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: March 31, 2004 No. 0-422
MIDDLESEX WATER COMPANY
(Exact name of registrant as specified in its charter)
INCORPORATED IN NEW JERSEY 22-1114430
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 RONSON ROAD, ISELIN, NJ 08830
(Address of principal executive offices) (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 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-2 of the Securities Exchange Act of 1934). 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 May 7, 2004
----- --------------------------
Common Stock, No Par Value 10,594,587
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements:
Condensed Consolidated Statements of Income 1
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Cash Flows 3
Condensed Consolidated Statements of Capital Stock and Long-Term Debt 4
Condensed Consolidated Statements of Comprehensive Income 5
Notes to Condensed 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 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31, Twelve Months Ended March 31,
2004 2003 2004 2003
--------------------------------- ---------------------------------
Operating Revenues $ 15,875,733 $ 14,981,373 $ 65,005,574 $ 62,684,756
--------------------------------- ---------------------------------
Operating Expenses:
Operations 8,904,091 7,811,629 33,758,561 30,516,982
Maintenance 862,508 975,854 3,415,767 3,165,499
Depreciation 1,436,230 1,280,180 5,518,777 4,947,730
Other Taxes 1,945,194 1,908,128 7,852,984 7,797,617
Income Taxes 507,359 629,733 3,114,844 3,926,129
--------------------------------- ---------------------------------
Total Operating Expenses 13,655,382 12,605,524 53,660,933 50,353,957
--------------------------------- ---------------------------------
Operating Income 2,220,351 2,375,849 11,344,641 12,330,799
Other Income (Expense):
Allowance for Funds Used During Construction 49,561 92,606 272,874 291,991
Other Income 19,806 19,944 131,361 225,661
Other Expense (3,236) (19,170) (73,997) (80,590)
--------------------------------- ---------------------------------
Total Other Income 66,131 93,380 330,238 437,062
Interest Charges 1,252,842 1,244,348 5,235,524 5,054,333
--------------------------------- ---------------------------------
Net Income 1,033,640 1,224,881 6,439,355 7,713,528
Preferred Stock Dividend Requirements 63,697 63,697 254,786 254,786
--------------------------------- ---------------------------------
Earnings Applicable to Common Stock $ 969,943 $ 1,161,184 $ 6,184,569 $ 7,458,742
--------------------------------- ---------------------------------
Earnings per share of Common Stock:
Basic $ 0.09 $ 0.11 $ 0.59 $ 0.72
Diluted $ 0.09 $ 0.11 $ 0.59 $ 0.72
Average Number of
Common Shares Outstanding :
Basic 10,579,095 10,378,502 10,524,905 10,327,655
Diluted 10,922,235 10,721,642 10,868,045 10,670,795
Cash Dividends Paid per Common Share $ 0.165 $ 0.161 $ 0.653 $ 0.638
See Notes to Condensed Consolidated Financial Statements.
-1-
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 2004 2003
---------------------------------------------------------------------------------------------------------------------
UTILITY PLANT: Water Production $ 78,086,493 $ 77,265,782
Transmission and Distribution 175,354,007 174,455,437
General 19,772,623 19,776,293
Construction Work in Progress 3,792,558 2,798,070
-------------------------------------------------------------------------------------------
TOTAL 277,005,681 274,295,582
Less Accumulated Depreciation 48,598,619 47,510,797
-------------------------------------------------------------------------------------------
UTILITY PLANT - NET 228,407,062 226,784,785
-------------------------------------------------------------------------------------------
NONUTILITY ASSETS - NET 4,259,946 4,147,685
---------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS: Cash and Cash Equivalents 3,296,224 3,005,610
Accounts Receivable 5,883,980 5,682,608
Unbilled Revenues 3,253,151 3,234,788
Materials and Supplies (at average cost) 1,647,585 1,419,142
Prepayments 848,095 1,009,304
-------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 14,929,035 14,351,452
---------------------------------------------------------------------------------------------------------------------
DEFERRED CHARGES Unamortized Debt Expense 3,249,171 3,272,783
AND OTHER ASSETS: Preliminary Survey and Investigation Charges 1,474,941 1,380,771
Regulatory Assets 8,344,778 8,216,117
Operations Contracts Fees Receivable 699,806 699,806
Restricted Cash 3,526,042 3,825,420
Other 517,243 513,116
-------------------------------------------------------------------------------------------
TOTAL DEFERRED CHARGES AND OTHER ASSETS 17,811,981 17,908,013
-------------------------------------------------------------------------------------------
TOTAL ASSETS $ 265,408,024 $ 263,191,935
-------------------------------------------------------------------------------------------
March 31, December 31,
CAPITALIZATION AND LIABILITIES 2004 2003
CAPITALIZATION: Common Stock, No Par Value $ 57,431,181 $ 56,924,028
Retained Earnings 21,689,030 22,668,348
