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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 September 30, 2005
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 November 1, 2005: Common Stock, No Par Value: 11,523,589 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
Notes to Unaudited Condensed Consolidated
Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures of Market Risk 26
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 28
SIGNATURE 29
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2005 2004 2005 2004
--------------------------------- ---------------------------------
Operating Revenues $ 20,832,448 $ 19,856,688 $ 56,006,102 $ 53,502,334
--------------------------------- ---------------------------------
Operating Expenses:
Operations 10,065,706 9,193,804 28,516,810 27,455,475
Maintenance 765,422 759,352 2,643,226 2,430,319
Depreciation 1,635,403 1,467,523 4,803,610 4,353,222
Other Taxes 2,352,781 2,224,028 6,599,435 6,195,329
Income Taxes 1,535,061 1,714,802 3,096,545 3,240,804
--------------------------------- ---------------------------------
Total Operating Expenses 16,354,373 15,359,509 45,659,626 43,675,149
--------------------------------- ---------------------------------
Operating Income 4,478,075 4,497,179 10,346,476 9,827,185
Other Income (Expense):
Allowance for Funds Used During Construction 109,009 179,173 459,915 309,455
Other Income 63,368 33,418 154,530 170,983
Other Expense (1,879) (85) (26,348) (29,761)
--------------------------------- ---------------------------------
Total Other Income, net 170,498 212,506 588,097 450,677
Interest Charges 1,624,145 1,347,475 4,584,315 3,991,681
--------------------------------- ---------------------------------
Net Income 3,024,428 3,362,210 6,350,258 6,286,181
Preferred Stock Dividend Requirements 61,947 63,697 189,340 191,090
--------------------------------- ---------------------------------
Earnings Applicable to Common Stock $ 2,962,481 $ 3,298,513 $ 6,160,918 $ 6,095,091
--------------------------------- ---------------------------------
Earnings per share of Common Stock:
Basic $ 0.26 $ 0.29 $ 0.54 $ 0.55
Diluted $ 0.26 $ 0.29 $ 0.54 $ 0.55
Average Number of
Common Shares Outstanding :
Basic 11,466,024 11,316,768 11,409,182 10,989,209
Diluted 11,805,164 11,659,908 11,750,989 11,332,349
Cash Dividends Paid per Common Share $ 0.1675 $ 0.1650 $ 0.5025 $ 0.4950
See Notes to Condensed Consolidated Financial Statements.
1
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 2005 2004
- --------------------------------------------------------------------------------------------------------------------------
(Restated-
see Note 9)
UTILITY PLANT: Water Production $ 89,764,872 $ 82,340,798
Transmission and Distribution 208,141,580 194,531,035
General 23,244,601 20,451,215
Construction Work in Progress 6,389,218 13,013,391
-----------------------------------------------------------------------------------------------
TOTAL 327,540,271 310,336,439
Less Accumulated Depreciation 53,942,198 52,017,761
-----------------------------------------------------------------------------------------------
UTILITY PLANT - NET 273,598,073 258,318,678
-----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS: Cash and Cash Equivalents 4,208,562 4,034,768
Accounts Receivable, net 7,719,202 6,316,853
Unbilled Revenues 4,574,528 3,572,713
Materials and Supplies (at average cost) 1,548,021 1,203,906
Prepayments 1,033,478 823,976
-----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 19,083,791 15,952,216
-----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
DEFERRED CHARGES Unamortized Debt Expense 3,177,044 3,172,254
AND OTHER ASSETS: Preliminary Survey and Investigation Charges 1,822,706 1,032,182
Regulatory Assets 8,482,542 8,198,565
Restricted Cash 6,493,814 13,257,106
Non-utility Assets, net 5,627,845 5,237,622
Other 596,871 465,419
-----------------------------------------------------------------------------------------------
TOTAL DEFERRED CHARGES AND OTHER ASSETS 26,200,822 31,363,148
-----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 318,882,686 $ 305,634,042
-----------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
- --------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION: Common Stock, No Par Value $ 74,684,237 $ 71,979,902
Retained Earnings 23,536,670 23,103,908
Accumulated Other Comprehensive Income, net of tax 52,524 44,841
-----------------------------------------------------------------------------------------------
TOTAL COMMON EQUITY 98,273,431 95,128,651
-----------------------------------------------------------------------------------------------
Preferred Stock 3,958,062 4,063,062
Long-term Debt 127,901,370 115,280,649
-----------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION 230,132,863 214,472,362
-----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
CURRENT Current Portion of Long-term Debt 2,103,932 1,091,351
LIABILITIES: Notes Payable 5,000,000 11,000,000
Accounts Payable 4,654,688 6,001,806
Accrued Taxes 7,390,748 6,784,380
Accrued Interest 851,683 1,703,131
Unearned Revenues and Advanced Service Fees 489,527 387,156
Other 724,968 795,456
-----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 21,215,546 27,763,280
-----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 6)
- --------------------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS Customer Advances for Construction 15,467,903 14,018,006
AND OTHER LIABILITIES: Accumulated Deferred Investment Tax Credits 1,637,603 1,696,566
Accumulated Deferred Income Taxes 15,381,387 14,556,153
Employee Benefit Plans 5,880,779 5,464,056
Regulatory Liability - Cost of Utility Plant Removal 5,553,764 5,363,152
Other 803,943 849,551
-----------------------------------------------------------------------------------------------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 44,725,379 41,947,484
-----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
CONTRIBUTIONS IN AID OF CONSTRUCTION 22,808,898 21,450,916
-----------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 318,882,686 $ 305,634,042
-----------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
2
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2005 2004
---------------------------------
(Restated-
see Note 9)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,350,258 $ 6,286,181
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 5,320,479 4,735,468
Provision for Deferred Income Taxes and ITC 61,268 182,178
Allowance for Funds Used During Construction (459,915) (309,455)
Changes in Assets and Liabilities:
Accounts Receivable (1,402,349) (1,498,368)
Unbilled Revenues (1,001,815) (889,811)
Materials & Supplies (344,115) (175,658)
Prepayments (209,502) (26,588)
Other Assets (130,128) (479,433)
Accounts Payable (1,384,541) 2,631,453
Accrued Taxes 602,410 1,612,018
Accrued Interest (851,448) (1,098,724)
Employee Benefit Plans 416,723 165,713
Unearned Revenue & Advanced Service Fees 102,371 141,997
Other Liabilities (116,096) 89,033
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,953,600 11,366,004
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (17,684,593) (19,773,185)
Cash Surrender Value & Other Investments (189,951) (123,714)
Restricted Cash 6,763,292 2,388,257
Preliminary Survey & Investigation Charges (790,524) 498,706
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (11,901,776) (17,009,936)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (1,003,768) (943,353)
Proceeds from Issuance of Long-term Debt 14,637,070 3,866,250
Net Short-term Notes Payable Repayments (6,000,000) (6,500,000)
Deferred Debt Issuance Expenses (131,777) (17,618)
Common Stock Issuance Expense -- (379,532)
Proceeds from Issuance of Common Stock 2,599,335 14,659,874
Payment of Common Dividends (5,728,156) (5,475,146)
Payment of Preferred Dividends (189,340) (191,090)
Construction Advances and Contributions-Net 938,606 220,623
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,121,970 5,240,008
- -----------------------------------------------------------------------------------------------------------------------------
NET CHANGES IN CASH AND CASH EQUIVALENTS 173,794 (403,924)
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,034,768 3,005,610
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,208,562 $ 2,601,686
- -----------------------------------------------------------------------------------------------------------------------------
*Excludes Allowance for Funds Used During Construction
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Utility Plant received as Construction Advances and Contributions $ 901,531 $ 2,015,064
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Period for:
Interest $ 5,394,714 $ 5,024,123
Interest Capitalized $ (459,915) $ (309,455)
Income Taxes $ 2,822,000 $ 1,755,500
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
3
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
(Unaudited)
September 30, December 31,
2005 2004
- -----------------------------------------------------------------------------------------------------------
Common Stock, No Par Value
Shares Authorized - 20,000,000
Shares Outstanding - 2005 - 11,499,745 $ 74,684,237 $ 71,979,902
2004 - 11,358,772
Retained Earnings 23,536,670 23,103,908
Accumulated Other Comprehensive Income, net of tax 52,524 44,841
- -----------------------------------------------------------------------------------------------------------
TOTAL COMMON EQUITY $ 98,273,431 $ 95,128,651
- -----------------------------------------------------------------------------------------------------------
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 - 13,881 $ 1,457,505 $ 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 $ 3,958,062 $ 4,063,062
- -----------------------------------------------------------------------------------------------------------
Long-term Debt
8.05%, Amortizing Secured Note, due December 20, 2021 $ 3,004,063 $ 3,063,389
6.25%, Amortizing Secured Note, due May 22, 2028 9,520,000 9,835,000
6.44%, Amortizing Secured Note, due August 25, 2030 6,976,667 --
6.46%, Amortizing Secured Note, due September 19, 2031 7,000,000 --
4.22%, State Revolving Trust Note, due December 31, 2022 769,238 784,000
3.30% to 3.60%, State Revolving Trust Note, due May 1, 2025 2,985,386 2,348,316
4.00% to 5.00%, State Revolving Trust Bond, due September 1, 2021 760,000 790,000
0.00%, State Revolving Fund Bond, due September 1, 2021 614,436 652,306
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 700,280 755,006
4.25% to 4.63%, Series Y, due September 1, 2018 870,000 920,000
0.00%, Series Z, due September 1, 2019 1,567,367 1,679,979
5.25% to 5.75%, Series AA, due September 1, 2019 1,990,000 2,085,000
0.00%, Series BB, due September 1, 2021 1,926,956 2,048,095
4.00% to 5.00%, Series CC, due September 1, 2021 2,185,000 2,275,000
5.10%, Series DD, due January 1, 2032 6,000,000 6,000,000
0.00%, Series EE, due September 1, 2024 7,715,909 7,715,909
3.00% to 5.50%, Series FF, due September 1, 2024 8,920,000 8,920,000
- -----------------------------------------------------------------------------------------------------------
SUBTOTAL LONG-TERM DEBT 130,005,302 116,372,000
- -----------------------------------------------------------------------------------------------------------
Less: Current Portion of Long-term Debt (2,103,932) (1,091,351)
- -----------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 127,901,370 $ 115,280,649
- -----------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
4
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), Tidewater
Environmental Services, Inc. (TESI), Pinelands Water Company (Pinelands Water)
and Pinelands Wastewater Company (Pinelands Wastewater) (collectively,
Pinelands), Utility Service Affiliates, Inc. (USA), Utility Service Affiliates
(Perth Amboy) Inc. (USA-PA) and Bayview Water Company. Southern Shores Water
Company, LLC (Southern Shores) and White Marsh Environmental Systems, Inc.
