serves
an additional 1,900 customers in Kent and Sussex Counties.
The majority of our revenue is generated from retail and contract water
services to customers in our service areas. We record water service revenue as
such service is rendered and include estimates for amounts unbilled at the end
of the period for services provided after the last billing cycle. Fixed
service charges are billed in advance by our subsidiary, Tidewater, and are
recognized in revenue as the service is provided.
Our ability to increase operating income and net income is based significantly
on three factors: weather, adequate and timely rate increases, and customer
growth.
Recent Developments
Sale of Common Stock
On May 12, 2004, the Company closed on the public offering of 700,000 shares of
its common stock at a price of $19.80 per share. The net proceeds of the stock
offering were used to repay most of the Company's outstanding short-term
borrowings. See Liquidity and Capital Resources for additional discussion.
14
Rate Increases
Effective May 27, 2004, Middlesex Water Company received approval from the BPU
for a 9.5%, or $4.3 million increase in its water rates. This increase
represents a portion of the Company's November 2003 request for a total rate
increase of 17.8% to cover the costs of its increased capital investment, as
well as maintenance and operating expenses.
Effective June 24, 2004, Pinelands Water Company and Pinelands Wastewater
Company received approval from the BPU for a combined overall rate increase of
approximately $131,000. This increase represents a portion of the Company's
December 2003 request for a total rate increase of approximately $250,000 to
help offset the increasing costs associated with capital improvements, and the
operation and maintenance of their systems.
Tidewater filed for a 24% base rate increase with the PSC on April 26, 2004.
In the rate application, Tidewater has projected that its net investment in
rate base since April 30, 2002 through September 30, 2004 will grow by $24.0
million to $47.9 million. These expenditures are necessary to keep pace with
double digit growth in customer base, improvements to water treatment, fire
protection and to interconnect systems for service reliability and back-up.
Tidewater has requested that the new rates be implemented in phases, and was
granted an initial 15% interim rate increase effective on June 25, 2004. We
cannot predict whether the PSC will approve, deny or reduce the amount of our
requests. If the ultimate outcome of the PSC decision is less than the 15%
increase implemented on June 25, 2004, Tidewater will be required to refund
the difference, with interest, to its customers.
New Pipeline Project
During June 2004, the Company began construction of a $9.7 million raw water
pipeline from its pump station in New Brunswick, New Jersey to its Water
Treatment Plant in Edison, New Jersey. This new 60" pipeline will ensure
backup water supply and will provide security and necessary redundancy for the
Company's existing concrete supply line. The Company anticipates the pipeline
construction project will be completed by Spring 2005, and will be financed
through low interest loans obtained through the New Jersey Environmental
Infrastructure Trust.
Results Of Operations - Three Months Ended June 30, 2004
Operating revenues for the three months ended June 30, 2004 increased $1.8
million or 11.1% from the same period in 2003. Water sales improved by $0.5
million in our New Jersey systems, which was primarily a result of base rate
increases.
Revenues rose in our Delaware service territories by $0.5 million. Customer
growth in Delaware provided additional consumption sales, facility charges and
connection fees of $0.4 million, and the Distribution System Improvements
Surcharge (DSIC) accounted for $0.1 million. The DSIC is a separate rate
mechanism that allows for cost recovery of certain capital improvement costs
incurred between base rate filings.
Our new meter services venture provided $0.7 million of additional revenues.
All other operations accounted for $0.1 million of higher revenues.
While we anticipate continued growth in the number of customers and increased
water consumption among our Delaware systems, such growth and increased
consumption cannot be guaranteed. Weather conditions may adversely impact
future consumption even with an anticipated growth in the number of customers.
Our New Jersey systems are also highly dependent on the effects of weather.
Our ability to generate operating revenues by our meter services venture is
dependent upon our ability to obtain additional contracts, and there can be no
assurance that we will be the successful bidder.
