SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For Quarter Ended: June 30, 2001 No. 0-422
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MIDDLESEX WATER COMPANY
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(Exact name of registrant as specified in its charter)
INCORPORATED IN NEW JERSEY 22-1114430
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 RONSON ROAD, ISELIN, NJ 08830
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(Address of principal executive offices) (Zip Code)
(732) 634-1500
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(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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that this registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 30 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2001
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Common Stock, No Par Value 5,066,207
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements:
Consolidated Statements of Income 1
Consolidated Balance Sheets 2
Consolidated Statements of Capitalization and
Retained Earnings 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures of Market Risk 12
PART II. OTHER INFORMATION 13
SIGNATURE 14
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
2001 2000 2001 2000 2001 2000
----- ----- ----- ----- ----- ----
Operating Revenues $14,753,732 $14,057,242 $27,897,630 $27,038,331 $55,335,842 $55,042,803
------------ ----------- ------------ ------------- ----------- ------------
Operating Expenses:
Operations 7,156,442 7,189,473 14,178,673 14,111,742 27,780,155 27,654,254
Maintenance 657,901 637,689 1,280,270 1,316,354 2,519,153 2,688,573
Depreciation 1,259,107 1,160,508 2,508,952 2,306,641 4,903,245 4,452,367
Other Taxes 1,883,940 1,764,805 3,586,937 3,433,195 7,085,703 7,011,978
Federal Income Taxes 988,394 776,656 1,463,330 1,291,025 2,809,363 2,917,638
------------ ----------- ------------ ------------- ----------- ------------
Total Operating Expenses 11,945,784 11,529,131 23,018,162 22,458,957 45,097,619 44,724,810
------------ ----------- ------------ ------------- ----------- ------------
Operating Income 2,807,948 2,528,111 4,879,468 4,579,374 10,238,223 10,317,993
Other Income:
Allowance for Funds Used During
Construction 22,353 27,588 38,258 44,764 128,655 317,944
Other - Net 345,010 37,910 416,169 75,265 569,696 253,252
------------ ----------- ------------ ------------- ----------- ------------
Total Other Income 367,363 65,498 454,427 120,029 698,351 571,196
Income Before Interest Charges 3,175,311 2,593,609 5,333,895 4,699,403 10,936,574 10,889,189
------------ ----------- ------------ ------------- ----------- ------------
Interest Charges 1,257,232 1,225,128 2,532,166 2,424,806 5,104,382 4,798,781
------------ ----------- ------------ ------------- ----------- ------------
Net Income 1,918,079 1,368,481 2,801,729 2,274,597 5,832,192 6,090,408
Preferred Stock Dividend Requirements 63,696 63,696 127,393 127,393 254,786 268,786
------------ ----------- ------------ ------------- ----------- ------------
Earnings Applicable to Common Stock $1,854,383 $1,304,785 $2,674,336 $2,147,204 $5,577,406 $5,821,622
============ =========== ============ ============= =========== ============
Earnings per share of Common Stock:
Basic $ 0.37 $ 0.26 $ 0.53 $ 0.43 $ 1.11 $ 1.17
Diluted $ 0.36 $ 0.26 $ 0.53 $ 0.43 $ 1.11 $ 1.17
Average Number of
Common Shares Outstanding :
Basic 5,062,171 5,014,922 5,057,411 5,010,138 5,045,623 4,977,788
Diluted 5,233,741 5,186,492 5,228,981 5,181,708 5,217,193 5,171,784
Cash Dividends Paid per Common Share $0.31 $0.30 1/2 $0.62 $0.61 $1.23 1/2 $1.21
See Notes to Consolidated Financial Statements.