(White Marsh) are wholly-owned subsidiaries of Tidewater. The financial
statements of Middlesex and its wholly owned subsidiaries (the Company) are
reported on a consolidated basis. All significant intercompany accounts and
transactions have been eliminated.
In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary, after the effect of the
restatement of certain financial reporting period financial statements (see Note
9 - Restatement of Condensed Consolidated Financial Statements), to present
fairly the financial position as of September 30, 2005 and December 31, 2004 and
the results of operations for the three and nine month periods ended September
30, 2005 and 2004, and cash flows for the nine month periods ended September 30,
2005 and 2004.
Recent Accounting Pronouncements - In May 2005, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No.154, "Accounting Changes and Error Corrections" (SFAS 154), which requires
retrospective application to prior periods' financial statements of voluntary
changes in accounting principles unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. SFAS 154
makes a distinction between "retrospective application" of an accounting
principle and the "restatement" of financial statements to reflect the
correction of an error. SFAS 154 replaces Accounting Principles Bulletin (APB)
No. 20, "Accounting Changes" (APB 20), and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements. APB 20 previously required that most
voluntary changes in accounting principle be recognized by including the
cumulative effect of changing to the new accounting principle in the net income
of the period of the change. SFAS 154 requires that a change in depreciation,
amortization or depletion method for long-lived non-financial assets be
accounted for as a change in accounting estimate affected by a change in
accounting principle, whereas APB 20 had required accounting for such a change
as a change in accounting principle. SFAS 154 carries forward the guidance in
APB 20 for reporting the correction of an error in previously issued financial
statements and a change in accounting estimate as well as the requirement for
justifying a change in accounting principle on the basis of a preference. This
statement is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005 (January 1, 2006 for the
Company).
In December 2004, the FASB issued SFAS No.123(R), "Share-Based Payment" (SFAS
123(R)), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123), and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees". The Statement requires that the cost resulting from all share-based
payment transactions be recognized in the financial statements. The Statement
also establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a
fair-value-based measurement method in accounting for share-based payment
transactions with employees, except for equity instruments held by employee
share ownership plans. This statement was originally effective for quarters
beginning after June 15, 2005, however on April 14, 2005, the Securities and
Exchange Commission adopted a rule which makes the provisions of SFAS 123(R)
effective for the first annual
5
reporting period beginning after June 15, 2005 (January 1, 2006 for the
Company). The Company currently recognizes compensation expense at fair value
for stock-based payment awards in accordance with SFAS No. 123 "Accounting for
Stock-Based Compensation," and does not anticipate adoption of this standard
will have a material impact on its financial position, results of operations, or
cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 addresses the
measurement of exchanges of nonmonetary assets and redefines the scope of
transactions that should be measured based on the fair value of the assets
exchanged. SFAS 153 is effective for nonmonetary asset exchanges occurring in
quarters beginning after June 15, 2005. The adoption of this standard did not
have an impact on its financial position, results of operations, or cash flows.
On October 22, 2004, the American Jobs Creation Act (AJCA) was signed into law.
Among other provisions, the AJCA creates a new deduction for qualified domestic
production activities. Certain activities of the Company, such as our water
treatment activity, are considered as qualifying production activities for
purposes of determining the deduction for qualified production activities. In
December 2004, the FASB issued FSP 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004." In accordance
with FSP 109-1, the Company is treating the deduction for qualified domestic
production activities as a reduction of the income tax provision in the period
as realized. The adoption of this statement has not had a material impact on the
Company's financial position, results of operations or cash flows.
In May 2004, the 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. FSP 106-2 provides
that if the effect of the Medicare Drug Act is not considered a significant
event, the measurement date for the adoption of FSP 106-2 is delayed until the
next regular measurement date. Based on discussions with its Actuary, Management
determined the effect of the Medicare Drug Act was a significant event and thus
the Company is accounting for the effects of FSP 106-2 as of its next
measurement date. The adoption of FSP 106-2 did not have a material effect on
the Company's financial statements.
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. On September 30, 2004,
the FASB issued FSP EITF 03-1-1, "Effective date of Paragraph's 10-20 of EITF
Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" (FSP EITF 03-1-1). FSP EITF 03-1-1
6
delayed the effective date for the measurement and recognition guidance
contained in EITF 03-1 until further implementation guidance is issued. The
Company does not expect any material effects from the adoption of EITF 03-1 on
its financial statements.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" (FIN 47), to clarify the term
"conditional asset retirement obligation" as used in SFAS No. 143, "Accounting
for Asset Retirement Obligations." Conditional asset retirement obligation
refers to a legal obligation to perform an asset retirement activity in which
the timing and/or method of settlement are conditional on a future event that
may or may not be within the control of the entity. The obligation to perform
the asset retirement activity is unconditional even though uncertainty exists
about the timing and/or method of settlement. Accordingly, an entity is required
to recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated. The
fair value of a liability for the conditional asset retirement obligation should
be recognized when incurred, generally, upon acquisition, construction,
development and/or through the normal operation of the asset. Uncertainty about
the timing and/or method of settlement should be factored into the measurement
of the liability when sufficient information exists. FIN 47 also clarifies when
an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005 (December 31, 2005 for
calendar-year enterprises). The Company does not anticipate adoption of this
standard will have a material impact on its financial position, results of
operations, or cash flows.
Rate Matters - Middlesex filed for a 13.1% base rate increase with the New
Jersey Board of Public Utilities (BPU) on May 16, 2005. The requested increase
is intended to recover increased costs of operations, maintenance, and taxes, as
well as capital investment of approximately $19.2 million since January 2004.
Included in the capital investment is $8.7 million for a second raw water
pipeline to ensure back-up water supply for our largest treatment plant. We
expect a decision on this matter within the next several months with new rates
being effective by the first quarter of 2006.
On August 10, 2005 Pinelands Water Company and Pinelands Wastewater Company
filed for base rate increases of 16.72% and 6.14%, respectively, with the BPU.
The requests were necessitated by increased costs of operations, maintenance,
and capital investment. We cannot predict whether the BPU will ultimately
approve, deny, or reduce the amount of our request. We expect a decision on this
matter in the first quarter of 2006.