15
Operating expenses increased $1.8 million or 13.7%. Operation and maintenance
expenses increased $1.6 million or 18.2%. In New Jersey, source of supply,
which is primarily purchased water, and pumping costs, which is primarily
purchased power, increased by $0.4 million. Purchased water increased as a
result of a change in the unit cost and structure and base purchases under the
raw water contract with the New Jersey Water Supply Authority and a non-
affiliated water utility. Purchased power costs are higher due to the effect
of the August 1, 2003 deregulation of electric generation in New Jersey and a
rate increase on the remaining portion of electric service. Payroll and
benefits costs, insurance and corporate governance related fees increased $0.2
million. The continued growth of our Delaware systems resulted in increases in
the cost of water treatment, insurance and additional employees and related
benefit costs of $0.2 million. The costs of our meter services venture and
wastewater operations and maintenance contracts increased $0.7 million. Costs
relating to our City of Perth Amboy contract increased by $0.1 million.
Depreciation expense increased $0.1 million or 8.3%, primarily as a result of
a higher level of utility plant in service. Since June 30, 2003, our net
investment in utility plant has increased by $18.2 million.
Other taxes increased by $0.1 million, reflecting higher taxes on taxable
gross revenues.
Other income increased $0.1 million, primarily due the recognition of a gain
on the sale of real estate that had previously been deferred pending the
outcome of the Middlesex rate case.
Net income increased by 4.8% to $1.9 million, however basic earnings per share
remained at $0.17 due to the increase in shares outstanding during the current
year, primarily due to the sale of 700,000 shares of common stock on May 12,
2004. Diluted earnings per share decreased from $0.17 to $0.16 as a result of
the increase in shares outstanding as compared to the prior year.
Results Of Operations - Six Months Ended June 30, 2004
Operating revenues for the six months ended June 30, 2004 increased $2.7
million or 8.6% from the same period in 2003. Customer growth of 10.6% in
Delaware provided additional consumption sales, facility charges and
connection fees of $0.6 million, and the DSIC helped to increase revenues by
$0.2 million. Favorable weather conditions during the current year period and
increased rates in New Jersey resulted in additional revenues of $0.6 million.
Our meter services venture contributed an additional $1.2 million. All other
revenues increased $0.1 million.
Operating expenses increased $2.8 million or 11.1%. Operation and maintenance
expenses increased $2.5 million or 14.6%. In New Jersey, source of supply and
pumping costs increased by $0.6 million, which is a result of the factors
discussed for the three-month results. Payroll and benefits costs, insurance
and corporate governance related fees increased $0.5 million. As previously
discussed, the continuing growth of our Delaware systems resulted in higher
costs of water treatment, additional employees and related benefit expenses,
insurance, and corporate governance related fees of $0.5 million.
The costs of our meter services venture and wastewater operations and
maintenance contracts increased $1.2 million. Costs relating to our City of
Perth Amboy contract decreased by $0.1 million. All other costs of operations
decreased by $0.1 million.
16
Depreciation expense increased $0.3 million or 10.2%, primarily as a result of
a higher level of utility plant in service.
Other taxes increased by $0.1 million, reflecting higher taxes on taxable
gross revenues.
Lower income taxes of $0.1 million over the prior year are attributable to
reduced operating results for 2004 as compared to 2003.
Other income increased $0.1 million as a result of a gain on the sale of real
estate discussed earlier.
Net income decreased by $0.1 million and basic and diluted earnings per share
decreased to $0.26 from $0.28 per share. The earnings per share decline was
due to the reduction in net income and the increase in the shares outstanding,
mainly due to the sale of 700,000 shares of common stock on May 12, 2004.
Results of Operations - Twelve Months Ended June 30, 2004
Operating revenues for the twelve months ended June 30, 2004 were $66.8
million, an increase of $3.6 million or 5.7%, compared to the twelve-month
period ended June 30, 2003. Customer growth of 10.6% in Delaware provided
additional consumption, connection fees and fixed services fees of $0.9
million. The DSIC contributed $0.3 million and the rate increase on April 1,
2003, accounted for $0.6 million. The Middlesex rate increase approved
effective May 27, 2004 helped increase revenues by $0.4 million.
Cool, wet weather caused consumption revenue to decline in New Jersey ($0.3
million) and Delaware ($0.1 million). Service fees from our meter services
venture and wastewater operations and maintenance contracts rose by $1.7
million. All other revenues increased by $0.1 million.
