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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 1, 2005: Common Stock, No Par Value: 11,453,119 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 13
Item 3. Quantitative and Qualitative Disclosures of Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
SIGNATURE 21
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
---------------------------- ----------------------------
Operating Revenues $ 18,430,751 $ 17,769,913 $ 35,173,654 $ 33,645,646
---------------------------- ----------------------------
Operating Expenses:
Operations 9,409,108 9,357,580 18,451,104 18,261,671
Maintenance 979,119 808,459 1,877,804 1,670,967
Depreciation 1,620,159 1,449,469 3,168,207 2,885,699
Other Taxes 2,163,520 2,026,107 4,246,654 3,971,301
Income Taxes 894,714 1,018,643 1,561,484 1,526,002
---------------------------- ----------------------------
Total Operating Expenses 15,066,620 14,660,258 29,305,253 28,315,640
---------------------------- ----------------------------
Operating Income 3,364,131 3,109,655 5,868,401 5,330,006
Other Income (Expense):
Allowance for Funds Used During Construction 140,456 80,721 350,906 130,282
Other Income 35,943 117,759 91,162 137,565
Other Expense (16,324) (26,440) (24,469) (29,676)
---------------------------- ----------------------------
Total Other Income, net 160,075 172,040 417,599 238,171
Interest Charges 1,578,078 1,391,364 2,960,170 2,644,206
---------------------------- ----------------------------
Net Income 1,946,128 1,890,331 3,325,830 2,923,971
Preferred Stock Dividend Requirements 63,696 63,696 127,393 127,393
---------------------------- ----------------------------
Earnings Applicable to Common Stock $ 1,882,432 $ 1,826,635 $ 3,198,437 $ 2,796,578
---------------------------- ----------------------------
Earnings per share of Common Stock:
Basic $ 0.17 $ 0.17 $ 0.28 $ 0.26
Diluted $ 0.16 $ 0.16 $ 0.28 $ 0.26
Average Number of
Common Shares Outstanding :
Basic 11,392,964 11,068,164 11,380,290 10,823,630
Diluted 11,736,104 11,411,304 11,723,430 11,166,770
Cash Dividends Paid per Common Share $ 0.1675 $ 0.1650 $ 0.3350 $ 0.3300
See Notes to Condensed Consolidated Financial Statements.
1
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 2005 2004
=====================================================================================================================
UTILITY PLANT: Water Production $ 90,016,001 $ 82,340,798
Transmission and Distribution 195,627,732 188,026,091
General 23,235,929 20,451,215
Construction Work in Progress 4,522,572 13,013,391
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TOTAL 313,402,234 303,831,495
Less Accumulated Depreciation 52,843,576 52,017,761
-------------------------------------------------------------------------------------------
UTILITY PLANT - NET 260,558,658 251,813,734
-------------------------------------------------------------------------------------------
=====================================================================================================================
CURRENT ASSETS: Cash and Cash Equivalents 1,775,866 4,034,768
Accounts Receivable, net 6,887,716 6,316,853
Unbilled Revenues 4,469,823 3,572,713
Materials and Supplies (at average cost) 1,484,304 1,203,906
Prepayments 1,148,964 823,976
-------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 15,766,673 15,952,216
-------------------------------------------------------------------------------------------
=====================================================================================================================
DEFERRED CHARGES Unamortized Debt Expense 3,095,555 3,172,254
AND OTHER ASSETS: Preliminary Survey and Investigation Charges 1,525,533 1,032,182
Regulatory Assets 8,185,848 8,198,565
Restricted Cash 8,943,926 13,257,106
Non-utility Assets, net 5,573,584 5,237,622
Other 554,826 465,419
-------------------------------------------------------------------------------------------
TOTAL DEFERRED CHARGES AND OTHER ASSETS 27,879,272 31,363,148
-------------------------------------------------------------------------------------------
TOTAL ASSETS $ 304,204,603 $ 299,129,098
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CAPITALIZATION AND LIABILITIES
=====================================================================================================================
CAPITALIZATION: Common Stock, No Par Value $ 73,187,022 $ 71,979,902
Retained Earnings 22,492,587 23,103,908
Accumulated Other Comprehensive Income, net of tax 53,888 44,841
===========================================================================================