-1-
MIDDLESEX WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS AND OTHER DEBITS
June 30, December 31,
2001 2000
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(Unaudited)
UTILITY PLANT:
Water Production $ 69,812,258 $ 69,363,626
Transmission and Distribution 138,071,845 136,545,596
General 20,457,631 20,189,182
Construction Work in Progress 2,157,505 1,036,498
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TOTAL 230,499,239 227,134,902
Less Accumulated Depreciation 41,005,600 38,856,591
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UTILITY PLANT-NET 189,493,639 188,278,311
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NONUTILITY ASSETS-NET 3,180,387 2,918,133
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CURRENT ASSETS:
Cash and Cash Equivalents 2,959,558 2,497,154
Temporary Cash Investments-Restricted 2,820,219 2,819,661
Accounts Receivable (net of allowance
for doubtful accounts) 6,241,446 5,282,796
Unbilled Revenues 3,474,501 2,969,043
Materials and Supplies (at average cost) 1,071,020 1,009,956
Prepayments and Other Current Assets 937,212 694,111
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TOTAL CURRENT ASSETS 17,503,956 15,272,721
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DEFERRED CHARGES:
Unamortized Debt Expense 2,881,430 2,950,276
Preliminary Survey and Investigation Charges 1,033,848 573,128
Regulatory Assets
Income Taxes 6,012,748 6,012,748
Post Retirement Costs 998,572 1,041,676
Other 2,373,835 2,352,966
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TOTAL DEFERRED CHARGES 13,300,433 12,930,794
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TOTAL $223,478,415 $219,399,959
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See Notes to Consolidated Financial Statements.
-2-
MIDDLESEX WATER COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND OTHER CREDITS
June 30, December 31,
2001 2000
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(Unaudited)
CAPITALIZATION (see accompanying statements) $156,918,263 $156,807,552
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CURRENT LIABILITIES:
Current Portion of Long-term Debt 217,915 215,859
Notes Payable 9,100,000 6,050,000
Accounts Payable 2,206,181 2,438,664
Taxes Accrued 6,791,538 6,050,322
Interest Accrued 1,785,216 1,797,520
Other 1,272,349 1,454,276
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TOTAL CURRENT LIABILITIES 21,373,199 18,006,641
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DEFERRED CREDITS:
Customer Advances for Construction 10,821,224 11,364,818
Accumulated Deferred Investment Tax Credits 1,971,724 2,011,033
Accumulated Deferred Federal Income Taxes 12,470,603 12,371,473
Employee Benefit Plans 5,029,806 4,658,364
Other 1,036,809 1,203,051
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TOTAL DEFERRED CREDITS 31,330,166 31,608,739
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CONTRIBUTIONS IN AID OF CONSTRUCTION 13,856,787 12,977,027
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TOTAL $223,478,415 $219,399,959
============ ============
See Notes to Consolidated Financial Statements.
-3-
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION AND RETAINED EARNINGS
June 30, December 31,
2001 2000
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(Unaudited)
CAPITALIZATION:
Common Stock, No Par Value
Shares Authorized, 10,000,000
Shares Outstanding - 2001 - 5,066,207; 2000 - 5,048,534 $ 49,486,750 $ 48,838,486
Retained Earnings 21,336,565 21,796,707
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TOTAL COMMON EQUITY 70,823,315 70,635,193
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Cumulative Preference Stock, No Par Value
Shares Authorized, 100,000; Shares Outstanding, None
Cumulative Preferred Stock, No Par Value, Shares Authorized - 140,497
Convertible:
Shares Outstanding, $7.00 Series - 14,881 1,562,505 1,562,505
Shares Outstanding, $8.00 Series - 12,000 1,398,857 1,398,857
Nonredeemable:
Shares Outstanding, $7.00 Series - 1,017 101,700 101,700
Shares Outstanding, $4.75 Series - 10,000 1,000,000 1,000,000
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TOTAL CUMULATIVE PREFERRED STOCK 4,063,062 4,063,062
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Long-term Debt:
8.05% Amortizing Secured Note, due December 20, 2021 3,293,110 3,320,428
First Mortgage Bonds:
7.25%, Series R, due July 1, 2021 6,000,000 6,000,000
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 August 1, 2018 955,963 970,667
4.53%, Series Y, due August 1, 2018 1,095,000 1,095,000
0.00%, Series Z, due September 1, 2019 2,055,728 2,089,061
5.25%, Series AA, due September 1, 2019 2,350,000 2,350,000
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SUBTOTAL LONG-TERM DEBT 82,249,801 82,325,156
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Less: Current Portion of Long-term Debt (217,915) (215,859)
