UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

 

For the quarterly period ended September 30, 2012

 

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

(State of incorporation)

22-1114430

(IRS employer identification no.)

  

1500 Ronson Road, Iselin, New Jersey 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 þ    No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post files).

Yes þ    No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨ Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨    No þ

The number of shares outstanding of each of the registrant's classes of common stock, as of October 26, 2012: Common Stock, No Par Value: 15,754,856 shares outstanding.

 
 

 

INDEX

 

 

PART I. FINANCIAL INFORMATION PAGE
     
Item 1. Financial Statements (Unaudited):  
     
  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
     
  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 22
     
Item 4. Controls and Procedures 22
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 23
     
Item 1A. Risk Factors 23
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
     
Item 3. Defaults upon Senior Securities 23
     
Item 4. Mine Safety Disclosures 23
     
Item 5. Other Information 23
     
Item 6. Exhibits 24
     
SIGNATURES 25

 

 
Index

 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share amounts)

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2012  2011  2012  2011
             
Operating Revenues  $32,353   $28,671   $83,300   $78,769 
                     
Operating Expenses:                    
Operations and Maintenance   15,600    14,667    44,740    42,760 
Depreciation   2,629    2,421    7,759    7,250 
Other Taxes   3,281    3,067    8,871    8,737 
                     
Total Operating Expenses   21,510    20,155    61,370    58,747 
                     
Operating Income   10,843    8,516    21,930    20,022 
                     
Other Income (Expense):                    
Allowance for Funds Used During Construction   110    235    383    626 
Other Income   106    759    423    1,118 
Other Expense   (4)   (20)   (155)   (180)
                     
Total Other Income, net   212    974    651    1,564 
                     
Interest Charges   1,808    1,703    4,941    4,631 
                     
Income before Income Taxes   9,247    7,787    17,640    16,955 
                     
Income Taxes   3,109    2,644    5,970    5,557 
                     
Net Income   6,138    5,143    11,670    11,398 
                     
Preferred Stock Dividend Requirements   52    52    155    155 
                     
Earnings Applicable to Common Stock  $6,086   $5,091   $11,515   $11,243 
                     
Earnings per share of Common Stock:                    
Basic  $0.39   $0.33   $0.73   $0.72 
Diluted  $0.38   $0.32   $0.73   $0.72 
                     
Average Number of                    
Common Shares Outstanding :                    
Basic   15,741    15,622    15,717    15,599 
Diluted   16,004    15,885    15,980    15,862 
                     
Cash Dividends Paid per Common Share  $0.1850   $0.1825   $0.5550   $0.5475 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

1
Index

 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED  BALANCE SHEETS

(Unaudited)

(In thousands)

 

      September 30,  December 31,
ASSETS     2012  2011
UTILITY PLANT:  Water Production  $129,464   $127,827 
   Transmission and Distribution   334,921    326,629 
   General   53,999    47,519 
   Construction Work in Progress   12,933    12,575 
   TOTAL   531,317    514,550 
   Less Accumulated Depreciation   98,027    92,351 
   UTILITY PLANT - NET   433,290    422,199 
              
CURRENT ASSETS:  Cash and Cash Equivalents   1,798    3,106 
   Accounts Receivable, net   13,213    11,280 
   Unbilled Revenues   6,902    4,842 
   Materials and Supplies (at average cost)   1,452    2,023 
   Prepayments   2,262    1,622 
   TOTAL CURRENT ASSETS   25,627    22,873 
              
DEFERRED CHARGES  Unamortized Debt Expense   2,509    2,611 
AND OTHER ASSETS:  Preliminary Survey and Investigation Charges   5,216    5,179 
   Regulatory Assets   65,438    67,302 
   Operations and Developer Contracts Receivable   1,847    5,300 
   Restricted Cash   4,053    3,260 
   Non-utility Assets - Net   9,638    8,182 
   Other   432    630 
   TOTAL DEFERRED CHARGES AND OTHER ASSETS   89,133    92,464 
   TOTAL ASSETS  $548,050   $537,536 
              