Operating expenses increased $4.7 million or 9.2%. Operations and maintenance
expenses increased $4.6 million or 13.6%. In New Jersey, water treatment,
source of supply and pumping costs increased by $1.1 million. Purchased water
increased as a result of a change in the unit cost structure and base
purchases under the raw water contract with the New Jersey Water Supply
Authority and an increase in the cost of finished water by a non-affiliated
water utility. Purchased power costs are higher due to the effect of the
August 1, 2003 deregulation of electric generation in New Jersey and a rate
increase on the remaining regulated portion of electric service. Payroll and
benefits costs, insurance and corporate governance related fees increased $0.9
million. Due to the continuing growth of our Delaware systems, the costs of
water treatment, additional employees and related benefit expenses, insurance,
bad debts, and consulting fees increased $1.0 million.
The costs of our meter services venture and wastewater operations and
maintenance contracts increased $1.5 million. Costs relating to our City of
Perth Amboy contract increased by $0.1 million. All other costs of operations
increased by $0.1 million.
Depreciation expense increased $0.7 million or 13.2%, primarily as a result of
a higher level of utility plant in service. Since June 30, 2002, our net
investment in utility plant has increased by $30.8 million.
Other taxes increased by $0.1 million, reflecting higher taxes on taxable
gross revenues.
Income taxes decreased $0.7 million due to reduced operating results as
compared to the same period in 2003.
17
Net income decreased 14.5% to $6.5 million. Basic and diluted earnings per
share decreased by $0.12 to $0.59 per share due to reduced earnings and the
increase in the number of common shares outstanding, resulting from the stock
issuance previously discussed.
Liquidity and Capital Resources
Cash flows from operations are largely based on three factors: weather,
adequate and timely rate increases, and customer growth. The effect of those
factors on net income is discussed in results of operations. For the six
months ended June 30, 2004, cash flows from operating activities decreased
$2.3 million to $4.8 million, as compared to the prior year. This decrease was
primarily attributable to larger amounts due from customers as a result
increased in operating revenues, and the timing of payments to vendors. The
$4.8 million of net cash flow from operations allowed us to fund approximately
50% of our utility plant expenditures for the period, with the remainder
funded with both short- and long-term borrowings. Due to the seasonality of
our primary business of providing regulated water service, cash flow from
operations in the first and second quarters of our fiscal year is not
necessarily an indication of our ability to generate cash to fund our capital
program or pay dividends to our shareholders.
The Company's capital program for 2004 is estimated to be $28.7 million and
includes $14.1 million for water system additions and improvements for our
Delaware systems, $6.0 million for a portion of the second raw water line to
Middlesex's primary water treatment plant, and $3.8 million for the RENEW
Program, which is our program to clean and cement line approximately nine
miles of unlined mains in the Middlesex System. There remains a total of
approximately 138 miles of unlined mains in the 730-mile Middlesex System.
Additional expenditures on the upgrade to the CJO Plant are estimated at $2.3
million. The capital program also includes $4.8 million for scheduled upgrades
to our existing systems in New Jersey. The scheduled upgrades consist of $0.8
million for mains, $0.8 million for service lines, $0.4 million for meters,
$0.3 million for hydrants, $0.2 million for computer systems and $2.3 million
for various other items.
To pay for our capital program in 2004, we will utilize internally generated
funds and funds available under existing New Jersey Environmental
Infrastructure Trust loans (currently, $2.6 million) and Delaware State
Revolving Fund loans (currently, $3.0 million), which provide low cost
financing for projects that meet certain water quality and system improvement
benchmarks. If necessary, we will also utilize short-term borrowings through
$33.0 million of available lines of credit with three commercial banks. As of
June 30, 2004, there was $4.5 million outstanding against the lines of credit.
The Company periodically issues shares of common stock in connection with its
dividend reinvestment and stock purchase plan. From time to time, the Company
may issue additional equity to reduce short-term indebtedness and for other
general corporate purposes. On November 26, 2003, we filed a registration
statement on Form S-3 covering the offering of 700,000 shares of our common
stock with the United States Securities and Exchange Commission. The common
stock offering was priced at $19.80 and closed on May 12, 2004. We used a
majority of the net proceeds to repay most of our outstanding short-term
borrowings following the closing of the stock sale.