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TOTAL LONG-TERM DEBT 82,031,886 82,109,297
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TOTAL CAPITALIZATION $ 156,918,263 $ 156,807,552
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Six Months Ended Year Ended
June 30, December 31,
2001 2000
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(Unaudited)
RETAINED EARNINGS:
BALANCE AT BEGINNING OF PERIOD $ 21,796,707 $ 22,895,844
Net Income 2,801,729 5,305,060
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TOTAL 24,598,436 28,200,904
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Cash Dividends:
Cumulative Preferred Stock 127,393 254,786
Common Stock 3,134,478 6,149,411
TOTAL DEDUCTIONS 3,261,871 6,404,197
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BALANCE AT END OF PERIOD $ 21,336,565 $ 21,796,707
============= =============
See Notes to Consolidated Financial Statements
-4-
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30, Twelve Months Ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,801,729 $ 2,274,597 $ 5,832,192 $ 6,090,408
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 2,693,378 2,415,146 5,222,933 4,795,652
Provision for Deferred Income Taxes 99,130 88,574 211,875 205,616
Allowance for Funds Used During Construction (38,258) (44,764) (128,655) (317,944)
Changes in Current Assets and Liabilities:
Accounts Receivable (958,650) (99,172) (172,729) 111,100
Accounts Payable (232,483) (477,847) (708,406) 661,129
Accrued Taxes 741,216 743,476 689,324 88,110
Accrued Interest (12,304) 47,860 (23,114) 69,145
Unbilled Revenues (505,458) (548,699) (297,939) (58,912)
Employee Benefit Plans 371,442 557,229 (183,999) 953,666
Other-Net (525,954) (142,399) (826,132) (142,429)
------------ ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,433,788 4,814,001 9,615,350 12,455,541
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (3,730,912) (5,887,054) (11,483,149) (18,788,413)
Note Receivable 97,500 (13,500) 70,500 2,759,130
Preliminary Survey and Investigation Charges (460,720) (222,576) (338,985) (349,880)
Other-Net (572,013) (82,740) (1,343,964) (236,374)
------------ ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (4,666,145) (6,205,870) (13,095,598) (16,615,537)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (75,355) (40,188) (241,524) (89,084)
Proceeds from Issuance of Long-term Debt -- -- -- 4,500,000
Short-term Bank Borrowings 3,050,000 1,000,000 6,100,000 --
Deferred Debt Issuance Expenses (1,885) -- (43,502) (20,404)
Temporary Cash Investments-Restricted (558) (121,327) 3,032,935 (3,036,297)
Proceeds from Issuance of Common Stock-Net 648,264 618,471 1,274,765 1,210,689
Payment of Common Dividends (3,134,478) (3,054,712) (6,229,177) (6,018,228)
Payment of Preferred Dividends (127,393) (127,393) (254,786) (268,786)
Construction Advances and Contributions-Net 336,166 63,669 684,672 1,344,923
------------ ------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 694,761 (1,661,480) 4,323,383 (2,377,187)
------------ ------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 462,404 (3,053,349) 843,135 (6,537,183)
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,497,154 5,169,772 3,797,660 8,653,606
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,959,558 $ 2,116,423 $ 4,640,795 $ 2,116,423
============ ============ ============ ============
* Excludes Allowance for Funds Used During Construction
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Period for:
Interest (net of amounts capitalized) $ 2,450,576 $ 2,236,251 $ 4,857,460 $ 4,249,599
Income Taxes $ 1,157,792 $ 988,450 $ 2,150,792 $ 3,202,750
See Notes to Consolidated Financial Statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Organization - Middlesex Water Company (Middlesex) is the parent company and
sole shareholder of Tidewater Utilities, Inc. (Tidewater), Pinelands Water
Company, Pinelands Wastewater Company, Utility Service Affiliates, Inc. (USA),
Utility Service Affiliates (Perth Amboy) Inc. (USA-PA) and Bayview Water Company
(See Note 2). White Marsh Environmental Systems, Inc. is a wholly-owned
subsidiary of Tidewater. The financial statements for Middlesex and its wholly
owned subsidiaries (the Company) are reported on a consolidated basis. All
intercompany accounts and transactions have been eliminated.
The consolidated notes accompanying the 2000 Form 10-K are applicable to this
report and, in the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position as
of June 30, 2001 and the results of operations and its cash flows for the
periods ended June 30, 2001 and 2000. Information included in the Balance Sheet
as of December 31, 2000, has been derived from the Company's audited financial
statements included in its annual report on Form 10-K for the year ended
December 31, 2000.