TOTAL COMMON EQUITY 95,733,497 95,128,651
===========================================================================================
Preferred Stock 4,063,062 4,063,062
Long-term Debt 115,376,100 115,280,649
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TOTAL CAPITALIZATION 215,172,659 214,472,362
-------------------------------------------------------------------------------------------
=====================================================================================================================
CURRENT Current Portion of Long-term Debt 1,185,882 1,091,351
LIABILITIES: Notes Payable 14,000,000 11,000,000
Accounts Payable 5,070,380 6,001,806
Accrued Taxes 7,204,777 6,784,380
Accrued Interest 1,942,373 1,703,131
Unearned Revenues and Advanced Service Fees 463,696 387,156
Other 659,381 795,456
-------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 30,526,489 27,763,280
-------------------------------------------------------------------------------------------
=====================================================================================================================
COMMITMENTS AND CONTINGENT LIABILITIES (Note 6)
=====================================================================================================================
DEFERRED CREDITS Customer Advances for Construction 12,178,644 12,366,060
AND OTHER LIABILITIES: Accumulated Deferred Investment Tax Credits 1,657,258 1,696,566
Accumulated Deferred Income Taxes 14,682,242 14,556,153
Employee Benefit Plans 6,357,169 5,464,056
Regulatory Liability - Cost of Utility Plant Removal 5,431,423 5,363,152
Other 812,069 849,551
-------------------------------------------------------------------------------------------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 41,118,805 40,295,538
-------------------------------------------------------------------------------------------
=====================================================================================================================
CONTRIBUTIONS IN AID OF CONSTRUCTION 17,386,650 16,597,918
-------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 304,204,603 $ 299,129,098
===========================================================================================
See Notes to Condensed Consolidated Financial Statements.
2
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2005 2004
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,325,830 $ 2,923,971
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 3,509,017 3,020,567
Provision for Deferred Income Taxes and ITC (159,513) 39,170
Allowance for Funds Used During Construction (350,906) (130,282)
Changes in Assets and Liabilities:
Accounts Receivable (570,863) (785,289)
Unbilled Revenues (897,110) (873,204)
Materials & Supplies (280,398) (215,910)
Prepayments (324,988) (200,973)
Other Assets (155,411) (222,368)
Accounts Payable (931,426) 669,749
Accrued Taxes 415,736 559,769
Accrued Interest 239,242 (178,028)
Employee Benefit Plans 893,113 (24,223)
Unearned Revenue & Advanced Service Fees 76,540 231,263
Other Liabilities (173,557) 289
----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,615,306 4,814,501
----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (11,592,836) (9,035,216)
Cash Surrender Value & Other Investments (154,744) (57,864)
Restricted Cash 4,313,180 823,690
Preliminary Survey & Investigation Charges (493,351) 318,934
Other Assets - 25,859
----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (7,927,751) (7,924,597)
----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (350,109) (335,280)
Proceeds from Issuance of Long-term Debt 540,091 1,242,581
Net Short-term Bank (Repayments) Borrowings 3,000,000 (8,000,000)
Deferred Debt Issuance Expenses (7,724) (11,859)
Common Stock Issuance Expense - (303,222)
Proceeds from Issuance of Common Stock 1,207,120 14,239,689
Payment of Common Dividends (3,809,758) (3,608,581)
Payment of Preferred Dividends (127,393) (127,393)
Construction Advances and Contributions-Net 601,316 46,027
----------------------------------------------------------------------------------------------
NET CASH (USED BY) PROVIDED BY FINANCING ACTIVITIES 1,053,543 3,141,962
----------------------------------------------------------------------------------------------
NET CHANGES IN CASH AND CASH EQUIVALENTS (2,258,902) 31,866
----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,034,768 3,005,610
----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,775,866 $ 3,037,476
----------------------------------------------------------------------------------------------
*Excludes Allowance for Funds Used During Construction.