As part of an approved settlement with the Delaware Public Service Commission
(PSC) on October 19, 2004, Tidewater was eligible to apply for a second phase
rate increase of $0.5 million, provided it completed a number of capital
projects within a specified time schedule. Tidewater filed an application for
this increase on March 28, 2005. Upon verification of project completion, the
new rates became effective on April 27, 2005. Tidewater also agreed to waive its
right to file Distribution System Improvement Charges (DSIC) applications over
the next three six-month cycles (January and July 2005, and January 2006) and to
defer making an application for a base rate increase until after April 27, 2006.
The DSIC allows a utility to promptly begin recovering depreciation expense and
a return on the capital invested for eligible distribution system improvements
recently placed into service.
In accordance with the tariff established for Southern Shores, an annual rate
increase of 3% was implemented on January 1, 2005. The increase cannot exceed
the lesser of the regional Consumer Price Index or 3%.
7
Note 2 - Capitalization
Common Stock - On April 28, 2005, the Company filed with the Securities and
Exchange Commission on Form S-3 to issue shares under its Dividend Reinvestment
and Common Stock Purchase Plan at a 5% discount on optional cash payments and
reinvested dividends for a six-month period commencing on June 1, 2005, and
concluding on December 1, 2005. During the nine months ended September 30, 2005,
there were 128,973 common shares (approximately $2.6 million) issued under the
Company's Dividend Reinvestment and Common Stock Purchase Plan.
On September 20, 2005, 1,000 shares of convertible $7.00 series preferred stock
were converted into 12,000 shares of common stock. The original value of the
preferred shares that were converted was $105,000.
Long-term Debt - Tidewater had previously received approval from the PSC to
finance up to $16.0 million in the form of long-term debt securities during the
current year. Of this amount, Tidewater received loan approval in April 2005
under the Delaware State Revolving Fund (SRF) program of $2.0 million. Tidewater
closed on this loan on July 25, 2005. The Delaware SRF program allows, but does
not obligate, Tidewater to draw down against a General Obligation Note for two
specific projects over a two-year period ending in April 2007. The interest rate
on any draw-down will be set at 3.49%. On August 25, 2005, Tidewater converted
$7.0 million of short-term borrowings to a $7.0 million mortgage-type loan to be
repaid over a term of 25 years. This loan bears interest at 6.44%. On September
15, 2005, Tidewater closed on another $7.0 million mortgage-type loan. This loan
bears interest at 6.46% and is to be repaid over a term of 26 years.
8
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
September 30,
Weighted Weighted
2005 Average 2004 Average
Basic: Income Shares Income Shares
----------------------------------------------------------------------------------------
Net Income $3,024 11,466 $3,362 11,317
Preferred Dividend (62) (64)
------ ------- ------ -------
Earnings Applicable to Common Stock $2,962 11,466 $3,298 11,317
Basic EPS $ 0.26 $ 0.29
----------------------------------------------------------------------------------------
Diluted:
----------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $2,962 11,466 $3,298 11,317
$7.00 Series Preferred Dividend 24 175 26 179
$8.00 Series Preferred Dividend 24 164 24 164
------ ------- ------ -------
Adjusted Earnings Applicable to
Common Stock $3,010 11,805 $3,348 11,660
Diluted EPS $ 0.26 $ 0.29
Nine Months Ended
September 30,
Weighted Weighted
2005 Average 2004 Average
Basic: Income Shares Income Shares
----------------------------------------------------------------------------------------
Net Income $6,350 11,409 $6,286 10,989
Preferred Dividend (189) (191)
------ ------- ------ -------
Earnings Applicable to Common Stock $6,161 11,409 $6,095 10,989
Basic EPS $ 0.54 $ 0.55
----------------------------------------------------------------------------------------
Diluted:
----------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $6,161 11,409 $6,095 10,989
$7.00 Series Dividend 76 178 78 179
$8.00 Series Dividend 72 164 72 164
------ ------- ------ -------
Adjusted Earnings Applicable to
Common Stock $6,309 11,751 $6,245 11,332
Diluted EPS $ 0.54 $ 0.55
9
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. This segment also includes the
operations of regulated wastewater systems in New Jersey and Delaware. 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 primarily includes non-regulated contract
services for the operation and maintenance of municipal and private water and
wastewater systems in New Jersey and Delaware. 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. Segment information is as follows:
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
Operations by Segments: 2005 2004 2005 2004
--------------------------------------------------------------------------------------
Revenues:
Regulated $18,700 $17,297 $49,852 $45,786
Non - Regulated 2,162 2,590 6,244 7,806
Inter-segment Elimination (30) (30) (90) (90)
---------------------------------------------------
Consolidated Revenues $20,832 $19,857 $56,006 $53,502
---------------------------------------------------
Operating Income:
Regulated $ 4,308 $ 4,341 $ 9,944 $ 9,454
Non - Regulated 170 156 402 373
---------------------------------------------------
Consolidated Operating Income $ 4,478 $ 4,497 $10,346 $ 9,827
---------------------------------------------------
Net Income:
Regulated $ 2,878 $ 3,245 $ 6,018 $ 6,026
Non - Regulated 146 117 332 260
---------------------------------------------------
Consolidated Net Income $ 3,024 $ 3,362 $ 6,350 $ 6,286
---------------------------------------------------
Capital Expenditures:
Regulated $ 6,004 $10,908 $17,450 $19,622
Non - Regulated 88 31 235 151
---------------------------------------------------
Total Capital Expenditures $ 6,092 $10,939 $17,685 $19,773
---------------------------------------------------
As of As of
September 30, December 31,
2005 2004
---- ----
Assets:
Regulated $315,505 $302,765
Non - Regulated 5,689 4,943
Inter-segment Elimination (2,311) (2,074)
-----------------------
Consolidated Assets $318,883 $305,634
-----------------------
10
Note 5 - Short-term Borrowings
The Company has established available lines of credit aggregating $40.0 million
that have varying expiration dates in 2006. At September 30, 2005, the
outstanding borrowings under these credit lines were $5.0 million at a weighted
average interest rate of 4.51%. As of that date, the Company had borrowing
capacity of $35.0 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 $10.9
million and $6.7 million at 4.72% and 2.04% for the three months ended September
30, 2005 and 2004, 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 $10.9 million and $9.3 million at 4.29% and
1.63% for the nine months ended September 30, 2005 and 2004, respectively.
Note 6 - Commitments and Contingent Liabilities
Guarantees - USA-PA operates the City of Perth Amboy's (Perth Amboy) water and
wastewater systems under a service contract agreement through June 30, 2018. The
agreement was effected under New Jersey's Water Supply Public/Private
Contracting Act and the New Jersey Wastewater Public/Private Contracting Act.
Under the agreement, USA-PA receives a fixed fee and a variable fee based on
increased system billing. Scheduled fixed fee payments for 2005 are $7.3
million. The fixed fees will increase over the term of the contract to $10.2
million.
In connection with the agreement, Perth Amboy, through the Middlesex County
Improvement Authority, issued approximately $68.0 million in three series of
bonds. Middlesex guaranteed one of those series of bonds, designated the Series
C Serial Bonds, in the principal amount of approximately $26.3 million. Perth
Amboy guaranteed the two other series of bonds. The Series C Serial Bonds have
various maturity dates with the final maturity date on September 1, 2015. As of
September 30, 2005 approximately $23.9 million of the Series C Serial Bonds
remained outstanding.
We are obligated to perform under the guarantee in the event notice is received
from the Series C Serial Bonds trustee of an impending debt service deficiency.
If Middlesex funds any debt service obligations as guarantor, there is a
provision in the agreement that requires Perth Amboy to reimburse us. There are
other provisions in the agreement that we believe make it unlikely that we will
be required to perform under the guarantee, such as scheduled annual rate
increases for water and wastewater services as well as rate increases due to
unforeseen circumstances. In the event revenues from customers could not satisfy
the reimbursement requirements, Perth Amboy has Ad Valorem taxing powers, which
could be used to raise the needed amount.
Water Supply - Middlesex has an agreement with the New Jersey Water Supply
Authority (NJWSA) for the purchase of untreated water. The agreement expires
November 30, 2023 and provides for an average purchase of 27 million gallons a
day (mgd). Pricing includes a two tier pricing schedule for the first 20 mgd and
the additional 7 mgd. In addition, the agreement has provisions for additional
pricing in the event Middlesex overdrafts or exceeds certain monthly and annual
thresholds.
11
Middlesex also has an agreement with a nonaffiliated water utility for the
purchase of treated water. This agreement, which expires December 31, 2005,
provides for the minimum purchase of 3 mgd of treated water with provisions for
additional purchases. Middlesex is currently negotiating an extension of the
agreement as to its duration and daily minimum purchase. The cost of the treated
water is set by the BPU and is not subject to negotiation.