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended. This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts. The adoption of this statement on
January 1, 2001, had no impact on the financial statements.
Note 2 - Regulatory Matters
Base Rate Cases - On June 6, 2001, Middlesex received a signed order from the
New Jersey Board of Public Utilities (BPU) approving an 8.1% rate increase or
approximately $3.3 million. The decision was based upon a rate base of $133.0
million and a Return on Equity of 10.5%. These components are expected to allow
the Company the opportunity to earn a 7.95% rate of return on the allowed rate
base.
The BPU approved an increase in base rates for the two Pinelands companies.
Pinelands Pinelands
Water Wastewater
-------------- --------------
Effective Date August 1, 2001 August 1, 2001
Percentage Increase 26.92% 11.81%
Revenue Increase $ 86,000 $ 104,000
Rate Base $956,000 $1,471,000
Return on Equity 10.5% 10.5%
Rate of Return 9.1% 9.2%
-6-
Note 3 - Capitalization
Common Stock - During the three months ended June 30, 2001, 8,848 common shares
($0.3 million) were issued under the Company's Dividend Reinvestment and Common
Stock Purchase Plan.
Note 4 - 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 Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
2001 2000 2001 2000 2001 2000
Basic: Income Shares Income Shares Income Shares Income Shares Income Shares Income Shares
---------------------------------------------------------------------------------------------------------------------------------
Net Income $1,918 5,062 $1,368 5,015 $2,801 5,058 $2,275 5,010 $5,832 5,046 $6,090 4,978
Preferred Dividend (64) (64) (127) (127) (255) (269)
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Earnings Applicable
to Common Stock $1,854 5,062 $1,304 5,015 $2,674 5,058 $2,148 5,010 $5,577 5,046 $5,821 4,978
Basic EPS $ 0.37 $ 0.26 $ 0.53 $ 0.43 $ 1.11 $ 1.17
---------------------------------------------------------------------------------------------------------------------------------
Diluted:
---------------------------------------------------------------------------------------------------------------------------------
Earnings Applicable
to Common Stock $1,854 5,062 $1,304 5,015 $2,674 5,058 $2,148 5,010 $5,577 5,046 $5,821 4,978
$7.00 Series Dividend 26 89 26 89 52 89 52 89 104 89 104 89
$8.00 Series Dividend 24 82 24 82 48 82 48 82 96 82 110 105
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Adjusted Earnings
Applicable to
Common Stock $1,904 5,233 $1,354 5,186 $2,774 5,229 $2,248 5,181 $5,777 5,217 $6,035 5,172
Diluted EPS $ 0.36 $ 0.26 $ 0.53 $ 0.43 $ 1.11 $ 1.17
Note 5 - Business Segment Data
The Company has identified two reportable segments. One is the regulated
business of collecting, treating and distributing water on a retail and
wholesale basis to residential, commercial, industrial and fire protection
customers in parts of New Jersey and Delaware. It also operates a regulated
wastewater system in New Jersey. The Company is subject to regulations as to its
rates, services and other matters by the States of New Jersey and Delaware with
respect to utility service within these States. The other segment is the
non-regulated contract services for the operation and maintenance of municipal
and private water and wastewater systems in New Jersey and Delaware. On January
1, 1999 the Company began operating the water and wastewater systems of the City
of Perth Amboy, New Jersey under a service contract. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies in Note 1 to the Consolidated Financial Statements.
Inter-segment transactions relating to operational costs are treated as pass
through expenses.