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Period for:
Interest $ 2,779,732 $ 2,822,152
Interest Capitalized $ (350,906) $ (130,282)
Income Taxes $ 1,807,000 $ 1,435,500
----------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
3
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
(Unaudited)
June 30, December 31,
2005 2004
===============================================================================================================
Common Stock, No Par Value
Shares Authorized - 20,000,000
Shares Outstanding - 2005 - 11,419,347 $ 73,187,022 $ 71,979,902
2004 - 11,358,772
Retained Earnings 22,492,587 23,103,908
Accumulated Other Comprehensive Income, net of tax 53,888 44,841
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TOTAL COMMON EQUITY 95,733,497 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 - 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 3,024,283 3,063,389
6.25%, Amortizing Secured Note, due May 22, 2028 9,625,000 9,835,000
4.22%, State Revolving Trust Note, due December 31, 2022 769,238 784,000
3.60%, State Revolving Trust Note, due May 1, 2025 2,888,407 2,348,316
4.00% to 5.00%, State Revolving Trust Bond, due September 1, 2021 790,000 790,000
0.00%, State Revolving Fund Bond, due September 1, 2021 641,580 652,306
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 742,578 755,006
4.25% to 4.63%, Series Y, due September 1, 2018 920,000 920,000
0.00%, Series Z, due September 1, 2019 1,650,588 1,679,979
5.25% to 5.75%, Series AA, due September 1, 2019 2,085,000 2,085,000
0.00%, Series BB, due September 1, 2021 2,014,399 2,048,095
4.00% to 5.00%, Series CC, due September 1, 2021 2,275,000 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 116,561,982 116,372,000
--------------------------------------------------------------------------------------------------------------
Less: Current Portion of Long-term Debt (1,185,882) (1,091,351)
--------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 115,376,100 $ 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 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 2004 Form 10-K are applicable to these
financial statements and, in the opinion of the Company, the accompanying
unaudited condensed consolidated financial statements contain all adjustments
necessary to present fairly the financial position as of June 30, 2005 and the
results of operations for the three and six month periods ended June 30, 2005
and 2004, and cash flows for the six month periods ended June 30, 2005 and 2004.
Information included in the Condensed Consolidated Balance Sheets as of December
31, 2004, has been derived from the Company's audited financial statements for
the year ended December 31, 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
5
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 fiscal periods 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 Company does not anticipate adoption
of this standard will have a material impact on its 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 is not considered a significant
event and thus the Company will account for the effects of FSP 106-2 at its next
measurement date (January 1, 2005). 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 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
6
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 primary treatment plant. 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.
The Company anticipates its Pinelands subsidiaries will file for base rate
increases with the BPU during August 2005. The request will be 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.
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 general 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%.
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 six months ended June 30, 2005, there
7
were 60,575 common shares (approximately $1.2 million) issued under the
Company's Dividend Reinvestment and Common Stock Purchase Plan.
Long-term Debt - Tidewater has received approval from the PSC to finance up to
$16.0 million in the form of long-term debt securities. 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%. Tidewater has received a commitment letter from CoBank, a rural
cooperative financial institution, approving the conversion of Tidewater's
existing $7.0 million short-term borrowings with CoBank and an additional $7.0
million of funding for an aggregated $14.0 million mortgage-type loan to be
repaid over a term of 25 years. The terms of the CoBank loan allow but do not
obligate, Tidewater to draw down against the additional $7.0 million at any time
after the loan closing through August 31, 2006. During that period, there is a
commitment fee of 12.5 basis points, or 0.125%, on the unused balance. The
interest rate for the CoBank loan will be a variable rate set weekly by CoBank,
with Tidewater having an option to fix the interest rate at any time over the
life of the loan at a margin over CoBank's cost of funds. The CoBank financing
is expected to be completed during the third quarter of 2005.