Accumulated Other Comprehensive Income, net of tax 50,808 50,808
-------------------------------------------------------------------------------------------
TOTAL COMMON EQUITY 79,171,019 79,643,184
-------------------------------------------------------------------------------------------
Preferred Stock 4,063,062 4,063,062
Long-term Debt 98,251,018 97,376,847
-------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION 181,485,099 181,083,093
---------------------------------------------------------------------------------------------------------------------
CURRENT Current Portion of Long-term Debt 1,065,629 1,067,258
LIABILITIES: Notes Payable 13,475,000 12,500,000
Accounts Payable 4,170,501 4,777,400
Taxes Accrued 8,155,934 6,258,739
Interest Accrued 719,630 1,810,639
Unearned Revenues and Advanced Service Fees 862,858 602,854
Other 760,566 678,596
-------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 29,210,118 27,695,486
---------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 5)
---------------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS: Customer Advances for Construction 11,414,908 11,711,846
Accumulated Deferred Investment Tax Credits 1,755,528 1,775,183
Accumulated Deferred Income Taxes 14,271,235 14,125,970
Employee Benefit Plans 5,298,433 5,086,988
Regulatory Liability - Cost of Utility Plant Removal 4,958,761 4,830,308
Other 927,330 909,498
-------------------------------------------------------------------------------------------
TOTAL DEFERRED CREDITS 38,626,195 38,439,793
---------------------------------------------------------------------------------------------------------------------
CONTRIBUTIONS IN AID OF CONSTRUCTION 16,086,612 15,973,563
---------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 265,408,024 $ 263,191,935
-------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
2
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, Twelve Months Ended March 31,
2004 2003 2004 2003
----------------------------- -----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,033,640 $ 1,224,881 $ 6,439,355 $ 7,713,528
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 1,499,191 1,391,893 5,741,161 5,436,266
Provision for Deferred Income Taxes (58,444) 39,393 209,082 236,341
Allowance for Funds Used During Construction (49,561) (92,606) (272,874) (291,991)
Changes in Assets and Liabilities:
Accounts Receivable (201,372) 469,029 (324,707) (133,630)
Unbilled Revenues (18,363) 40,543 (112,603) (163,881)
Materials & Supplies (228,443) (70,697) (386,551) (147,478)
Prepayments 161,209 201,322 (234,025) 81,890
Other Assets 30,126 44,136 261,792 (117,289)
Operations Contracts Receivable -- -- (699,806) --
Accounts Payable (606,899) 393,845 1,259,687 179,981
Accrued Taxes 1,897,195 1,965,957 265,053 (510,253)
Accrued Interest (1,091,009) (423,475) (471,173) 340,606
Employee Benefit Plans 211,445 233,827 (215,131) 99,015
Unearned Revenue & Advanced Service Fees 260,004 (98,441) 544,710 (38,021)
Other Liabilities 99,805 (114,830) (21,796) (1,520,489)
------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,938,524 5,204,777 11,982,174 11,164,595
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (2,935,590) (3,797,087) (18,712,708) (16,482,195)
Cash Surrender Value & Other Investments (57,864) -- (524,154) (4,438)
Restricted Cash 299,378 750,349 1,870,187 2,415,247
Investment in Associated Companies -- 3,716 (3,716) (16,902)
Proceeds from Real Estate Dispositions -- -- 532,922 --
Preliminary Survey & Investigation Charges (94,170) (299,203) (77,270) (486,948)
Other Assets -- (225,540) 178,276 709,688
------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,788,246) (3,567,765) (16,736,463) (13,865,548)
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (212,204) (108,901) (987,730) (490,436)
Proceeds from Issuance of Long-term Debt 1,084,746 124,931 12,165,538 192,281
Net Short-term Bank Borrowings/(Repayments) 975,000 825,000 (5,000,000) 6,850,000
Deferred Debt Issuance Expenses (17,512) (35,442) (176,554) 54,041
Common Stock Issuance Expense (204,286) -- (307,570) (3,688)
Restricted Cash -- 144 (23) 219,732
Proceeds from Issuance of Common Stock 507,153 970,100 3,146,912 3,414,955
Payment of Common Dividends (1,744,975) (1,670,677) (6,865,552) (6,578,771)
Payment of Preferred Dividends (63,697) (63,697) (254,786) (254,786)
Construction Advances and Contributions-Net (183,889) 307,604 1,406,310 1,131,499
------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 140,336 349,062 3,126,545 4,534,827
------------------------------------------------------------------------------------------------------------------------------
NET CHANGES IN CASH AND CASH EQUIVALENTS 290,614 1,986,074 (1,627,744) 1,833,874
------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,005,610 2,937,894 4,923,968 3,090,094
------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,296,224 $ 4,923,968 $ 3,296,224 $ 4,923,968
------------------------------------------------------------------------------------------------------------------------------
*Excludes Allowance for Funds Used During Construction.