18
Going forward into 2005 through 2006, we currently project that we will be
required to expend approximately $38.5 million for capital projects. Plans to
finance those projects are underway as we have received approval to borrow up to
$18.0 million under the New Jersey Environmental Infrastructure Trust program.
That debt financing is expected to close in early November 2004. We anticipate
that some of the capital projects in Delaware will be eligible for the Delaware
State Revolving Fund program in that state and we are pursuing those
opportunities. We also expect to use internally generated funds and proceeds
from the sale of common stock through the Dividend Reinvestment and Common Stock
Purchase Plan.
In addition to the effect of weather conditions on revenues, increases in
certain operating costs will impact our liquidity and capital resources. As
described in our overview section, we have recently received rate relief for
Middlesex and the Pinelands Companies and we have filed for rate relief for
Tidewater. There is no certainty, however, that the PSC will approve any or
all of the requested increase. The timing of any decision rendered will have
an impact on revenues and earnings and also the need of when to file for
additional rate increases.
Recent Accounting Pronouncements - In May 2004, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position (FSP) 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (FSP 106-2). FSP 106-2 provides guidance on the
accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (Medicare Drug Act) for employers who sponsor
postretirement health care plans that provide prescription drug benefits. FSP
106-2 also requires those employers to provide certain disclosures regarding
the effect of the federal subsidy provided by the Medicare Drug Act. The
Medicare Drug Act generally permits plan sponsors that provide retiree
prescription drug benefits that are "actuarially equivalent" to the benefits
of Medicare Part D to be eligible for a non-taxable federal subsidy. FSP 106-2
is effective for the first interim or annual period beginning after June 15,
2004.
Middlesex's retirees health benefit plan currently includes a prescription
drug benefit that is provided to retired employees. It is anticipated that
implementation of the new requirements will have a positive impact on the
Company's results of operations and cash flows, although the magnitude of the
impact cannot be determined with any degree of certainty at this time.
In March 2004, the Emerging Issues Task Force (EITF) reached consensus on EITF
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments" (EITF 03-1). EITF 03-1 further defines the meaning of
an "other-than-temporary impairment" and its application to debt and equity
securities. Impairment occurs when the fair value of a security is less than
its cost basis. When such a condition exists, the investor is required to
evaluate whether the impairment is other-than-temporary as defined in EITF 03-
1. When an impairment is other-than-temporary, the security must be written
down to its fair value. EITF 03-1 also requires additional annual quantitative
and qualitative disclosures for available for sale and held to maturity
impaired investments that are not other-than temporarily impaired. The Company
does not expect any material effects from the adoption of EITF 03-1 on its
financial statements.
Item 3. Quantitative and Qualitative Disclosures of Market Risk
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rates through the use of
fixed rate, long-term debt and, to a lesser extent, short-term debt. The
Company's interest rate risk related to existing fixed rate, long-term debt is
not material due to the term of the majority of our Amortizing Secured Notes
and First Mortgage Bonds, which have maturity dates ranging from 2009 to 2038.
Over the next twelve months, approximately $1.0 million of the current portion
of eleven existing long-term debt instruments will mature. Applying a
hypothetical change in the rate of interest charged by 10% on those borrowings
would not have a material effect on earnings.
19
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was conducted by the Company's Chief Executive Officer along
with the Company's Chief Financial Officer. Based upon that evaluation, the
Company's Chief Executive Officer and the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective
as of the end of the period covered by this Report. There have been no
significant changes in the Company's internal controls or in other factors,
which could significantly affect internal controls during the quarter ended
June 30, 2004.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in Company reports filed under the
Exchange Act is accumulated and communicated to management, including the
Company's Chief Executive Officer and Chief Financial Officer as appropriate,
to allow timely decisions regarding disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the Company's Annual Report on Form 10-K/A-2 for the year
ended December 31, 2003, and Quarterly Report on Form 10-Q filed for the period
ended March 31, 2004.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of the security holders during
the Company's Annual Meeting of Shareholders held on May 19, 2004:
(1) Election of Directors. Nominees for Class II, term expiring 2007:
FOR WITHHOLD
--------- --------
Annette Catino 8,806,489 86,248
Stephen H. Mundy 8,728,016 164,721
Walter G. Reinhard 8,775,571 117,116
20
(2) Appointment of Deloitte & Touche LLP as independent auditors for 2004:
FOR AGAINST ABSTAIN
--------- -------- -------
8,744,407 105,558 42,772
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31 Section 302 Certification by Dennis G. Sullivan pursuant to Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934.