Note 3 - Earnings Per Share
Basic earnings per share (EPS) are computed on the basis of the weighted average
number of shares outstanding. Diluted EPS assumes the conversion of both the
Convertible Preferred Stock $7.00 Series and the Convertible Preferred Stock
$8.00 Series.
(In Thousands Except for per Share Amounts)
Three Months Ended
June 30,
Weighted Weighted
2005 Average 2004 Average
Basic: Income Shares Income Shares
-----------------------------------------------------------------------------
Net Income $ 1,946 11,393 $ 1,890 11,068
Preferred Dividend (64) (64)
------- ------- ------- -------
Earnings Applicable to Common Stock $ 1,882 11,393 $ 1,826 11,068
Basic EPS $ 0.17 $ 0.17
-----------------------------------------------------------------------------
Diluted:
-----------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 1,882 11,393 $ 1,826 11,068
$7.00 Series Preferred Dividend 26 179 26 179
$8.00 Series Preferred Dividend 24 164 24 164
------- ------- ------- -------
Adjusted Earnings Applicable to
Common Stock $ 1,932 11,736 $ 1,876 11,411
Diluted EPS $ 0.16 $ 0.16
8
Six Months Ended
June 30,
Weighted Weighted
2005 Average 2004 Average
Basic: Income Shares Income Shares
------------------------------------------------------------------------------
Net Income $ 3,326 11,380 $ 2,924 10,824
Preferred Dividend (127) (127)
------- ------- ------- -------
Earnings Applicable to Common Stock $ 3,199 11,380 $ 2,797 10,824
Basic EPS $ 0.28 $ 0.26
------------------------------------------------------------------------------
Diluted:
------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 3,199 11,380 $ 2,797 10,824
$7.00 Series Dividend 52 179 52 179
$8.00 Series Dividend 48 164 48 164
------- ------- ------- -------
Adjusted Earnings Applicable to
Common Stock $ 3,299 11,723 $ 2,897 11,167
Diluted EPS $ 0.28 $ 0.26
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 a 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. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies in the Consolidated Notes to the Financial Statements in the
Company's Annual Report for the period ended December 31, 2004 filed on Form
10-K. 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:
9
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30 June 30,
Operations by Segments: 2005 2004 2005 2004
----------------------------------------------------------------------------
Revenues:
Regulated $ 16,393 $ 15,099 $ 31,152 $ 28,490
Non - Regulated 2,068 2,701 4,082 5,216
Inter-segment Elimination (30) (30) (60) (60)
-------------------- ---------------------
Consolidated Revenues $ 18,431 $ 17,770 $ 35,174 $ 33,646
-------------------- ---------------------
Operating Income:
Regulated $ 3,262 $ 3,040 $ 5,636 $ 5,113
Non - Regulated 102 70 232 217
-------------------- ---------------------
Consolidated Operating Income $ 3,364 $ 3,110 $ 5,868 $ 5,330
-------------------- ---------------------
Net Income:
Regulated $ 1,867 $ 1,856 $ 3,140 $ 2,781
Non - Regulated 79 34 186 143
-------------------- ---------------------
Consolidated Net Income $ 1,946 $ 1,890 $ 3,326 $ 2,924
-------------------- ---------------------
Capital Expenditures:
Regulated $ 7,313 $ 6,053 $ 11,446 $ 8,915
Non - Regulated 88 46 147 120
-------------------- ---------------------
Total Capital Expenditures $ 7,401 $ 6,099 $ 11,593 $ 9,035
-------------------- ---------------------
As of As of
June 30, December 31,
2005 2004
---- ----
Assets:
Regulated $ 301,183 $ 296,260
Non - Regulated 5,231 4,943
Inter-segment Elimination (2,209) (2,074)
--------- ---------
Consolidated Assets $ 304,205 $ 299,129
--------- ---------
10
Note 5 - Short-term Borrowings
The Company has established lines of credit aggregating $40.0 million that have
varying expiration dates through the remainder of 2005. At June 30, 2005, the
outstanding borrowings under these credit lines were $14.0 million at a weighted
average interest rate of 4.14%. As of that date, the Company had borrowing
capacity of $26.0 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 $12.0
million and $8.2 million at 4.36% and 1.58% for the three months ended June 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 $11.1 million and $10.7 million at 4.11% and 1.57%
for the six months ended June 30, 2005 and 2004, respectively.