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Cash Paid for Interest $ 2,453,181 $ 1,670,774 $ 5,844,285 $ 4,486,546
Interest Capitalized $ (49,561) $ (92,606) $ (272,874) $ (291,991)
Income Taxes $ 112,000 $ -- $ 2,584,000 $ 4,177,000
------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
3
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
(Unaudited)
March 31, December 31,
2004 2003
------------------------------------------------------------------------------------------------------------------
Common Stock, No Par Value
Shares Authorized - 20,000,000
Shares Outstanding - 2004 - 10,588,947 $ 57,431,181 $ 56,924,028
2003 - 10,566,937
Retained Earnings 21,689,030 22,668,348
Accumulated Other Comprehensive Income, net of tax 50,808 50,808
------------------------------------------------------------------------------------------------------------------
TOTAL COMMON EQUITY 79,171,019 79,643,184
------------------------------------------------------------------------------------------------------------------
Cumulative Preference Stock, No Par Value:
Shares Authorized - 100,000
Shares Outstanding - None
Cumulative Preferred Stock, No Par Value
Shares Authorized - 140,497
Convertible:
Shares Outstanding, $7.00 Series - 14,881 1,562,505 1,562,505
Shares Outstanding, $8.00 Series - 12,000 1,398,857 1,398,857
Nonredeemable:
Shares Outstanding, $7.00 Series - 1,017 101,700 101,700
Shares Outstanding, $4.75 Series - 10,000 1,000,000 1,000,000
------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK 4,063,062 4,063,062
------------------------------------------------------------------------------------------------------------------
Long-term Debt
8.05%, Amortizing Secured Note, due December 20, 2021 3,118,856 3,136,531
6.25%, Amortizing Secured Note, due May 22, 2028 10,150,000 10,255,000
4.22%, State Revolving Trust Note, due December 31, 2022 364,607 192,281
3.60%, State Revolving Trust Note, due May 1, 2025 1,493,212 580,792
4.00%, State Revolving Trust Bond, due September 1, 2021 820,000 820,000
0.00%, State Revolving Fund Bond, due September 1, 2021 679,778 690,833
First Mortgage Bonds:
5.20%, Series S, due October 1, 2022 12,000,000 12,000,000
5.25%, Series T, due October 1, 2023 6,500,000 6,500,000
6.40%, Series U, due February 1, 2009 15,000,000 15,000,000
5.25%, Series V, due February 1, 2029 10,000,000 10,000,000
5.35%, Series W, due February 1, 2038 23,000,000 23,000,000
0.00%, Series X, due September 1, 2018 794,923 807,956
4.25%, Series Y, due September 1, 2018 965,000 965,000
0.00%, Series Z, due September 1, 2019 1,726,994 1,792,435
5.25%, Series AA, due September 1, 2019 2,175,000 2,175,000
0.00%, Series BB, due September 1, 2021 2,168,277 2,168,277
4.00%, Series CC, due September 1, 2021 2,360,000 2,360,000
5.10%, Series DD, due January 1, 2032 6,000,000 6,000,000
------------------------------------------------------------------------------------------------------------------
SUBTOTAL LONG-TERM DEBT 99,316,647 98,444,105
------------------------------------------------------------------------------------------------------------------
Less: Current Portion of Long-term Debt (1,065,629) (1,067,258)
------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 98,251,018 $ 97,376,847
------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
4
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Twelve Months Ended
March 31, March 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net Income $1,033,640 $1,224,881 $6,439,355 $7,713,528
Other Comprehensive Income:
Change in Value of Equity Investments, Net of Income Tax -- -- 50,808 --
---------- ---------- ---------- ----------
Other Comprehensive Income -- -- 50,808 --
---------- ---------- ---------- ----------
Comprehensive Income $1,033,640 $1,224,881 $6,490,163 $7,713,528
========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Organization - Middlesex Water Company (Middlesex) is the parent company and
sole shareholder of Tidewater Utilities, Inc. (Tidewater), Pinelands Water
Company, Pinelands Wastewater Company, Utility Service Affiliates, Inc. (USA),
Utility Service Affiliates (Perth Amboy) Inc. (USA-PA) and Bayview Water
Company. Southern Shores Water Company, LLC and White Marsh Environmental
Systems, Inc. are wholly-owned subsidiaries of Tidewater. The financial
statements for Middlesex and its wholly owned subsidiaries (the Company) are
reported on a consolidated basis. All significant intercompany accounts and
transactions have been eliminated.
The consolidated notes within the 2003 Form 10-K/A-2 are applicable to these
financial statements and, in the opinion of the Company, the accompanying
unaudited condensed consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
financial position as of March 31, 2004 and the results of operations and its
cash flows for the three and twelve month periods ended March 31, 2004 and 2003.
Information included in the Balance Sheet at December 31, 2003, has been derived
from the Company's audited financial statements for the year ended December 31,
2003. Certain reclassifications of prior period data have been made to conform
with current presentation.
Recent Accounting Pronouncements - In March 2004, the Financial Accounting
Standards Board (FASB) issued, as a proposal, FASB Staff Position (FSP) 106-b
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." When issued in final, this
guidance will supersede FSP 106-1 issued in 2003 and will clarify the accounting
and disclosure requirements for employers with postretirement benefit plans that
have been or will be affected by the passage of the Medicare Prescription Drug
Improvement and Modernization Act of 2003 (the Act). The Act introduces two new
features to Medicare that an employer needs to consider in measuring its
obligation and net periodic postretirement benefit costs. The effective date for
the new requirements is the first interim or annual period beginning after June
15, 2004.