CAPITALIZATION AND LIABILITIES           
CAPITALIZATION:  Common Stock, No Par Value  $143,081   $141,432 
   Retained Earnings   38,344    35,549 
   TOTAL COMMON EQUITY   181,425    176,981 
   Preferred Stock   3,353    3,353 
   Long-term Debt   132,410    132,167 
   TOTAL CAPITALIZATION   317,188    312,501 
              
CURRENT  Current Portion of Long-term Debt   5,064    4,569 
LIABILITIES:  Notes Payable   27,750    24,250 
   Accounts Payable   4,242    5,706 
   Accrued Taxes   9,240    7,847 
   Accrued Interest   1,321    1,628 
   Unearned Revenues and Advanced Service Fees   753    734 
   Other   1,489    1,953 
   TOTAL CURRENT LIABILITIES   49,859    46,687 
              
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)           
              
DEFERRED CREDITS  Customer Advances for Construction   22,042    21,944 
AND OTHER LIABILITIES:  Accumulated Deferred Investment Tax Credits   1,087    1,146 
   Accumulated Deferred Income Taxes   39,974    37,022 
   Employee Benefit Plans   48,735    51,006 
   Regulatory Liability - Cost of Utility Plant Removal   8,597    8,029 
   Other   977    995 
   TOTAL DEFERRED CREDITS AND OTHER LIABILITIES   121,412    120,142 
              
CONTRIBUTIONS IN AID OF CONSTRUCTION   59,591    58,206 
   TOTAL CAPITALIZATION AND LIABILITIES  $548,050   $537,536 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

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Index

 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   Nine  Months Ended Sept  30,
   2012  2011
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Income  $11,670   $11,398 
Adjustments to Reconcile Net Income to          
Net Cash Provided by Operating Activities:          
Depreciation and Amortization   8,349    7,767 
Provision for Deferred Income Taxes and Investment Tax Credits   3,351    1,297 
Equity Portion of Allowance for Funds Used During Construction (AFUDC)   (242)   (405)
Cash Surrender Value of Life Insurance   (132)   (42)
Stock Compensation Expense   456    315 
Changes in Assets and Liabilities:          
Accounts Receivable   1,520    (578)
Unbilled Revenues   (2,060)   (1,567)
Materials & Supplies   571    187 
Prepayments   (640)   (722)
Accounts Payable   (1,464)   (614)
Accrued Taxes   1,393    1,919 
Accrued Interest   (307)   (703)
Employee Benefit Plans   182    (1,226)
Unearned Revenue & Advanced Service Fees   19    (113)
Other Assets and Liabilities   (1,484)   158 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES   21,182    17,071 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Utility Plant Expenditures, Including AFUDC of $141 in 2012, $221 in 2011   (17,886)   (17,647)
Restricted Cash   (793)   2,504 
Investment in Joint Venture   (1,000)   — 
           
NET CASH USED IN INVESTING ACTIVITIES   (19,679)   (15,143)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Redemption of Long-term Debt   (4,191)   (3,818)
Proceeds from Issuance of Long-term Debt   4,929    2,747 
Net Short-term Bank Borrowings   3,500    7,250 
Deferred Debt Issuance Expense   (22)   (34)
Repurchase of Preferred Stock   —    (9)
Proceeds from Issuance of Common Stock   1,193    1,168 
Payment of Common Dividends   (8,720)   (8,538)
Payment of Preferred Dividends   (155)   (155)
Construction Advances and Contributions-Net   655    1,142 
           
NET CASH USED IN FINANCING ACTIVITIES   (2,811)   (247)
NET CHANGES IN CASH AND CASH EQUIVALENTS   (1,308)   1,681 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   3,106    2,453 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $1,798   $4,134 
           
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:          
Utility Plant received as Construction Advances and Contributions  $828   $6,400 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:          
  Cash Paid During the Year for:          
Interest  $5,276   $5,365 
Interest Capitalized  $141   $221 
Income Taxes  $1,313   $2,614 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

3
Index

 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK

AND LONG-TERM DEBT

(Unaudited)

(In thousands)

 

  September 30,  December 31,
  2012  2011
Common Stock, No Par Value          
Shares Authorized - 40,000          
Shares Outstanding - 2012 - 15,752  $143,081   $141,432 
  2011 - 15,682          
           