Purchased water costs are shown below:
(Millions of Dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
Purchased Water 2005 2004 2005 2004
--------------- ---- ---- ---- ----
Untreated $0.7 $0.6 $1.7 $1.6
Treated 0.5 0.5 1.4 1.6
---- ---- ---- ----
Total Costs $1.2 $1.1 $3.1 $3.2
==== ==== ==== ====
Construction - Based on its capital budget, the Company plans to spend
approximately $23.2 million on its construction program in 2005.
Litigation - 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, and by agreement, the electric utility's counterclaim for
approximately $1.1 million in damages was submitted to binding arbitration, in
which the agreed maximum exposure of the Company is $0.3 million, which the
Company has accrued for. While we are unable to predict the outcome of the
arbitration, we believe that we have substantial defenses.
The Company is defendant in various lawsuits in the normal course of business.
We believe the resolution of pending claims and legal proceedings will not have
a material adverse effect on the Company's consolidated financial statements.
Change in Control Agreements - The Company has Change in Control Agreements with
certain of its Officers that provide compensation and benefits in the event of
termination of employment in connection with a change in control of the Company.
Note 7 - Employee Retirement Benefit Plans
Pension - The Company has a non-contributory defined benefit pension plan, which
covers all employees with more than 1,000 hours of service. The Company made
cash contributions of $1.0 million during the current year. In addition, the
Company maintains an unfunded supplemental pension plan for certain of its
executives.
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. The Company expects to make total cash
contributions of $1.4 million during the current year. These contributions will
be made each quarter during 2005. The Company has made contributions totaling
$0.9 million through September 30, 2005.
12
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 September 30,
2005 2004 2005 2004
--------------------------------------------------
Service Cost $ 281 $ 186 $ 156 $ 106
Interest Cost 390 346 193 145
Expected Return on Assets (387) (372) (69) (53)
Amortization of Unrecognized Losses 12 -- 120 73
Amortization of Unrecognized Prior Service Cost 23 23 -- --
Amortization of Transition Obligation -- -- 34 34
--------------------------------------------------
Net Periodic Benefit Cost $ 319 $ 183 $ 434 $ 305
--------------------------------------------------
Pension Benefits Other Benefits
---------------- --------------
Nine Months Ended September 30,
2005 2004 2005 2004
--------------------------------------------------
Service Cost $ 844 $ 559 $ 466 $ 319
Interest Cost 1,169 1,039 578 435
Expected Return on Assets (1,160) (1,118) (206) (160)
Amortization of Unrecognized Losses 36 -- 361 219
Amortization of Unrecognized Prior Service Cost 69 69 -- --
Amortization of Transition Obligation -- -- 102 102
--------------------------------------------------
Net Periodic Benefit Cost $ 958 $ 549 $ 1,301 $ 915
--------------------------------------------------
Note 8 - Other Comprehensive Income
Comprehensive income was as follows:
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-------------------------------------------------
Net Income $ 3,024 $ 3,362 $ 6,350 $ 6,286
Other Comprehensive Income:
Change in Value of Equity Investments,
Net of Income Tax (1) (11) 8 (15)
-------------------------------------------------
Other Comprehensive Income (1) (11) 8 (15)
-------------------------------------------------
Comprehensive Income $ 3,023 $ 3,351 $ 6,358 $ 6,271
-------------------------------------------------
13
Note 9 - Restatement of Condensed Consolidated Financial Statements
On November 5, 2005 and subsequent to the issuance of the Company's Form 10-K
for the year ended December 31, 2004, management determined that the previously
filed Consolidated Balance Sheets and Statements of Cash Flows needed to be
restated.
The Condensed Consolidated Balance Sheet reflects the non-cash contributions of
utility plant from developers and the related construction advance or
contributions as of the date the Company took ownership of the property.
Previously, the Company recorded the contributions as of the date the cost
information regarding the contributed property was received from the developer.
The Condensed Consolidated Statement of Cash Flows reflects only the related
cash activity for construction advances and contributions of utility plant.
Additionally, the Company has included supplemental non-cash disclosure related
to utility plant contributions by developers. Previously, the Company
incorrectly included non-cash activity for construction advances and
contributions of utility plant as cash outflows from investing activities and
cash inflows from financing activities.
The restatement does not have any effect on net income, earnings applicable to
common stock, cash flow from operations, or liquidity.
A summary of the significant effect of the restatement is as follows:
Condensed Consolidated Balance Sheet Effects:
December 31, 2004
-----------------
As Previously As
Reported Restated
-------- --------
Utility Plant - Transmission and
Distribution $188,026,091 $194,531,035
Total Assets 299,129,098 305,634,042
Customer Advances for Construction 12,366,060 14,018,006
Contributions in Aid of Construction 16,597,918 21,450,916
Total Capitalization and Liabilities 299,129,098 305,634,042
14
Condensed Consolidated Statement of Cash Flows Effects:
Nine Months Ended
September 30, 2004
------------------
As Previously As
Reported Restated
-------- --------
Utility Plant Expenditures $(20,629,121) $(19,773,184)
Net Cash Used in Investing Activities (17,865,872) (17,009,935)
Construction Advances and Contributions - Net 1,076,559 220,622
Net Cash Provided by Financing Activities 6,095,944 5,240,007
Supplemental Disclosure of Non-Cash Activity:
Utility Plant received as Construction Advances
and Contributions $ -- $ 2,015,064
15
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.
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 2005 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
discount rates and 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;
- new or additional water quality standards;
- weather variations and other natural phenomena;
- acts of war or terrorism; and
- other factors discussed elsewhere in this quarterly report.
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 to the
16
Company's understanding 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.
Risk Factors
Our revenue and earnings depend on the rates we charge our customers. We cannot
raise utility rates without filing a petition with the appropriate governmental
agency. If these agencies modify, delay, or deny our petition, our revenues will
not increase and our earnings will decline unless we are able to reduce costs.
The BPU regulates all of our public utility companies in New Jersey with respect
to rates and charges for service, classification of accounts, awards of new
service territory, acquisitions, financings and other matters. That means, for
example, that we cannot raise the utility rates we charge to our customers
without first filing a petition with the BPU and going through a lengthy
administrative process. In much the same way, the PSC regulates our public
utility companies in Delaware. We cannot give assurances of when we will request
approval for any such matter, nor can we predict whether the BPU or PSC will
approve, deny or reduce the amount of such requests.
Certain costs of doing business are not within our control. The failure to
obtain any rate increase would prevent us from increasing our revenues and,
unless we are able to reduce costs, would result in reduced earnings.
We are subject to penalties unless we comply with environmental laws and
regulations, including water quality regulations. Compliance with those laws and
regulations impose costs on us.
The EPA and DEP regulate our operations in New Jersey with respect to water
supply, treatment and distribution systems and the quality of the water, as do
the EPA, DNREC, DPH and DRBC with respect to operations in Delaware. Federal,
New Jersey and Delaware regulations relating to water quality require us to
perform expanded types of testing to ensure that our water meets state and
federal water quality requirements. We are subject to EPA regulations under the
Federal Safe Drinking Water Act, which include the Lead and Copper Rule, the
maximum contaminant levels established for various volatile organic compounds,
the Federal Surface Water Treatment Rule and the Total Coliform Rule. There are
also similar state regulations by the DEP in New Jersey. The DEP and DPH monitor
our activities and review the results of water quality tests that we perform for
adherence to applicable regulations. In addition, environmental regulatory
agencies are reviewing current regulations governing the limits of certain
organic compounds found in the water as byproducts of treatment.
The cost to water companies of complying with the proposed water quality
standards depends in part on the limits set in the regulations and on the method
selected to implement them. Those costs could be very high and make us less
profitable if we cannot recover those costs through our rates that we charge our
customers.
We depend upon our ability to raise money in the capital markets to finance some
of the costs of complying with laws and regulations, including environmental
laws and regulations or to pay for some of the costs of improvements or the
expansion of our utility system assets. We cannot issue debt or equity
securities without regulatory approval.
We require financing to fund the ongoing capital program for the improvement of
our utility system assets and for planned expansion of that system. We project
that we may expend approximately $74.4 million for existing capital projects. We
must have regulatory approval to sell debt or equity securities to raise money
for these projects. If sufficient capital is not available or the cost of
capital is too high, or if the regulatory authorities deny a petition of ours to
sell debt or equity securities, we would not be able to meet the cost of
complying with environmental laws and regulations or the costs of improving and
expanding our utility system assets. This might result in the imposition of
fines or restrictions on our operations and may curtail our ability to improve
upon and expand our utility system assets.