Note 6 - Commitments and Contingent Liabilities
A lawsuit was filed in 1998 against the Company for damages involving the break
of both a Company water line and an underground electric power cable containing
both electric lines and petroleum based insulating fluid. The electric utility
also asserted claims against the Company. The lawsuit was settled in 2003, 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, for which the Company has accrued.
While we are unable to predict the outcome of the arbitration, we believe that
we have substantial defenses.
The Company is a defendant in various lawsuits. We believe the resolution of
pending claims and legal proceedings will not have a material adverse effect on
the Company's consolidated financial statements.
Note 7 - Employee Retirement Benefit Plans
Pension - The Company has a noncontributory defined benefit pension plan, which
covers all employees with more than 1,000 hours of service. The Company expects
to make cash contributions of $0.6 million during the current year. These
contributions are expected to be made during the third quarter of 2005. In
addition, the Company maintains an unfunded supplemental pension plan for 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 $1.2 million during the current year. These contributions will
be made each quarter during 2005. The Company has made contributions totaling
$0.6 million through June 30, 2005.
11
The following table sets forth information relating to the Company's periodic
costs for its retirement plans.
(Dollars in Thousands)
Pension Benefits Other Benefits
---------------- --------------
Three Months Ended June 30,
2005 2004 2005 2004
----------------------------------------
Service Cost $ 283 $ 186 $ 153 $ 106
Interest Cost 381 346 193 145
Expected Return on Assets (384) (372) (69) (53)
Amortization of Unrecognized Losses 3 -- 120 73
Amortization of Unrecognized Prior Service Cost 23 23 -- --
Amortization of Transition Obligation -- -- 34 34
----------------------------------------
Net Periodic Benefit Cost $ 306 $ 183 $ 431 $ 305
----------------------------------------
(Dollars in Thousands)
Pension Benefits Other Benefits
---------------- --------------
Six Months Ended June 30,
2005 2004 2005 2004
----------------------------------------
Service Cost $ 565 $ 373 $ 306 $ 213
Interest Cost 762 693 385 290
Expected Return on Assets (768) (746) (137) (107)
Amortization of Unrecognized Losses 7 -- 240 146
Amortization of Unrecognized Prior Service Cost 46 46 -- --
Amortization of Transition Obligation -- -- 68 68
----------------------------------------
Net Periodic Benefit Cost $ 612 $ 366 $ 862 $ 610
----------------------------------------
Note 8 - Other Comprehensive Income
Comprehensive income was as follows:
(Dollars in Thousands)
Three Months Ended Six Months
June 30, June 30,
2005 2004 2005 2004
----------------------------------------
Net Income $ 1,946 $ 1,890 $ 3,326 $ 2,924
Other Comprehensive Income:
Change in Value of Equity Investments,
Net of Income Tax 10 (3) 9 (3)
----------------------------------------
Other Comprehensive Income 10 (3) 9 (3)
----------------------------------------
Comprehensive Income $ 1,956 $ 1,887 $ 3,335 $ 2,921
----------------------------------------
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements of the Company included
elsewhere herein and with the company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2004.
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
13
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.