Middlesex's retirees health benefit plan currently includes a prescription drug
benefit that is provided to retired employees. It is anticipated that
implementation of the new requirements will have a positive impact on the
Company's results of operations and cash flows, although the magnitude of the
impact cannot be determined with any degree of certainty at this time.
Rate Matters - Tidewater filed for a 24% base rate increase with the Delaware
Public Service Commission (PSC) on April 26, 2004. In the rate application,
Tidewater has projected that its net investment in rate base since April 30,
2002 through September 30, 2004 will grow by $24.0 million to $47.9 million.
These expenditures are necessary to keep pace with double digit growth in
customer base, improvements to water treatment, fire protection and to
interconnect systems for service reliability and back-up. Tidewater has
requested that the new rates be implemented in phases, with the initial 13%
interim rate increase effective in late June 2004. The remainder would be split
and phased-in over two subsequent six-month periods. We cannot predict whether
the PSC will approve, deny or reduce the amount of our requests.
Stock Based Compensation - As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) the Company elected to account for its
stock-based compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Had compensation costs for the
-6-
Company's restricted stock plan been determined based on the methodology
prescribed in SFAS No. 123, there would have been no effect on its results of
operations or cash flows.
Note 2 - Capitalization
Common Stock - We filed with the United States Securities and Exchange
Commission a registration statement on Form S-3 covering the offering of 700,000
shares of our common stock. The common stock offering was priced at $19.80 and
sold on May 6, 2004. We will use the net proceeds to repay most of our
outstanding short-term borrowings once the sale is closed, which is expected to
be on May 12, 2004. During the three months ended March 31, 2004, there were
22,010 common shares ($0.5 million) issued under the Company's Dividend
Reinvestment and Common Stock Purchase Plan.
Long-term Debt - On March 24, 2004, Tidewater received approval from the PSC to
borrow $0.8 million to fund a portion of its multi-year capital program.
Subsequent to the PSC approval, Tidewater closed on a Delaware State Revolving
Fund (SRF) loan of $0.8 million. The Delaware SRF program will allow, but does
not obligate, Tidewater to draw down against a General Obligation Note for three
specific projects. Tidewater will be charged an annual fee, which is a
combination of interest charges and administrative fees, of 3.30% on the
outstanding principal amount. All unpaid principal and fees must be paid on or
before March 1, 2026.
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 Twelve Months Ended
March 31 March 31
2004 2003 2004 2003
Basic: Income Shares Income Shares Income Shares Income Shares
-----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,034 10,579 $ 1,225 10,379 $ 6,440 10,525 $ 7,714 10,328
Preferred Dividend (64) (64) (255) (255)
------- ------- ------- ------- ------- ------- ------- ------
Earnings Applicable
to Common Stock $ 970 10,579 $ 1,161 10,379 $ 6,185 10,525 $ 7,459 10,328
Basic EPS $ 0.09 $ 0.11 $ 0.59 $ 0.72
Diluted:
-----------------------------------------------------------------------------------------------------------------------------------
Earnings Applicable
to Common Stock $ 970 10,579 $ 1,161 10,379 $ 6,185 10,525 $ 7,459 10,328
$7.00 Series Dividend 26 179 26 179 104 179 104 179
$8.00 Series Dividend 24 164 24 164 96 164 96 164
------- ------- ------- ------- ------- ------- ------- ------
Adjusted Earnings
Applicable to
Common Stock $ 1,020 10,922 $ 1,211 10,722 $ 6,385 10,868 $ 7,659 10,671
Diluted EPS $ 0.09 $ 0.11 $ 0.59 $ 0.72
-7-
Note 4 - Business Segment Data
The Company has identified two reportable segments. One is the regulated
business of collecting, treating and distributing water on a retail and
wholesale basis to residential, commercial, industrial and fire protection
customers in parts of New Jersey and Delaware. It also operates a regulated
wastewater system in New Jersey. The Company is subject to regulations as to its
rates, services and other matters by the States of New Jersey and Delaware with
respect to utility service within these States. The other segment is primarily
for the non-regulated contract services for the operation and maintenance of
municipal and private water and wastewater systems in New Jersey and Delaware.
Also included in this segment are miscellaneous services for service line
maintenance programs and meter replacement projects. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies in the consolidated notes to the financial statements
included in the Form 10-K/A-2. Inter-segment transactions relating to
operational costs are treated as pass through expenses. Finance charges on
inter-segment loan activities are based on interest rates that are below what
would normally be charged by a third party lender.