Weather conditions and overuse of underground aquifers may interfere with our
sources of water, demand for water services, and our ability to supply water to
customers.
17
Our ability to meet the existing and future water demands of our customers
depends on an adequate supply of water. Unexpected conditions may interfere with
our water supply sources. Drought and overuse of underground aquifers may limit
the availability of ground and surface water. These factors might adversely
affect our ability to supply water in sufficient quantities to our customers.
Governmental drought restrictions might result in decreased use of water
services and can adversely affect our revenue and earnings. Additionally, cool
and wet weather may reduce consumption demands, also adversely affecting our
revenue and earnings. Freezing weather may also contribute to water transmission
interruptions caused by pipe and main breakage. Any interruption in our water
supply could cause a reduction in our revenue and profitability.
Our water sources may become contaminated by naturally-occurring or man-made
compounds and events. This may cause disruption in services and impose costs to
restore the water to required levels of quality.
Our sources of water may become contaminated by naturally-occurring or man-made
compounds and events. In the event that our water supply is contaminated, we may
have to interrupt the use of that water supply until we are able to install
treatment equipment or substitute the flow of water from an uncontaminated water
source through our transmission and distribution systems. We may also incur
significant costs in treating the contaminated water through the use of our
current treatment facilities, or development of new treatment methods. Our
inability to substitute water supply from an uncontaminated water source, or to
adequately treat the contaminated water source in a cost-effective manner may
reduce our revenues and make us less profitable.
The necessity for increased security has and may continue to result in increased
operating costs.
In the wake of the September 11, 2001 terrorist attacks and the ensuing threats
to the health and security of the United States of America, we have taken steps
to increase security measures at our facilities and heighten employee awareness
of threats to our water supply. We have tightened our security measures
regarding the delivery and handling of certain chemicals used in our business.
We are at risk for terrorist attacks and have and will continue to incur
increased costs for security precautions to protect our facilities, operations
and supplies from such risks.
We face competition from other utilities and service providers which might
hinder our growth and reduce our profitability.
We face risks of competition from other utilities authorized by federal, state
or local agencies. Once a utility regulator grants a service territory to a
utility, that utility is usually the only one to service that territory.
Although a new territory offers some protection against competitors, the pursuit
of service territories is competitive, especially in Delaware where new
territories may be awarded to utilities based upon competitive negotiation.
Competing utilities have challenged, and may in the future challenge, our
applications for new service territories. Also, third parties entering into
long-term agreements to operate municipal systems might adversely affect us and
our long-term agreements to supply water on a contract basis to municipalities.
18
We have a long-term contractual obligation for water and wastewater system
operation and maintenance under which we may incur costs in excess of payments
received.
Middlesex Water Company and USA-PA operate and maintain the water and wastewater
systems of the City of Perth Amboy, New Jersey under a multi-year contract. This
contract does not protect us against incurring costs in excess of payments we
will receive pursuant to the contract. There can be no assurance that we will
not experience losses resulting from this contract. Losses under this contract
or our failure or inability to perform may have a material adverse effect on our
financial condition and results of operations. Also, as of September 30, 2005,
approximately $23.9 million of Perth Amboy's bonds we have guaranteed remain
outstanding. If Perth Amboy defaults on its obligations to pay the bonds we have
guaranteed, we would have to raise funds to meet our obligations under that
guarantee,
An important element of our growth strategy is the acquisition of water and
wastewater systems. Any pending or future acquisitions we decide to undertake
may involve risks.
The acquisition of water and wastewater systems is an important element in our
growth strategy. This strategy depends on identifying suitable acquisition
opportunities and reaching mutually agreeable terms with acquisition candidates.
The negotiation of potential acquisitions as well as the integration of acquired
businesses could require us to incur significant costs and cause diversion of
our management's time and resources. Further, acquisitions may result in
dilution of our equity securities, incurrence of debt and contingent
liabilities, fluctuations in quarterly results and other acquisition related
expenses. In addition, the business and other assets we acquire may not achieve
the sales and profitability expected.
We have restrictions on our dividends. There can also be no assurance that we
will continue to pay dividends in the future or, if dividends are paid, that
they will be in amounts similar to past dividends.
Our Restated Certificate of Incorporation and our Indenture of Mortgage dated as
of April 1, 1927, as supplemented impose conditions on our ability to pay
dividends. We have paid dividends on our common stock each year since 1912 and
have increased the amount of dividends paid each year since 1973. Our earnings,
financial condition, capital requirements, applicable regulations and other
factors, including the timeliness and adequacy of rate increases, will determine
both our ability to pay dividends on common stock and the amount of those
dividends. There can be no assurance that we will continue to pay dividends in
the future or, if dividends are paid, that they will be in amounts similar to
past dividends.
We are subject to anti-takeover measures that may be used by existing management
to discourage, delay or prevent changes of control that might benefit
non-management shareholders.
Subsection 10A of the New Jersey Business Corporation Act, known as the
Shareholder Protection Act, applies to us. The Shareholder Protection Act deters
merger proposals, tender offers or other attempts to effect changes in our
19
control that are not negotiated and approved by our Board of Directors. In
addition, we have a classified Board of Directors, which means only one-third of
the Directors are elected each year. A classified Board can make it harder for
an acquirer to gain control by voting its candidates onto the Board of Directors
and may also deter merger proposals and tender offers. Our Board of Directors
also has the ability, subject to obtaining BPU approval, to issue one or more
series of preferred stock having such number of shares, designation,
preferences, voting rights, limitations and other rights as the Board of
Directors may fix. This could be used by the Board of Directors to discourage,
delay or prevent an acquisition that might benefit non-management shareholders.
Overview
Middlesex Water Company (Middlesex or the Company) has operated as a water
utility in New Jersey since 1897, and in Delaware, through our wholly-owned
subsidiary, Tidewater Utilities, Inc. (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 Utility Service
Affiliates, Inc. (USA), Utility Service Affiliates (Perth Amboy) Inc. (USA-PA),
and White Marsh Environmental Systems, Inc. (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 Company (Pinelands Water) and Pinelands Wastewater
Company (Pinelands Wastewater) (collectively, Pinelands), provide water and
wastewater services to residents in Southampton Township, New Jersey.
Our Delaware subsidiaries, Tidewater and Southern Shores Water Company, LLC
(Southern Shores), provide water services to approximately 27,000 retail
customers in New Castle, Kent, and Sussex Counties, Delaware. Our Tidewater
Environmental Services, Inc. (TESI) subsidiary commenced operations during 2005
as a regulated wastewater utility in Delaware. Although TESI has responded to
numerous requests for proposal, the Company does not have any customers or
revenues as of September 30, 2005. Our other Delaware subsidiary, White Marsh,
serves 1,900 customers in Kent and Sussex Counties under operating contracts.
Our USA subsidiary provides customers within the Middlesex System a service line
maintenance program called LineCareSM.
The majority of our revenue is generated from retail and contract water services
to customers in or near 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 significantly
dependent on four factors: weather, adequate and timely rate relief, effective
cost management, and customer growth.
20
Recent Developments
Restatement of Consolidated Financial Statements
As noted in Note 9 of the Notes to the Unaudited Condensed Consolidated
Financial Statements, on November 5, 2005 and subsequent to the issuance of the
Company's Form 10-K for the year ended December 31, 2004, management determined
that the previously filed Consolidated Balance Sheets and Statements of Cash
Flows needed to be restated.
The accompanying Condensed Consolidated Balance Sheet, as restated, reflects the
non-cash contributions of utility plant from developers and the related
construction advance or contributions as of the date the Company took ownership
of the property. Previously, the Company recorded the contributions as of the
date the cost information regarding the contributed property was received from
the developer.
The accompanying Condensed Consolidated Statement of Cash Flows, as restated,
reflects only the cash activity for construction advances and contributions of
utility plant. Additionally, the Company has included supplemental non-cash
disclosure related to utility plant contributions by developers. Previously, the
Company incorrectly included non-cash construction advances and contributions of
utility plant as cash outflows from investing activities and cash inflows from
financing activities.
The Consolidated Balance Sheets as of December 31, 2004 and 2003 and the
Consolidated Statements of Cash Flows for the fiscal periods ended December 31,
2004, 2003, and 2002, and the Condensed Consolidated Balance Sheet as of March
31, 2005 and June 30, 2005 and the Condensed Consolidated Statement of Cash
Flows for the periods ended March 31, 2004 and June 30, 2004 will be restated on
Forms 10-K/A and 10-Q/A, respectively, and will be filed as soon as practicable.