-7-
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
Operations by Segments: 2001 2000 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------
Revenues:
Regulated $ 13,059 $ 12,287 $ 24,469 $ 23,578 $ 48,524 $ 47,731
Non - Regulated 1,704 1,779 3,447 3,478 6,848 7,348
Inter-segment Elimination (9) (9) (18) (18) (36) (36)
-------- -------- -------- -------- -------- --------
Consolidated Revenues $ 14,754 $ 14,057 $ 27,898 $ 27,038 $ 55,336 $ 55,043
-------- -------- -------- -------- -------- --------
Operating Income:
Regulated $ 2,702 $ 2,385 $ 4,722 $ 4,354 $ 9,893 $ 9,506
Non - Regulated 106 143 157 225 345 812
Inter-segment Elimination -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Consol. Operating Income $ 2,808 $ 2,528 $ 4,879 $ 4,579 $ 10,238 $ 10,318
-------- -------- -------- -------- -------- --------
Depreciation/Amortization:
Regulated $ 1,245 $ 1,147 $ 2,481 $ 2,281 $ 4,846 $ 4,413
Non - Regulated 14 14 28 26 57 39
Inter-segment Elimination -- -- -- -- -- --
Consolidated
-------- -------- -------- -------- -------- --------
Depreciation/Amortization $ 1,259 $ 1,161 $ 2,509 $ 2,307 $ 4,903 $ 4,452
-------- -------- -------- -------- -------- --------
Other Income:
Regulated $ 617 $ 395 $ 853 $ 604 $ 1,534 $ 1,980
Non - Regulated 5 -- 55 (3) 62 (3)
Inter-segment Elimination (255) (330) (454) (481) (898) (1,406)
-------- -------- -------- -------- -------- --------
Consolidated Other Income $ 367 $ 65 $ 454 $ 120 $ 698 $ 571
-------- -------- -------- -------- -------- --------
Interest Expense:
Regulated $ 1,476 $ 1,370 $ 2,958 $ 2,707 $ 5,897 $ 5,321
Non - Regulated 14 23 28 45 39 145
Inter-segment Elimination (233) (168) (454) (327) (832) (667)
-------- -------- -------- -------- -------- --------
Consol. Interest Expense $ 1,257 $ 1,225 $ 2,532 $ 2,425 $ 5,104 $ 4,799
-------- -------- -------- -------- -------- --------
Net Income:
Regulated $ 1,843 $ 1,410 $ 2,617 $ 2,250 $ 5,529 $ 6,164
Non - Regulated 97 120 184 179 368 664
Inter-segment Elimination (22) (162) -- (154) (65) (738)
-------- -------- -------- -------- -------- --------
Consolidated Net Income $ 1,918 $ 1,368 $ 2,801 $ 2,275 $ 5,832 $ 6,090
-------- -------- -------- -------- -------- --------
Capital Expenditures:
Regulated $ 2,419 $ 3,178 $ 3,667 $ 5,367 $ 11,365 $ 18,257
Non - Regulated 29 49 64 520 118 531
Inter-segment Elimination -- --
-------- -------- -------- -------- -------- --------
Total Capital Expenditures $ 2,448 $ 3,227 $ 3,731 $ 5,887 $ 11,483 $ 18,788
-------- -------- -------- -------- -------- --------
As of As of
June 30, December 31,
2001 2000
Assets:
Regulated $ 244,107 $ 236,923
Non - Regulated 3,169 3,034
Inter-segment Elimination (23,798) (20,557)
--------- ---------
Consolidated Assets $ 223,478 $ 219,400
--------- ---------
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Three Months Ended June 30, 2001
Operating revenues for the three months ended June 30, 2001 were up $0.7 million
or 5.0% from the same period in 2000. Higher base rates in our Middlesex service
territory provided $0.2 million of the increase. Increased consumption in all
service areas generated the balance of the revenue increase.
Operating expenses increased $0.4 million or 3.6%. Operations and maintenance
expenses declined slightly over the prior period Depreciation expense increased
8.5% over the same period from last year. Plant improvements of $11.0 million
over the last twelve months plus an increase in the composite depreciation rate
for our Delaware utility plant were the primary reasons for the increase of this
expense.
Other taxes rose $0.1 million due to higher revenue related taxes. Federal
income taxes rose 27.3%, reflecting a higher amount of current taxable income.
Other income rose $0.3 million due to a one-time gain on the sale of excess land
by a small investor owned utility in Southern Delaware. Middlesex is a 23%
equity owner of that utility.
Net income rebounded in the second quarter and increased by 40.1% to $1.9
million.
Results of Operations -Six Months Ended June 30, 2001
Operating revenues for the six months ended June 30, 2001 were up $0.9 million
or 3.2% from the same period in 2000. Higher base rates in our Middlesex service
territory provided $0.2 million of the increase. Increased consumption in all
service areas generated the balance of the revenue increase.
Operating expenses increased $0.6 million or 2.5% over the same period last
year. Operations and maintenance expenses increased slightly over the prior
period. Depreciation expense increased 8.8% over the same period from last year.