(Thousands of Dollars)
Three Months Ended Twelve Months Ended
March 31, March 31,
Operations by Segments: 2004 2003 2004 2003
----------------------------------------------------------------------------------------
Revenues:
Regulated $ 13,391 $ 12,949 $ 56,149 $ 54,820
Non - Regulated 2,515 2,044 8,971 7,909
Inter-segment Elimination (30) (12) (114) (44)
-----------------------------------------------------
Consolidated Revenues $ 15,876 $ 14,981 $ 65,006 $ 62,685
-----------------------------------------------------
Operating Income:
Regulated $ 2,073 $ 2,273 $ 10,815 $ 11,849
Non - Regulated 147 103 530 482
-----------------------------------------------------
Consolidated Operating Income $ 2,220 $ 2,376 $ 11,345 $ 12,331
-----------------------------------------------------
Depreciation:
Regulated $ 1,417 $ 1,270 $ 5,455 $ 4,908
Non - Regulated 19 10 64 40
-----------------------------------------------------
Consolidated Depreciation $ 1,436 $ 1,280 $ 5,519 $ 4,948
-----------------------------------------------------
Other Income:
Regulated $ 525 $ 610 $ 2,841 $ 2,964
Non - Regulated -- -- (32) (12)
Inter-segment Elimination (459) (517) (2,479) (2,515)
-----------------------------------------------------
Consolidated Other Income $ 66 $ 93 $ 330 $ 437
-----------------------------------------------------
Interest Expense:
Regulated $ 1,412 $ 1,550 $ 6,071 $ 6,252
Non - Regulated 37 15 138 56
Inter-segment Elimination (196) (321) (973) (1,254)
-----------------------------------------------------
Consolidated Interest Expense $ 1,253 $ 1,244 $ 5,236 $ 5,054
-----------------------------------------------------
Net Income:
Regulated $ 925 $ 1,137 $ 6,079 $ 7,298
Non - Regulated 109 88 360 416
-----------------------------------------------------
Consolidated Net Income $ 1,034 $ 1,225 $ 6,439 $ 7,714
-----------------------------------------------------
Capital Expenditures:
Regulated $ 2,862 $ 3,471 $ 18,393 $ 15,771
Non - Regulated 74 326 320 711
-----------------------------------------------------
Total Capital Expenditures $ 2,936 $ 3,797 $ 18,713 $ 16,482
-----------------------------------------------------
-8-
As of As of
March 31, December 31,
2004 2003
---- ----
Assets:
Regulated $ 261,402 $ 259,689
Non - Regulated 5,792 5,223
Inter-segment Elimination (1,786) (1,720)
-------------------------
Consolidated Assets $ 265,408 $ 263,192
-------------------------
Note 5 - Commitments and Contingent Liabilities
A lawsuit was filed in 1998 against the Company for damages involving the break
of both a Company water line and an underground electric power cable containing
both electric lines and petroleum based insulating fluid. The electric utility
also asserted claims against the Company. The lawsuit was settled in 2003 by
agreement to submit plaintiff's claim for approximately $1.1 million damages to
binding arbitration, in which the agreed maximum exposure of the Company is $0.3
million. While we are unable to predict the outcome of the arbitration, we
believe that we have substantial defenses. We have not recorded any liability
for the claim.
Another claim is pending involving a construction subcontractor, the Company's
general contractor and the Company concerning a major construction project. The
dispute relates to work required to be performed under a construction contract
and related subcontracts and includes payment issues and timing/delay issues.
The matter was instituted in 2001 and is pending in Superior Court, Middlesex
County, New Jersey. We have estimated our maximum exposure in this litigation to
be $4.3 million. We believe that we have substantial defenses to a number of the
asserted claims. It is reasonably possible that we may be responsible for some
portion of the amount claimed, but significantly less than the maximum. We are
unable, however, to determine this amount. Any amount in this matter, which is
determined to be due from us, will be recorded as an addition to utility plant
in service, subject to recovery in rates charged to our customers. However, the
outcome could have a material adverse effect on the Company's financial
statements.
Note 6 - Employee Retirement Benefit Plans
Pension - The Company has a noncontributory defined benefit pension plan, which
covers substantially all employees with more than 1,000 hours of service. In
addition, the Company maintains an unfunded supplemental pension plan for its
executives. Based on the 2004 pension plan valuation, the Company expects to
make a cash contribution of $0.5 million during the current year, which is a
decrease from the $1.0 million estimate disclosed at December 31, 2003. The
contribution is expected to be made during the second quarter of 2004.
Postretirement Benefits Other Than Pensions - The Company has a postretirement
benefit plan other than pensions for substantially all of its retired employees.
Coverage includes healthcare and life insurance. Retiree contributions are
dependent on credited years of service. Based on the 2004 postretirement benefit
plan valuation, the Company expects to make a cash contribution of $1.2 million
during the current year, which is an increase from the $1.0 million estimate
disclosed at December 31, 2003. The contribution is expected to be made during
the second quarter of 2004.
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The following table sets forth information relating to the Company's periodic
costs for its retirement plans.