For an additional discussion of factors that may affect the Company's business
and results of operations, see Risk Factors in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2004.
Overview
The Company has operated as a water utility in New Jersey since 1897, and in
Delaware, through our wholly-owned subsidiary, Tidewater, since 1992. We are in
the business of collecting, treating, distributing and selling water for
domestic, commercial, municipal, industrial and fire protection purposes. We
also operate a New Jersey municipal water and wastewater system under contract
and provide wastewater services in New Jersey and Delaware through our
subsidiaries. We are regulated as to rates charged to customers for water and
wastewater services in New Jersey and for water services in Delaware, as to the
quality of water service we provide and as to certain other matters. Our USA,
USA-PA and White Marsh subsidiaries are not regulated utilities.
Our New Jersey water utility system (the Middlesex System) provides water
services to approximately 58,000 retail customers, primarily in central New
Jersey. The Middlesex System also provides water service under contract to
municipalities in central New Jersey with a total population of approximately
267,000. Through our subsidiary, USA-PA, we operate the water supply system and
wastewater system for the City of Perth Amboy, New Jersey. Our other New Jersey
subsidiaries, Pinelands Water and Pinelands Wastewater, provide water and
wastewater services to residents in Southampton Township, New Jersey.
Our Delaware subsidiaries, Tidewater and Southern Shores, provide water services
to approximately 27,000 retail customers in New Castle, Kent, and Sussex
Counties, Delaware. Our 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 June 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 based significantly
on four factors: weather, adequate and timely rate relief, effective cost
management, and customer growth.
14
Recent Developments
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 cannot predict whether the BPU will approve, deny, or reduce the
amount of our request. We believe a decision on this matter will be received in
the first quarter of 2006.
The Company anticipates its Pinelands subsidiaries will file for base rate
increases with the BPU during August 2005. The request will be 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.
As part of an approved settlement with the 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 DSIC 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 June 30, 2005
Operating revenues for the three months ended June 30, 2005 increased $0.7
million or 3.7% from the same period in 2004. Water sales improved by $0.9
million in our New Jersey systems, which was primarily a result of a base rate
increase that was granted to Middlesex on May 27, 2004. Revenues rose in our
Delaware service territories by $0.4 million. Base rate increases and customer
growth in Delaware provided additional water consumption sales and facility
charges totaling $0.5 million. Unfavorable weather in the Spring of 2005 delayed
the completion of homes by developers in several residential subdivisions
resulting in lower than expected customer growth in Delaware. Revenues from
connection fees, which are one-time charges as homes are initially connected to
the water system, were delayed in the second quarter due to the construction
delays. This resulted in a reduction in connection fee revenues by $0.1 million
as compared to the same period in the prior year.
USA had reduced revenues of $0.7 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. During the
first six months of 2005, approximately 1,000 new customers were added to the
Delaware System, as compared to approximately 1,200 during the prior year
15
period. This has resulted in reduced connection fee revenues through June 30,
2005 and 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 4.9% by several large
industrial customers. With regard to Middlesex's industrial customer class, we
expect this trend to continue throughout the remainder of 2005. Weather
conditions may adversely impact future water consumption in spite of anticipated
customer growth in Delaware. Our water systems are also highly dependent on the
effects of weather. As a result of anticipated regulation of wastewater services
in Delaware, we have established a new 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 its revenues in the near term.
Operating expenses increased $0.4 million or 2.8%. Operation and maintenance
expenses increased $0.2 million or 2.2%. In New Jersey, Payroll and benefits
costs, insurance and corporate governance related fees increased $0.7 million.
The continued growth of our Delaware systems resulted in increases in the cost
of water treatment, insurance and additional employees and related benefit costs
of $0.2 million. Costs related to our meter services venture decreased $0.7
million due to the completion of the original projects during December 2004.
Water treatment costs related to our City of Perth Amboy contract decreased by
$0.1 million. All other operating expenses increased $0.1 million.