The restatement does not have any effect on net income, earnings applicable to
common stock, cash flow from operations, or liquidity. The restatement does not
have any effect on utility rate base in either Delaware or New Jersey and is not
anticipated to affect pending or future rate cases.
A summary of the significant effects of the restatement on our Form 10-Q filings
for the periods ended September 30, 2005, June 30, 2005 and March 31, 2005 and
on our Form 10-K for the year ended December 31, 2004 are as follows:
Condensed Consolidated Balance Sheet Effects:
June 30, 2005 March 31, 2005
------------- --------------
As Previously As As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
Utility Plant - Transmission and Distribution $197,627,732 $202,613,826 $190,591,871 $197,429,415
Total Assets 304,204,603 311,190,697 297,488,517 304,326,061
Customer Advances for Construction 12,178,644 14,153,090 12,032,771 13,871,817
Contributions in Aid of Construction 17,386,650 22,398,298 16,627,018 21,625,516
Total Capitalization and Liabilities 304,204,603 311,190,697 297,488,517 304,326,061
21
Condensed Consolidated Statement of Cash Flows Effects:
Nine Months Ended Six Months Ended Three Months Ended
September 30, 2004 June 30, 2004 March 31, 2004
------------------ ------------- --------------
As Previously As As Previously As As Previously As
Reported Restated Reported Restated Reported Restated
-------- -------- -------- -------- -------- --------
Utility Plant Expenditures $(20,629,121) $(19,773,184) $ (9,035,216) $(8,834,106) $(2,935,590) $(2,918,050)
Net Cash Used in Investing Activities (17,865,872) (17,009,935) (7,924,597) (7,723,487) (2,788,246) (2,770,706)
Construction Advances and Contributions - Net 1,076,559 220,622 46,027 (155,083) (183,889) (201,429)
Net Cash Provided by Financing Activities 6,095,944 5,240,007 3,141,962 2,940,852 140,336 122,796
Supplemental Disclosure of Non-Cash Activity:
Utility Plant received as Construction
Advances and Contributions $ -- $ 2,015,064 $ -- $ 950,037 $ -- $ 252,743
Consolidated Balance Sheet Effects:
December 31, 2004 December 31, 2003
----------------- -----------------
As Previously As As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
Utility Plant - Transmission and Distribution $188,026,091 $194,531,035 $174,455,437 $179,219,783
Total Assets 299,129,098 305,634,042 263,191,935 267,956,281
Customer Advances for Construction 12,366,060 14,018,006 11,711,846 12,838,342
Contributions in Aid of Construction 16,597,918 21,450,916 15,973,563 19,611,413
Total Capitalization and Liabilities 299,129,098 305,634,042 263,191,935 267,956,281
Consolidated Statement of Cash Flows Effects:
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
As Previously As As Previously As As Previously As
Reported Restated Reported Restated Reported Restated
-------- -------- -------- -------- -------- --------
Utility Plant Expenditures $(29,860,100) $(28,878,576) $(19,574,205) $(17,576,634) $(16,489,095) $(16,255,866)
Net Cash Used in Investing Activities (39,217,034) (38,235,510) (17,515,982) (15,518,411) (13,872,562) (13,639,333)
Construction Advances and Contributions - Net 1,278,569 297,045 1,897,803 (99,768) 874,205 640,976
Net Cash Provided by Financing Activities 24,687,170 23,705,646 3,335,271 1,337,700 1,077,069 843,840
Supplemental Disclosure of Non-Cash Activity:
Utility Plant received as Construction
Advances and Contributions $ -- $ 2,722,121 $ -- $ 3,753,037 $ -- $ 1,042,529
22
Rate Increases
Middlesex filed for a 13.1% base rate increase with the BPU on May 16, 2005.
Reasons for the requested increase are higher costs of operations, maintenance,
and taxes, as well as capital investment of approximately $19.2 million since
January 2004. Included in the capital investment is $8.7 million for a second
raw water pipeline to ensure back-up water supply for our primary treatment
plant. We expect a decision on this matter within the next several months with
new rates being effective by the first quarter of 2006.
On August 10, 2005 Pinelands Water and Pinelands Wastewater filed for base rate
increases of 16.72% and 6.14%, respectively, with the New Jersey Board of Public
Utilities (BPU). The requests were necessitated by increased costs of
operations, maintenance, and capital investment. We cannot predict whether the
BPU will ultimately approve, deny, or reduce the amount of our request. We
expect a decision on this matter in the first quarter of 2006.
As part of an approved settlement with the Public Service Commission on October
19, 2004, Tidewater was eligible to apply for a second phase rate increase of
$0.5 million, provided it completed a number of capital projects within a
specified time schedule. Tidewater filed an application for this increase on
March 28, 2005. Upon verification of project completion, the new rates became
effective on April 27, 2005. Tidewater also agreed to waive its right to file
Distribution System Improvement Charge applications over the next three
six-month cycles (January and July 2005, and January 2006) and to defer making
an application for a general rate increase until after April 27, 2006.
In accordance with the tariff established for Southern Shores, an annual rate
increase of 3% was implemented on January 1, 2005. The increase cannot exceed
the lesser of the regional Consumer Price Index or 3%.
Results of Operations - Three Months Ended September 30, 2005
Operating revenues for the three months ended September 30, 2005 increased $1.0
million or 4.9% from the same period in 2004. Water sales improved by $1.0
million in our New Jersey systems from increased water consumption due to
weather that was drier than the same period in 2004. Revenues rose in our
Delaware service territories by $0.4 million due to the phase two base rate
increase as discussed above and customer growth.
USA had reduced revenues of $0.5 million as compared to the same period in 2004.
This reduction was due to our meter services venture completing its original
contracts during December 2004. USA has not bid on, and consequently has not
obtained, any additional meter services contracts for 2005. Furthermore, no
additional meter services contracts are expected for the remainder of 2005. All
other operations accounted for $0.1 million of higher revenues.
While we anticipate continued customer and consumption growth among our Delaware
systems, such growth and increased consumption cannot be guaranteed. Unfavorable
weather in the Spring of 2005 delayed the completion of homes by developers in
several residential subdivisions, which has resulted in lower water consumption
revenues than anticipated due to the lag in new customer connections that
resulted from the developer construction delays. While overall water sales for
the Middlesex System are higher in 2005 than the prior year period, there has
been decreased consumption of 1.0% by several large industrial customers. With
regard to Middlesex's industrial customer class, we expect this trend to
continue throughout the remainder of 2005. Our water systems are highly
dependent on the effects of weather, which may adversely impact future
consumption in spite of anticipated customer growth. As a result of recent
regulation of wastewater services in
23
Delaware, we have established a regulated wastewater operation (TESI) that
commenced operations during fiscal 2005. Due to the start-up nature of this
operation, we expect our expenses with respect to this subsidiary to marginally
exceed revenues in the near term.
Operating expenses increased $1.0 million or 6.5%. Operation and maintenance
expenses increased $0.9 million or 8.8%. In New Jersey, payroll and benefits
costs increased $0.7 million and the costs of purchased water, purchased power
and repairs to our distribution system increased $0.3 million. The continued
growth of our Delaware systems resulted in increases in the cost of water
production and additional employees and related benefit costs of $0.3 million.
Costs related to our meter services venture decreased $0.5 million due to the
completion of the original projects during December 2004. All other operating
expenses increased $0.1 million.
Depreciation expense increased $0.2 million or 11.4%, primarily as a result of a
higher level of utility plant in service.
Other taxes increased by $0.1 million, reflecting taxes on increased taxable
gross revenues. Income taxes decreased by $0.2 million as a result of reduced
operating results as compared to the same period in 2004.
Interest expense increased by $0.3 million, or 20.5%, as a result of a higher
level of long-term indebtedness, and higher interest rates on short-term
borrowings during the current quarter as compared to the same period in 2004. As
a result of the additional long-term debt issuances during 2005, as well as
expected higher short-term interest rates than were charged in the fourth
quarter of 2004, we anticipate that our interest expense will increase for the
remainder of 2005.
Net income decreased by 10.0% to $3.0 million. Basic and diluted earnings per
share decreased from $0.29 to $0.26, primarily due to reduced earnings.