(Thousands of Dollars)
Pension Benefits Other Benefits
Three Months Ended March 31,
2004 2003 2004 2003
-----------------------------------------
Service Cost $ 186 $ 171 $ 106 $ 66
Interest Cost 346 339 145 121
Expected Return on Assets (372) (318) (53) (44)
Amortization of Unrecognized Losses -- -- 73 36
Amortization of Unrecognized Prior Service Cost 23 23 -- --
Amortization of Transition Obligation -- -- 34 34
-----------------------------------------
Net Periodic Benefit Cost $ 183 $ 215 $ 305 $ 213
-----------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Middlesex Water Company has operated as a water utility in New Jersey since
1897, and in Delaware, through our wholly-owned subsidiary, Tidewater, since
1992. We are in the business of collecting, treating, distributing and selling
water for domestic, commercial, municipal, industrial and fire protection
purposes. We also operate a New Jersey municipal water and wastewater system
under contract and provide wastewater services in New Jersey and Delaware
through our subsidiaries. We are regulated as to rates charged to customers for
water and wastewater services in New Jersey and for water services in Delaware,
as to the quality of water service we provide and as to certain other matters.
Only our USA, USA-PA and White Marsh subsidiaries are not regulated utilities.
Our New Jersey water utility system (the Middlesex System) provides water
services to approximately 58,000 retail customers, primarily in central New
Jersey. The Middlesex System also provides water service under contract to
municipalities in central New Jersey with a total population of approximately
267,000. In partnership with our subsidiary, USA-PA, we operate the water supply
system and wastewater system for the City of Perth Amboy, New Jersey. Our other
New Jersey subsidiaries, Pinelands Water and Pinelands Wastewater, provide water
and wastewater services to residents in Southampton Township, New Jersey.
Our Delaware subsidiaries, Tidewater and Southern Shores, provide water services
to approximately 24,000 retail customers in New Castle, Kent and Sussex
Counties, Delaware. Our other Delaware subsidiary, White Marsh, services an
additional 1,900 customers in Kent and Sussex Counties.
The majority of our revenue is generated from retail and contract water services
to customers in our service areas. We record water service revenue as such
service is rendered and include estimates for amounts unbilled at the end of the
period for services provided after the last billing cycle. Fixed service charges
are billed in advance by our subsidiary, Tidewater, and are recognized in
revenue as the service is provided.
Our ability to increase operating income and net income is based significantly
on three factors: weather, adequate and timely rate increases, and customer
growth.
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We currently have three base rates increase petitions before the New Jersey
Board of Public Utilities (BPU) totaling $8.3 million for Middlesex ($8.0
million), Pinelands Water ($0.1 million) and Pinelands Wastewater ($0.2
million). Those requests were filed in the fourth quarter of 2003. We have
completed the discovery portion of the Middlesex case and are in settlement
discussions with the various interveners. We are still in the discovery phase of
the Pinelands cases with evidentiary hearings scheduled for early June 2004. We
cannot predict whether the BPU will approve, deny or reduce the amount of our
requests; however, despite the outcome, we will continue to seek rate increases
in the future where increased operating costs and capital investment necessitate
such action.
Tidewater filed for a 24% base rate increase with the PSC on April 26, 2004. In
the rate application, Tidewater has projected that its net investment in rate
base since April 30, 2002 through September 30, 2004 will grow by $24.0 million
to $47.9 million. These expenditures are necessary to keep pace with double
digit growth in customer base, improvements to water treatment, fire protection
and to interconnect systems for service reliability and back-up. Tidewater has
requested that the new rates be implemented in phases, with the initial 13%
interim rate increase effective in late June 2004. The remainder would be split
and phased-in over two subsequent six-month periods. We cannot predict whether
the PSC will approve, deny or reduce the amount of our requests.
Results of Operations - Three Months Ended March 31, 2004
Operating revenues for the three months ended March 31, 2004 rose $0.9 million
or 6.0% over the same period in 2003. Customer growth of 10.8% in Delaware
provided additional connection fees, fixed service fees and consumption revenues
of $0.2 million. Also in Delaware, our revenues rose by $0.2 million from the
full effect of the April 2003 base rate increase. Though we anticipate continued
growth in the number of customers and increased water consumption among our
Delaware systems, such growth and increased consumption cannot be guaranteed.
Our new meter services venture provided $0.5 million in additional revenues. We
continue to submit proposals to obtain these meter replacement projects, but
there can be no assurance we will be the successful bidder.
Operating expenses increased by $1.1 million or 8.3%. Less severe winter weather
in 2004 resulted in lower main break repair costs by $0.1 million. As a result
of the continuing customer growth in our Delaware systems, the cost of water
treatment, additional employees and related employee benefits rose by $0.2
million. In New Jersey, employee payroll and benefits costs and corporate
governance related fees pushed up operating expenses by $0.3 million. Source of
supply, which is primarily purchased water, and pumping costs, which is
primarily purchased power, increased by $0.2 million. Purchased water increased
as a result of a change in the unit cost structure and base purchases under the
raw water contract with the New Jersey Water Supply Authority. We expect that
the cost of finished water purchased from a nonaffiliated water utility to
increase by 3.34% effective during the second quarter of 2004. Purchased power
costs are higher due to the effect of the August 1, 2003 deregulation of
electric generation in New Jersey and a rate increase on the remaining regulated
portion of electric service. The costs of our meter replacement projects and
wastewater operations and maintenance contracts amounted to $0.5 million of the
overall expense increase. Costs relating to our City of Perth Amboy contract
decreased $0.1 million. All other operating costs increased $0.1 million.