Depreciation expense increased $0.2 million or 11.8%, primarily as a result of a
higher level of utility plant in service. Since June 30, 2004, our net
investment in utility plant has increased by $34.0 million.
Other taxes increased by $0.1 million, reflecting taxes on increased taxable
gross revenues. Income taxes decreased by $0.1 million as a result of an
increased tax benefits from a higher level of Allowance for Funds Used During
Construction (AFUDC) as compared to the prior year period, due to the increase
in capital projects in New Jersey and Delaware.
Net income increased by 3.0% to $1.9 million. Basic earnings per share, however
remained at $0.17 due to the increase in shares outstanding during the current
year, primarily due to the sale of 700,000 shares of common stock on May 12,
2004 and shares issued under the Company's Dividend Reinvestment plan during the
second quarter of 2005. Diluted earnings per share remained at $0.16.
Results of Operations - Six Months Ended June 30, 2005
Operating revenues for the six months ended June 30, 2005 increased $1.5 million
or 4.5% from the same period in 2004. Water sales improved by $1.8 million in
our New Jersey systems, as a result of the base rate increases that were granted
to Middlesex on May 27, 2004. Customer growth of 9.1% in Delaware provided
additional consumption sales, facility charges and connection fees of $0.7
million. Base rate increases accounted for $0.1 million of the increase.
USA had reduced revenues of $1.2 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 $0.1 million of additional
revenues.
Operating expenses increased $1.0 million or 3.5%. Operation and maintenance
expenses increased $0.4 million or 2.0%. In New Jersey, Payroll and benefits
costs (primarily pension and post-retirement expenses) and corporate governance
related fees increased $1.0 million. As previously discussed, the continuing
growth of our Delaware systems resulted in higher costs of water treatment,
additional employees and related benefit expenses, and corporate governance
related fees of $0.5 million.
16
The costs of our meter services decreased $1.1 million due to the completion of
the original projects during December 2004. Costs relating to our City of Perth
Amboy contract decreased by $0.1 million. All other costs of operations
increased by $0.1 million.
Our pension and post-retirement costs have increased by approximately $0.3
million for the six months ended June 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 a similar amount 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 $0.3 million or 9.8%, due to the higher level of
utility plant in service, as discussed for the three-month results.
Other taxes increased by $0.3 million, reflecting taxes on higher taxable gross
revenues.
Income taxes were comparable to the prior year period as a result of an
increased tax benefits from a higher level of AFUDC.
Other income increased $0.2 million, primarily due to higher AFUDC as a result
of increases in capital projects in New Jersey and Delaware.
Net income increased by $0.4 million, or 13.7%, and basic and diluted earnings
per share increased from $0.26 to $0.28 per share. The earnings per share
increase was due to the higher net income, but was partially offset by the
increase in average shares outstanding as compared to the prior year period.
Liquidity and Capital Resources
Cash flows from operations are largely based 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 six months ended June 30, 2005, cash flows from operating activities
decreased $0.2 million to $4.6 million, as compared to the prior year. This
decrease was primarily attributable to the timing of payments to vendors, which
was partially offset by the timing of retirement plan contributions, and
interest payments. The $4.6 million of net cash flow from operations allowed us
to internally fund approximately 40% of our utility plant expenditures for the
period, with the remainder funded with restricted cash from the proceeds of
previously issued long-term borrowings. Due to the seasonality of our primary
business of providing regulated water service, cash flow from operations in the
first and second quarters of any fiscal year is not necessarily an indication of
our ability to generate cash to fund our capital program or pay dividends to our
shareholders over the course of an entire calendar year.
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 129 miles of unlined mains in the 730-mile Middlesex System. The
capital program also includes $5.3 million for other scheduled upgrades to our
existing systems in New Jersey. The scheduled upgrades consist of $1.1 million
for improvements to existing plant, $1.2 million for
17
mains, $0.8 million for service lines, $0.3 million for meters, $0.3 million for
hydrants, and $1.6 million for computer systems and various other items.