31.1 Section 302 Certification by A. Bruce O'Connor pursuant to Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934.
32 Section 906 Certification by Dennis G. Sullivan pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Section 906 Certification by A. Bruce O'Connor pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
(1) On April 15, 2004, the Company filed a Current Report on Form 8-K dated
April 15, 2004, under Item 5, announcing the Company had filed Form
10-K/A for 2003 and Form 10-Q/A for each of the first, second, and third
quarters of 2003.
(2) On April 28, 2004, the Company filed a Current Report on Form 8-K dated
April 28, 2004, under Item 5, furnishing a press release announcing the
Company's earnings for the first quarter of fiscal 2004.
(3) On May 13, 2004, the Company filed a Current Report on form 8-K dated May
13, 2004, under Item 5, furnishing a press release announcing the closing
on the public offering of 700,000 shares of Common Stock.
(4) On May 28, 2004, the Company filed a Current Report on Form 8-K dated May
28, 2004, under Item 5, furnishing a press release announcing the
approval from the New Jersey Board of Public Utilities for a rate
increase filed by Middlesex Water Company.
21
(5) On July 29, 2004, the Company filed a Current Report on Form 8-K dated
July 29, 2004, under Item 5, furnishing a press release announcing the
Company's earnings for the first quarter of fiscal 2004.
(6) On July 29, 2004, the Company filed a Current Report on Form 8-K/A dated
July 29, 2004, under Item 5, furnishing a revised press release of the
Company's earnings for the first quarter of fiscal 2004.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MIDDLESEX WATER COMPANY
By: /s/ A. Bruce O'Connor
----------------------
A. Bruce O'Connor
Vice President and
Chief Financial Officer
23
Exhibit 31
SECTION 302 CERTIFICATION PURSUANT TO RULES 13a-14
AND 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934
I, Dennis G. Sullivan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Middlesex Water
Company;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have;
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) (Omitted pursuant to SEC Release No. 33-8238)
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Dennis G. Sullivan
-----------------------
Dennis G. Sullivan
Chief Executive Officer
Date: August 9, 2004
Exhibit 31.1
SECTION 302 CERTIFICATION PURSUANT TO RULES 13A-14
AND 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934
I, A. Bruce O'Connor, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Middlesex Water
Company;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have;
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b. (Omitted pursuant to SEC Release No. 33-8238)
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
d. Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ A. Bruce O'Connor
----------------------
A. Bruce O'Connor
Chief Financial Officer
Date: August 9, 2004
Exhibit 32
SECTION 906 CERTIFICATION PURSUANT TO 18 U.S.C.(section)1350
I, Dennis G. Sullivan, hereby certify that, to the best of my knowledge,
the periodic report being filed herewith containing financial statements fully
complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and that information
contained in said periodic report fairly presents, in all material respects,
the financial condition and results of operations of Middlesex Water Company
for the period covered by said periodic report.
/s/ Dennis G. Sullivan
-----------------------
Dennis G. Sullivan
Chief Executive Officer
Date: August 9, 2004
A signed original of this written statement required by Section 906 has been
provided to Middlesex Water Company and will be retained by Middlesex Water
Company and furnished to the Securities and Exchange Commission or its staff
upon request.
Exhibit 32.1
SECTION 906 CERTIFICATION PURSUANT TO 18 U.S.C.(section)1350
I, A. Bruce O'Connor, hereby certify that, to the best of my knowledge, the
periodic report being filed herewith containing financial statements fully
complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and that information
contained in said periodic report fairly presents, in all material respects,
the financial condition and results of operations of Middlesex Water Company
for the period covered by said periodic report.
/s/ A. Bruce O'Connor
----------------------
A. Bruce O'Connor
Chief Financial Officer
Date: August 9, 2004
A signed original of this written statement required by Section 906 has been
provided to Middlesex Water Company and will be retained by Middlesex Water
Company and furnished to the Securities and Exchange Commission or its staff
upon request.