Depreciation expense for 2004 increased by $0.2 million, or 12.2%. Much of the
increase is due to operations in Delaware where we invested over $11.9 million
in utility plant since March 31, 2003.
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Lower income taxes of $0.1 million over last year are attributable to the
reduced operating results for 2004 as compared to 2003.
Net income decreased to $1.0 million from $1.2 million and basic and diluted
earnings per share decreased by $0.02 to $0.09 due to lower earnings and an
increase in the number of common shares outstanding.
Results of Operations - Twelve Months Ended March 31, 2004
Operating revenues rose $2.3 million or 3.7% over the same period in 2003.
Customer growth of 10.8% in Delaware provided additional connection fees and
fixed service fees and of $1.4 million. Also in Delaware, the April 1, 2003 base
rate increase and the Distribution System Improvement Surcharge (DSIC) accounted
for $0.6 million of the revenue increase. The DSIC is a separate rate mechanism
that allows for cost recovery of certain capital improvement costs incurred in
between base rate filings. Delaware regulated water utilities are allowed to
apply for a DSIC every six months with the maximum increase limited to 5.0% in
any six month period and a 7.5% overall limitation. Our current DSIC rate is
4.89% of base rates.
Cool, wet weather caused consumption to decline in New Jersey ($0.5 million) and
Delaware ($0.3 million). Our new meter services venture and wastewater
operations and maintenance contracts provided $0.9 million in additional
revenues. All other operations accounted for $0.2 million of higher revenues.
Though we anticipate continued growth in the number of customers and increased
water consumption among our Delaware systems, such growth and increased
consumption cannot be guaranteed. Although not as significant in the first
quarter of our fiscal year, weather conditions may adversely impact future
consumption even with anticipated growth in the number of customers.
Operating expenses increased by $3.3 million or 6.6%. As a result of the
continuing customer growth in our Delaware systems, the cost of additional
employees and related employee benefits rose by $0.8 million. In New Jersey,
employee payroll and benefits costs, insurance and corporate governance related
fees pushed up costs by $0.9 million. Water treatment, source of supply and
pumping costs increased by $0.6 million. Purchased water increased as a result
of a change in the unit cost structure and base purchases under the raw water
contract with the New Jersey Water Supply Authority. We expect that the cost of
finished water purchased from a nonaffiliated water utility to increase by 3.34%
effective during the second quarter of 2004. Purchased power costs are higher
due to the effect of the August 1, 2003 deregulation of electric generation in
New Jersey and a rate increase on the remaining regulated portion of electric
service. The costs of our meter replacement projects and wastewater operations
and maintenance contracts amounted to $0.9 million of the overall expense
increase. Costs relating to our City of Perth Amboy contract increased $0.2
million.
Depreciation expense increased by $0.6 million, or 11.5%, due to a higher level
of utility plant in service. Since March 31, 2002, our net investment in utility
plant has increased by $35.6 million.
Other income decreased by $0.1 million as interest rates fell on short-term cash
balance investments.
Interest expense increased by $0.2 million due to higher level of overall debt
outstanding as compared to the same period in 2003.
Lower income taxes of $0.8 million over last year are attributable to the
reduced operating results as compared to the same period in 2003.
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Net income decreased to $6.4 million from $7.7 million and basic and diluted
earnings per share decreased by $0.13 to $0.59 due to lower earnings and an
increase in the number of common shares outstanding.
Liquidity and Capital Resources
Cash flows from operations are largely based on three factors: weather, adequate
and timely rate increases, and customer growth. The effect of those factors on
net income is discussed in results of operations. For the three months ended
March 31, 2004, the $2.9 million of net cash flow from operations allowed us to
fund 100% of our utility plant expenditures for the period. Due to the
seasonality of our primary business of providing regulated water service, cash
flow from operations in the first quarter of our fiscal year is not necessarily
an indication of our ability to generate cash to fund our capital program or pay
dividends to our shareholders.
The Company's capital program for 2004 is estimated to be $28.7 million and
includes $14.1 million for water system additions and improvements for our
Delaware systems, $6.0 million for a portion of the second raw water line to
Middlesex's primary water treatment plant, and $3.8 million for the RENEW
Program, which is our program to clean and cement line approximately nine miles
of unlined mains in the Middlesex System.
There remains a total of approximately 138 miles of unlined mains in the 730
mile Middlesex System. Additional expenditures on the upgrade to the CJO Plant
are estimated at $2.3 million. The capital program also includes $7.3 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, $1.2 million for distribution
system improvements, $0.1 million for computer systems and $3.7 million for
various other items.