To pay for our capital program in 2005, we will utilize internally generated
funds and funds available under existing New Jersey Environmental Infrastructure
Trust loans (currently, $3.8 million) and Delaware State Revolving Fund (SRF)
loans (currently, $1.3 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 $40.0 million of available
lines of credit with three commercial banks. As of June 30, 2005, there was
$14.0 million outstanding against the lines of credit.
Tidewater received approval from the PSC to finance up to $16.0 million in the
form of long-term debt securities. Of this amount, Tidewater received loan
approval in April 2005 under the Delaware SRF program of $2.0 million. Tidewater
closed on the $2.0 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%. Tidewater has received a commitment
letter from CoBank, a rural cooperative financial institution, approving the
conversion of Tidewater's existing $7.0 million short-term borrowings with
CoBank and an additional $7.0 million of funding for an aggregated $14.0 million
mortgage type loan to be repaid over a term of 25 years. The terms of the CoBank
loan allow, but do not obligate, Tidewater to draw down against the additional
$7.0 million at any time after the loan closing through August 31, 2006. During
that period, there is a commitment fee of 12.5 basis points, or 0.125%, on the
unused balance. The interest rate for the CoBank loan will be a variable rate
set weekly by CoBank, with Tidewater having an option to fix the interest rate
at any time over the life of the loan at a margin over CoBank's cost of funds.
The CoBank financing is expected to be completed during the third quarter of
2005.
The Company periodically issues shares of common stock in connection with its
dividend reinvestment and stock purchase plan. On April 27, 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 six
months ended June 30, 2005, the company raised approximately $1.2 million
through the issuance of 60,575 common shares under the Company's Dividend
Reinvestment and Common Stock Purchase 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,
we will finance our capital expenditures under SRF loan programs. We also expect
to use internally generated funds and proceeds from the sale of common stock and
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. 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.
18
Item 3. Quantitative and Qualitative Disclosures of Market Risk
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rates through the use of
fixed rate, long-term debt and, to a lesser extent, short-term debt. The
Company's interest rate risk related to existing fixed rate, long-term debt is
not material due to the term of the majority of our Amortizing Secured Notes and
First Mortgage Bonds, which have maturity dates ranging from 2009 to 2038. Over
the next twelve months, approximately $1.2 million of the current portion of
eleven existing long-term debt instruments will mature. Applying a hypothetical
change in the rate of interest charged by 10% on those borrowings would not have
a material effect on earnings.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was conducted by the Company's Chief Executive Officer along with
the Company's Chief Financial Officer. Based upon that evaluation, the Company's
Chief Executive Officer and the Company's Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective as of the end of
the period covered by this Report. There have been no significant changes in the
Company's internal controls or in other factors, which could significantly
affect internal controls during the quarter ended June 30, 2005.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the Company's Annual Report on Form 10-K for the year ended
December 31, 2004, and Quarterly Report on Form 10-Q filed for the period ended
March 31, 2005.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
19
Item 4. Submission of Matters to a Vote of Security Holders
The following matter was submitted to a vote of the security holders during the
Company's Annual Meeting of Shareholders held on May 25, 2005:
Election of Directors. Nominees for Class III, term expiring 2008:
FOR WITHHELD
--- --------
John R. Middleton, M.D. 9,627,320 135,425
Jeffries Shein 9,630,158 132,587
J. Richard Tompkins 9,625,118 137,627
Item 5. Other Information
None.
Item 6. Exhibits
31 Section 302 Certification by Dennis G. Sullivan pursuant to Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934.
31.1 Section 302 Certification by A. Bruce O'Connor pursuant to Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934.
32 Section 906 Certification by Dennis G. Sullivan pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Section 906 Certification by A. Bruce O'Connor pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
20
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: August 9, 2005
21