Results of Operations - Nine Months Ended September 30, 2005
Operating revenues for the nine months ended September 30, 2005 increased $2.5
million or 4.7% from the same period in 2004. Water sales improved by $2.7
million in our Middlesex system, of which $1.7 million was a result of the base
rate increases that were granted to Middlesex on May 27, 2004, and $1.0 million
was due to increased consumption due to drier weather as compared to the prior
year period. Customer growth of 8.7% in Delaware provided additional water
consumption sales, facility charges and connection fees of $1.3 million. Base
rate increases accounted for $0.3 million of the increase.
USA had reduced revenues of $1.7 million as compared to the same period in 2004,
due to our meter services venture completing its original contracts during
December 2004. All other operations accounted for $0.2 million of additional
revenues.
Operating expenses increased $2.0 million or 4.5%. Operation and maintenance
expenses increased $1.3 million or 4.3%. In New Jersey, payroll and benefits
costs (primarily pension and post-retirement expenses) and corporate governance
related fees increased $1.7 million. Costs for purchased power and purchased
water increased by $0.1 million, and costs for water treatment and distribution
increased by $0.4 million for our Middlesex system. The continuing growth of our
Delaware systems resulted in higher costs of water treatment and additional
employees and related benefit expenses of $0.7 million.
The costs of our meter services venture decreased $1.6 million due to the
completion of the original projects during December 2004. All other costs of
operations were consistent with the prior year period.
24
Our pension and post-retirement costs have increased by approximately $0.8
million for the nine months ended September 30, 2005 as compared to the prior
year period (see Note 7 of the Notes to the Condensed Consolidated Financial
Statements). Our pension and post-retirement expenses are anticipated to
increase by $0.3 million for the remainder of fiscal 2005. Payroll and benefits
costs (excluding pension and post-retirement expenses previously discussed) are
also expected to be higher during the remainder of 2005 than the same period in
2004.
Depreciation expense increased $0.5 million or 10.3%, primarily due to the
higher level of utility plant in service.
Other taxes increased by $0.4 million, reflecting taxes on higher taxable gross
revenues.
Income taxes decreased $0.1 million, as a result of an increased tax benefits
from a higher level of Allowance for Funds Used During Construction (AFUDC) and
deductions available to the Company for qualified production activities under
the American Jobs Creation Act of 2004.
Other income increased $0.1 million, primarily due to higher AFUDC as a result
of increases in capital projects in New Jersey and Delaware.
Interest expense increased by $0.6 million, or 14.9%, as a result of a higher
level of long-term indebtedness, and higher average interest rates and increased
weighted average short-term borrowings as compared to the prior year period.
Net income increased by $0.1 million, or 1.0%, however basic and diluted
earnings per share decreased from $0.55 to $0.54 per share. The earnings per
share decrease was due to an increase in average shares outstanding as compared
to the prior year period as a result of the sale of 700,000 shares of common
stock on May 12, 2004, and shares issued under the Company's Dividend
Reinvestment Plan during 2005.
Liquidity and Capital Resources
Cash flows from operations are largely dependent on four factors: weather,
adequate and timely rate relief, effective cost management, and customer growth.
The effect of these factors on net income is discussed in results of operations.
For the nine months ended September 30, 2005, cash flows from operating
activities decreased $4.4 million to $7.0 million, as compared to the prior
year. This decrease was primarily attributable to the timing of payments to
vendors and for taxes. The $7.0 million of net cash flow from operations allowed
us to internally fund approximately 36% of our utility plant expenditures for
the period, with the remainder funded with the proceeds from the issuance of
long-term debt and restricted cash from the proceeds of previously issued
long-term borrowings.
The Company's capital program for 2005 is estimated to be $23.2 million and
includes $11.2 million for water system additions and improvements for our
Delaware systems, $3.4 million to complete the new raw water line to the
Middlesex primary water treatment plant that began in 2004, and $3.3 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 120 miles of unlined mains in the 730-mile Middlesex System. The
capital program also includes $5.3 million for other planned upgrades to our
systems in New Jersey. The upgrades consist of $1.1 million for improvements to
existing plant, $1.2 million for mains, $0.8 million for
25
service lines, $0.3 million for meters, $0.3 million for hydrants, and $1.6
million for computer systems and various other capital items.
To pay for our capital program in 2005, we expect to utilize internally
generated funds and funds available under existing New Jersey Environmental
Infrastructure Trust loans (currently, $1.6 million) and Delaware State
Revolving Fund (SRF) loans (currently, $1.2 million), which provide low cost
financing for projects that meet certain water quality and system improvement
criteria. If necessary, we will also utilize short-term borrowings through $40.0
million of available lines of credit with five financial institutions. All of
the lines have one year lives and expire at different dates during the year. The
Company has renewed all the lines of credit into 2006. As of September 30, 2005,
there was $5.0 million outstanding against the lines of credit.
Tidewater had previously received approval from the PSC to finance up to $16.0
million in the form of long-term debt securities during the current year. Of
this amount, Tidewater received loan approval in April 2005 under the Delaware
SRF program of $2.0 million. Tidewater closed on this loan on July 25, 2005. The
Delaware SRF program allows, but does not obligate, Tidewater to draw down
against a General Obligation Note for two specific projects over a two-year
period ending in April 2007. The interest rate on any draw down will be set at
3.49%. On August 25, 2005, Tidewater converted $7.0 million of short-term
borrowings to a $7.0 million mortgage-type loan to be repaid over a term of 25
years. This loan bears interest at 6.44%. On September 15, 2005, Tidewater
closed on another $7.0 million mortgage-type loan. This loan bears interest at
6.46% and is to be repaid over a term of 26 years.
On April 28, 2005, the Company filed with the Securities and Exchange Commission
on Form S-3 to issue shares under its Dividend Reinvestment and Common Stock
Purchase Plan (the Plan) at a 5% discount on optional cash payments and
reinvested dividends for a six-month period commencing on June 1, 2005, and
concluding on December 1, 2005. During the nine months ended September 30, 2005,
the company raised approximately $2.6 million through the issuance of 128,973
common shares under the Plan. From time to time, the Company may issue
additional equity to reduce short-term indebtedness and for other general
corporate purposes.
Going forward into 2006 through 2007, we project that we will expend
approximately $45.9 million for capital projects. To the extent possible, and
because of the favorable interest rates available to regulated water utilities
at this time, we expect to finance a portion of our capital needs under SRF loan
programs. We also expect to use internally generated funds and proceeds from the
sale of common stock, which includes proceeds from the Plan.
In addition to the effect of weather conditions on revenues, increases in
certain operating costs will impact our liquidity and capital resources. We have
received rate relief for Tidewater in the last twelve months and Middlesex and
the Pinelands Companies have recently filed for base rate increases. Changes in
operating costs and timing of capital projects will have an impact on revenues,
earnings, and cash flows and will also impact the timing of filings for future
rate increases.
Recent Accounting Pronouncements - See Note 1 of the Notes to Unaudited
Condensed Consolidated Financial Statements for a discussion of recent
accounting pronouncements.
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
26
majority of our Amortizing Secured Notes and First Mortgage Bonds, which have
maturity dates ranging from 2009 to 2038. Approximately $2.1 million of the
total balance of the sixteen existing long-term debt instruments is current.
Applying a hypothetical change in the rate of interest charged by 10% on those
borrowings would not have a material effect on earnings.
Item 4. Controls and Procedures
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.
On November, 5, 2005, and subsequent to the issuance of the Company's Form 10-K
for the year ended December 31, 2004, management determined that the previously
filed consolidated balance sheets and cash flow statements needed to be
restated. The restatement is necessary to reflect the non-cash contributions of
utility plant from developers and the related construction advances or
contributions at the date the Company took ownership of the property, to reflect
only the related cash activity for construction advances and contributions for
utility plant, and add supplemental non-cash disclosure related to contributions
of utility plant. The Consolidated Balance Sheets as of December 31, 2003 and
2004 and the Consolidated Statements of Cash Flows for the fiscal periods ended
December 31, 2002, 2003 and 2004, and the Condensed Consolidated Balance Sheet
as of March 31, 2005 and June 30, 2005 and the Condensed Consolidated Statements
of Cash Flows for the periods March 31, 2004 and June 30, 2004 will be restated
on Forms 10-K/A and 10-Q/A, respectively.
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, which
included consideration of the restatements, the Company's Chief Executive
Officer and the Company's Chief Financial Officer concluded that the Company's
disclosure controls and procedures were not effective as of the end of the
period covered by this Report. As a result of this conclusion, the Company
performed additional review and analysis to ensure its consolidated financial
statements are prepared in accordance with generally accepted accounting
principles. Accordingly, management believes that the condensed consolidated
financial statements included in this report fairly present in all material
respects our financial condition, results of operations and cash flows for the
periods presented.