To pay for our capital program in 2004, we will utilize internally generated
funds and funds available under existing New Jersey Environmental Infrastructure
Trust loans (currently, $3.5 million) and Delaware State Revolving Fund loans
(currently, $3.1 million), which provide low cost financing for projects that
meet certain water quality and system improvement benchmarks. If necessary, we
will also utilize short-term borrowings through $25.0 million of available lines
of credit with three commercial banks. As of March 31, 2004, there was $13.5
million outstanding against the lines of credit. We filed with the United States
Securities and Exchange Commission a registration statement on Form S-3 covering
the offering of 700,000 shares of our common stock. The common stock offering
was priced at $19.80 and sold on May 6, 2004. We will use the net proceeds to
repay most of our outstanding short-term borrowings once the sale is closed,
which is expected to be on May 12, 2004.
Going forward into 2005 through 2006, we currently project that we will be
required to expend approximately $38.5 million for capital projects. Plans to
finance those projects are underway as we expect to receive approval to borrow
up to $17.0 million under the New Jersey Environmental Infrastructure Trust
program in November of 2004. We anticipate that some of the capital projects in
Delaware will be eligible for the Delaware State Revolving Fund program in that
state and we are pursuing those opportunities. We also expect to use internally
generated funds and proceeds from the sale of common stock through the Dividend
Reinvestment and Common Stock Purchase Plan.
In addition to the effect of weather conditions on revenues, increases in
certain operating costs will impact our liquidity and capital resources. As
described in our overview section, we have filed for rate relief for Middlesex,
Tidewater and the Pinelands Companies. There is no certainty, however, that the
BPU or PSC will approve any or all of the requested increases. The timing of any
decision rendered will have an impact on revenues and earnings and also the need
of when to file for additional rate increases.
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Recent Accounting Pronouncements - In March 2004, the Financial Accounting
Standards Board (FASB) issued, as a proposal, FASB Staff Position (FSP) 106-b
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." When issued in final, this
guidance will supersede FSP 106-1 issued in 2003 and will clarify the accounting
and disclosure requirements for employers with postretirement benefit plans that
have been or will be affected by the passage of the Medicare Prescription Drug
Improvement and Modernization Act of 2003 (the Act). The Act introduces two new
features to Medicare that an employer needs to consider in measuring its
obligation and net periodic postretirement benefit costs. The effective date for
the new requirements is the first interim or annual period beginning after June
15, 2004.
Middlesex's retirees health benefit plan currently includes a prescription drug
benefit that is provided to retired employees. It is anticipated that
implementation of the new requirements will have a positive impact on the
Company's results of operations and cash flows, although the magnitude of the
impact can not be determined with any degree of certainty at this time.
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 $0.5 million of the current portion of six 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.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was conducted by the Company's Chief Executive Officer along with
the Company's Chief Financial Officer. Based upon that evaluation, the Company's
Chief Executive Officer and the Company's Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective as of the end of
the period covered by this Report. There have been no significant changes in the
Company's internal controls or in other factors, which could significantly
affect internal controls during the quarter ended March 31, 2004.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
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Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A lawsuit was filed in 1998 against the Company for damages involving the
break of both a Company water line and an underground electric power cable
containing both electric lines and petroleum based insulating fluid. The
electric utility also asserted claims against the Company. The lawsuit was
settled in 2003 by agreement to submit plaintiff's claim for approximately
$1.1 million damages to binding arbitration, in which the agreed maximum
exposure of the Company is $0.3 million. While we are unable to predict
the outcome of the arbitration, we believe that we have substantial
defenses. We have not recorded any liability for the claim.
Another claim is pending involving a construction subcontractor, the
Company's general contractor and the Company concerning a major
construction project. The dispute relates to work required to be performed
under a construction contract and related subcontracts and includes
payment issues and timing/delay issues. The matter was instituted in 2001
and is pending in Superior Court, Middlesex County, New Jersey. We have
estimated our maximum exposure in this litigation to be $4.3 million. We
believe that we have substantial defenses to a number of the asserted
claims. It is reasonably possible that we may be responsible for some
portion of the amount claimed, but significantly less than the maximum. We
are unable, however, to determine this amount. Any amount in this matter,
which is determined to be due from us, will be recorded as an addition to
utility plant in service, subject to recovery in rates charged to our
customers. However, the outcome could have a material adverse effect on
the Company's financial statements.
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
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit 31: Section 302 Certification by Dennis G.
Sullivan Pursuant to Rules 13a-14 and
15d-14 of the Securities Exchange Act of
1934
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Exhibit 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.
Exhibit 32: Section 906 Certification by Dennis G.
Sullivan Pursuant to 18 U.S.C.ss.1350
Exhibit 32.1: Section 906 Certification by A. Bruce
O'Connor Pursuant to 18 U.S.C.ss.1350
Reports on Form 8-K: February 4, 2004 Earnings Release
February 10, 2004 Postponement of Common Stock Offering
March 16, 2004 Announcement of SEC Filing
April 15, 2004 Announcement of Amended SEC Filings
April 28, 2004 Earnings Release
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 Controller
and Chief Financial Officer
Date: May 10, 2004
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