Plant improvements of $11.0 million over the last twelve months plus an increase
in the composite depreciation rate for our Delaware utility plant were the
primary reasons for the increase of this expense.
Federal income taxes rose 13.4%, reflecting a higher amount of current taxable
income.
Other income rose $0.3 million due to a one-time gain on the sale of excess land
by a small investor owned utility in Southern Delaware. Middlesex is a 23%
equity owner of that utility.
Net income increased in the second quarter by 23.1% to $2.8 million.
-9-
Results of Operations - Twelve Months Ended June 30, 2001
Operating revenues for the twelve months ended June 30, 2001 were up $0.3
million to $55.3 million. Higher consumption in all our service territories
provided $0.5 million of additional revenue. Rate increases accounted for $0.3
million. Service fees from our operations and maintenance contracts fell $0.5
million. $0.3 million of that decline was due to lower variable fees earned
under the City of Perth Amboy contract. These variable fees are based upon
consumption revenue growth, which failed to materialize due to unfavorable
weather during the comparative period. The balance of the decline is the result
of the 1999 acquisition by Middlesex of the franchised customers previously
served under the City of South Amboy contract.
Operating expenses increased $0.4 million or less than one percent. Maintenance
costs decreased by $0.2 million due to a lower number of cold weather related
main breaks and a decreased number of emergency repairs at the Delaware mobile
home parks systems acquired in January 2000. Depreciation expense increased $0.5
million or 10.1% as a result of the CJO Plant completion in July 1999, with a
cost of approximately $35.0 million and other utility plant improvements of
$28.2 million since June 30, 1999.
Federal income taxes declined $0.1 million or 3.7% as a result of the lower
amount of taxable income.
Other income rose $0.1 million as earnings from our investment in Sussex Shores
contributed $0.3 million due to a one-time gain on the sale of excess land by a
small investor owned utility in Southern Delaware. Middlesex is a 23% equity
owner of that utility. AFUDC declined due to reduced capital expenditures on
projects that would be subject to AFUDC.
The 5.2% decrease in preferred stock dividend requirements reflects the partial
exercise of the conversion feature of the $8.00 Series of Preferred Stock in
late 1999. Basic and diluted earnings per share decreased almost 5.1% to $1.11.
Capital Resources
The Company's capital program for 2001 is estimated to be $17.3 million and
includes $8.6 million for water system additions and improvements for our
Delaware systems and $1.8 million for final expenditures on the upgrade to the
CJO Plant. The capital program also includes $6.9 million for scheduled upgrades
to our existing systems in New Jersey. The scheduled upgrades consist of $0.8
million for mains, $0.9 million for service lines, $0.3 million for meters, $0.3
million for hydrants, $0.8 million for computer systems and $3.8 million for
various other items.
Liquidity
The capital program in Delaware will be financed through a combination of a
capital contribution from Middlesex and long-term debt financing from either a
financial institution or the Company. Middlesex, Tidewater and Bayview each have
filed applications with their respective state agencies to qualify certain
capital projects for financing through the State Revolving Fund (SRF). SRF
provides low cost financing for projects that meet certain water quality
improvement benchmarks. Most of the proceeds from those loans, if granted, will
be used in 2002 with some minor expenditure in 2001. Other capital expenditures
will be financed through internally generated funds and sale of common stock
through the Dividend Reinvestment and Common Stock Purchase Plan (DRP). Capital
expenditures of $4.2 million have been incurred in the six months ended June 30,
2001. The Company will also utilize short-term borrowings through $18.0 million
of available lines of credit it has with two commercial banks for working
capital purposes. At June 30, 2001, there was $9.1 million outstanding against
the lines of credit.
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Accounting Standards
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended. This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts. The adoption of this statement on
January 1, 2001, had no impact on the financial statements.
The FASB issued two new accounting pronouncements. SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 will require business combinations entered into after June 30, 2001 to be
accounted for using the purchase method of accounting. Specifically identifiable
intangible assets acquired, other than goodwill, will be amortized over their
estimated useful economic life. SFAS No. 142 eliminates amortization of
goodwill. Goodwill impairment testing will be required at least annually. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001 to all
goodwill and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were initially
recognized.