Based on the foregoing, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's internal controls over
financial reporting were not effective in meeting the objectives as described
above. During the quarter covered by this report, in connection with the
discovery of errors related to recording and reporting construction advances and
contributions for utility plant, and conclusion that the Company had a material
weakness in its internal control over financial reporting, the Company has
subsequently implemented procedures related to recording non-cash contributions
of utility assets from developers, expanded its periodic review process of
non-cash activities and expanded its review of the presentation of non-cash
transactions. Management believes these changes will remediate the material
weakness that led to the restatement and enhance the reliability and
effectiveness of the financial reporting process.
27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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, and
by agreement, the electric utility's counterclaim for approximately $1.1 million
in damages was submitted to binding arbitration, in which the agreed maximum
exposure of the Company is $0.3 million, which the Company has accrued for.
While we are unable to predict the outcome of the arbitration, we believe that
we have substantial defenses.
The Company is defendant in various lawsuits in the normal course of business.
We believe the resolution of pending claims and legal proceedings will not have
a material adverse effect on the Company's consolidated financial statements.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The Company's Chief Executive Officer, Chief Financial Officer and Audit
Committee have discussed with its independent registered public accounting firm,
the matters disclosed in the accompanying unaudited Condensed Consolidated
Financial Statements and more fully described in Note 9 to the Unaudited
Condensed Consolidated Financial Statements.
Item 6. Exhibits
10 Agreement dated September 26, 2005, between Dennis G. Sullivan and
Middlesex Water Company.
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.
28
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
Date: November 14, 2005
29
AGREEMENT
---------
This Agreement (the "Agreement") is entered into as of the 26th day of
September, 2005, by and between Dennis G. Sullivan (the "Officer") and Middlesex
Water Company (the "Company").
BACKGROUND
A. The Officer has served the Company for over 21 years including most
recently serving as its President and Chief Executive Officer.
B. In anticipation of the Officer's retirement, the Company's Board of
Directors, in early 2004, initiated a succession planning process to
identify a successor to the Officer to serve as the Company's President
and Chief Executive Officer and to facilitate a smooth transition of
leadership of the Company.
C. An Executive Vice President was appointed November 1, 2004, with the
expectation that after a period of transition the Executive Vice President
would be prepared to succeed to the Office of President and Chief
Executive Officer.
D. In connection with that planning process, the Company's Board of Directors
has determined that it is in the best interests of the Company that the
transition take place effective January 1, 2006 whereby the Executive Vice
President would succeed to the Office of President and Chief Executive
Officer on that date and that the Officer's retirement would take effect
on that date.
E. This Agreement is intended to reflect the terms related to the Officer's
retirement other than those benefits which would otherwise be available to
the Officer upon retirement.
F. This Agreement will be subject to ratification by the Board of Directors.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein the parties agree as follows:
1. The Officer will continue in his position as President and Chief Executive
Officer until December 31, 2005 and will retire effective January 1, 2006.
2. The Officer will remain a member of the Company's Board of Directors for
the remainder of his term which is to run until the Company's Annual
Meeting to be held in May, 2006. As of his retirement date, Officer shall
be entitled to receive the same amount of Board Fees as are paid to other
non-management Directors.
Agreement, Dennis G. Sullivan
Page 2 of 4
3. Upon retirement the Officer will resign from his positions as a member of
the Boards of Directors of the Company's subsidiaries.
4. Commencing January 1, 2006, and continuing up to and including March 31,
2006, the Officer shall act as a consultant to the Company for which he
will receive a fee of $80,000 as long as he is able to perform the duties
contemplated herein. During the consulting period the Officer will have
use of a Company vehicle and cell phone. Although the parties have not
specified a fixed amount of service time for such consulting services, it
is contemplated that the Officer will be available to provide information
and advice whenever reasonably requested by the Company. During the
consulting period, the Officer will be available to review correspondence,
render advice, attend meetings and, in general, perform any and all such
other services as the Company may reasonably require of the Officer as a
consultant to the Company.
5. For a two-year period following his retirement, the Officer agrees that he
will not directly, or indirectly, in any individual or representative
capacity, carry on, engage or participate in any business in the States of
New Jersey and Delaware that is in direct competition in any manner
whatsoever with the business of the Company, except as may be expressly
agreed to in writing by the Company
6. At the time of his retirement, the Officer will be the beneficial owner of
8,700 shares of Restricted Stock of the Company issued pursuant to the
company's Restricted Stock Plan and held by the Company in Escrow. The
Officer shall also be eligible to receive additional shares of such
Restricted Stock relating to performance in 2005. The amount of such award
will be determined by the Board upon recommendation by the Compensation
Committee. (Such shares that have been issued and any additional shares
that will be issued are hereinafter referred to as "Restricted Stock.")
Although the Company has the right, pursuant to the Restricted Stock Plan,
to reacquire certain of those shares in the event of early retirement, the
Company waives its right to reacquire the Restricted Stock and agrees to
release any such shares from escrow as of the effective date of the
Officer's retirement, and distribute them to the Officer. Any additional
shares to be awarded to the Officer would not be subject to any plan
restrictions or escrow agreement and would not be subject to reacquisition
by the Company.
7. The Officer is eligible to receive benefits pursuant to the Company's
Supplemental Executive Retirement Plan ("SERP"). The SERP provides that
such benefits are to be based on the Officer's "Compensation" as that term
is defined in the SERP. Such Compensation is agreed to be the Officer's
2005 actual salary of $301,600. Although the SERP contains provisions in
Section 6.2 authorizing certain retirement reductions resulting from an
Early Retirement Date as compared to a Normal Retirement Date, the Company
agrees to waive those reductions.
Agreement, Dennis G. Sullivan
Page 3 of 4
8. The benefits described herein are not intended to supercede any other
benefits to which the Officer would be entitled to receive upon his
retirement as an officer or employee of the Company. This includes, but is
not limited to, the following:
The Officer shall be entitled to participate in all health, welfare and
other benefit plans generally available to all retirees for as long as the
Officer is eligible and elects to participate. Currently, the Company will
pay 100% of all monthly premiums of these benefits (which includes
medical, dental, prescription drug and life).
9. In consideration of the agreements and conditions set forth herein, the
payments made by the Company, and the other terms of this Agreement, the
adequacy of which is hereby acknowledged, Officer for himself, his heirs,
successors and assigns, does hereby release and forever discharge the
Company of and from any and all manner of action or claim of whatsoever
nature, in law or in equity, whether known or unknown, accrued or not
accrued, including but not limited to those claims which employee may not
be aware of and those not mentioned in this Agreement, which Officer now
has or hereafter may have against the Company, arising out of any acts or
omissions of any nature whatsoever which occurred at any time before the
effective date of this Agreement with respect to the subject matter of
this Agreement.
10. This Agreement shall be binding upon and inure to the benefit of the
Company's and Officer's heirs, administrators, representatives, executors,
successors, affiliates and assigns.
11. This Agreement expresses the entire understanding of the parties with
respect to the subject matter of the Agreement and the release of the
claims as set forth herein. The Agreement supersedes any prior written or
oral representations, agreements, or understandings with respect hereto.
12. Each party acknowledges that he or it has had the opportunity to review
the provisions of this Agreement with independent advisors (financial,
legal or otherwise) prior to the execution of this Agreement by each such
party.
13. This Agreement is made and entered into in the State of New Jersey and
shall in all respects be interpreted, enforced and governed under the laws
of the State of New Jersey without regard to New Jersey law regarding
choice of law. The language of all parts of this Agreement shall in all
cases be construed as a whole, according to its fair meaning, and not
strictly for or against either of the parties.
14. Neither party may assign or otherwise transfer its rights or delegate its
duties under this Agreement without the prior written consent of the other
party, and any attempt to do so without such consent is void.
Agreement, Dennis G. Sullivan
Page 4 of 4
IN WITNESS WHEREOF, the undersigned parties have executed this Agreement
as of the date first written above.
MIDDLESEX WATER COMPANY
By: /s/J. Richard Tompkins
----------------------
J. Richard Tompkins
Chairman of the Board
/s/Dennis G. Sullivan
----------------------
Dennis G. Sullivan
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)) and internal
control over financial reporting (as defined in Exchange At Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
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: November 14, 2005
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)) and internal
control over financial reporting (as defined in Exchange At Rules
13a-15(f) and 15d-15(f))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. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
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: November 14, 2005
Exhibit 32
SECTION 906 CERTIFICATION PURSUANT TO 18 U.S.C. ss.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: November 14, 2005
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. ss.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: November 14, 2005
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.