The FASB also issued SFAS No. 143, Assets Retirement Obligation, which the
Company is required to adopt January 1, 2003. The Company is currently
evaluating the effect of adopting these three new accounting pronouncements.
Regulatory Matters
On April 10, 2001, Middlesex completed the purchase of the water utility assets
and certain trade payables of Fortescue Realty Company. This transaction was
effected with the creation of a wholly-owned subsidiary, Bayview Water Company.
The first long-term objective for improving service to the 300 customers is to
obtain low cost financing through the New Jersey State Revolving Fund (SRF) to
replace the entire water distribution system. This plan calls for construction
to begin in the fourth quarter of 2001. SRF financing is also expected to be in
place by November 2001. Because of the system replacement, significant rate
relief will be required. The Company is currently reviewing its timetable for
filing for the necessary rate increase.
The Hearing Examiner issued his findings and recommendations report in
connection with the petition by Tidewater before the Delaware Public Service
Commission (PSC) to acquire the 2,200 customer Sea Colony, LLC water system.
Although the Hearing Examiner stated that the record supports the approval of
the application, the Hearing Examiner recommended that the PSC condition their
approval on the removal of PSC Order No. 5592, which referenced failure to
provide adequate or proper safe water services. That PSC Order pertained to the
December 2000 base rate increase approved by the PSC.
Tidewater has filed a motion for the removal of PSC Order No. 5592. Three public
hearings and one evidentiary hearings were held in connection with that motion.
Tidewater believes that the record from those hearings will be favorable for the
approval of the motion by the PSC at their August 21, 2001 meeting.
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Outlook
Middlesex and its subsidiaries continue to review operations for cost
reductions, without sacrificing service to our customers. Higher revenues from
the most recently approved rate increases for Middlesex and the two Pinelands
cases should help improve earnings over last year. A return to more typical
spring and summer weather patterns will also increase revenues. Similarly,
increased usage in Delaware may provide additional revenue as a result of the
rate increase and restructured rates. The restructured rates now reflect a
greater proportionate charge on the consumption component of the rate. Even with
the recent rate increase in Delaware, we are earning less than half of the
approved 9.14% rate of return. We are evaluating the timing of additional rate
relief request in that jurisdiction. Our latest earnings projections for 2001
are between $1.14 and $1.18 per basic share.
Forward Looking Information
Certain matters discussed in this report on Form 10-Q are "forward-looking
statements" intended to qualify for safe harbors from liability established by
the Private Securities Litigation Reform Act of 1995. Such statements may
address future plans, objectives, expectations and events concerning various
matters such as capital expenditures, earnings, litigation, growth potential,
rate and other regulatory matters, liquidity, capital resources and accounting
matters. Actual results in each case could differ materially from those
currently anticipated in such statements. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures of Market Risk
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rates through the use of
fixed rate, long-term debt and, to a lesser extent, short-term debt. The
Company's interest rate risk related to existing fixed rate, long-term debt is
not material due to the term of the majority of our First Mortgage Bonds, which
have maturity dates ranging from 2009 to 2038. Over the next twelve months,
approximately $0.2 million of the current portion of four existing long-term
debt instruments will mature. Applying a hypothetical change in the rate of
interest charged by 10% on those borrowings would not have a material effect on
earnings.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A claim has been made by multiple plaintiffs for damages
resulting from personal injury, including death, and property
damage alleged to have been caused by the delivery in Delaware
of inadequate quality water, and related claims. While the
Company has little detail about the claim at this time, we
have substantial insurance coverage, which we believe will be
sufficient for all claims in this matter other than for
punitive damages.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting of Shareholders held May 23, 2001.
Matters voted upon at the meeting:
Nominees for Class II, term expiring 2004
FOR WITHHOLD
Stephen H. Mundy 4,068,835 72,303
Richard A. Russo 4,085,360 55,778
Resolution approving appointment of Deloitte & Touche LLP,
Certified Public Accountants, as independent auditors for
2001:
FOR AGAINST ABSTAIN
--- ------- -------
4,103,743 19,564 17,831
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: Filed June 26, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
MIDDLESEX WATER COMPANY
(Registrant)
/s/ A. Bruce O'Connor
----------------------
Date: August 14, 2001 A. Bruce O'Connor
Vice President and Controller
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