Retained Earnings   38,344    35,549 
TOTAL COMMON EQUITY  $181,425   $176,981 
           
Cumulative Preferred Stock, No Par Value:          
Shares Authorized - 134          
Shares Outstanding -   32          
Convertible:          
Shares Outstanding, $7.00 Series - 14   1,457    1,457 
Shares Outstanding, $8.00 Series -   7   816    816 
Nonredeemable:          
Shares Outstanding, $7.00 Series -   1   80    80 
Shares Outstanding, $4.75 Series - 10   1,000    1,000 
TOTAL PREFERRED STOCK   $3,353   $3,353 
           
Long-term Debt:          
  8.05%, Amortizing Secured Note, due December 20, 2021  $2,208   $2,319 
  6.25%, Amortizing Secured Note, due May 19, 2028   6,580    6,895 
  6.44%, Amortizing Secured Note, due August 25, 2030   5,017    5,227 
  6.46%, Amortizing Secured Note, due September 19, 2031   5,297    5,507 
  4.22%, State Revolving Trust Note, due December 31, 2022   527    546 
  3.30% to 3.60%, State Revolving Trust Note, due May 1, 2025   3,502    3,623 
  3.49%, State Revolving Trust Note, due January 25, 2027   602    633 
  4.03%, State Revolving Trust Note, due December 1, 2026   805    825 
  4.00% to 5.00%, State Revolving Trust Note, due August 1, 2021   389    434 
  0.00%, State Revolving Fund Note, due August 1, 2021   320    359 
  3.64%, State Revolving Trust Note, due July 1, 2028   356    364 
  3.64%, State Revolving Trust Note, due January 1, 2028   119    122 
  3.45%, State Revolving Trust Note, due August 1, 2031   392    39 
  6.59%, Amortizing Secured Note, due April 20, 2029   5,784    6,046 
  7.05%, Amortizing Secured Note, due January 20, 2030   4,333    4,521 
  5.69%, Amortizing Secured Note, due January 20, 2030   8,889    9,273 
  3.75%, State Revolving Trust Note, due July 1, 2031   2,664    2,021 
  3.75%, State Revolving Trust Note, due November 30, 2030   1,415    1,404 
  First Mortgage Bonds:          
  5.20%, Series S, due October 1, 2022   12,000    12,000 
  5.25%, Series T, due October 1, 2023   6,500    6,500 
  5.25%, Series V, due February 1, 2029   10,000    10,000 
  5.35%, Series W, due February 1, 2038   23,000    23,000 
  0.00%, Series X, due September 1, 2018   322    375 
  4.25% to 4.63%, Series Y, due September 1, 2018   355    410 
  0.00%, Series Z, due September 1, 2019   782    894 
  5.25% to 5.75%, Series AA, due September 1, 2019   955    1,080 
  0.00%, Series BB, due September 1, 2021   1,085    1,206 
  4.00% to 5.00%, Series CC, due September 1, 2021   1,275    1,400 
  5.10%, Series DD, due January 1, 2032   6,000    6,000 
  0.00%, Series EE, due August 1, 2023   4,385    4,804 
  3.00% to 5.50%, Series FF, due August 1, 2024   5,755    6,160 
  0.00%, Series GG, due August 1, 2026   1,262    1,352 
  4.00% to 5.00%, Series HH, due August 1, 2026   1,560    1,640 
  0.00%, Series II, due August 1, 2024   1,059    1,150 
  3.40% to 5.00%, Series JJ, due August 1, 2027   1,490    1,560 
  0.00%, Series KK, due August 1, 2028   1,434    1,526 
  5.00% to 5.50%, Series LL, due August 1, 2028   1,570    1,635 
  0.00%, Series MM, due August 1, 2030   1,801    1,901 
  3.00% to 4.375%, Series NN, due August 1, 2030   1,910    1,985 
  0.00%, Series OO, due August 1, 2031   2,860    — 
  2.00% to 5.00%, Series PP, due August 1, 2031   915    — 
SUBTOTAL LONG-TERM DEBT   137,474    136,736 
Less: Current Portion of Long-term Debt   (5,064)   (4,569)
TOTAL LONG-TERM DEBT   $132,410   $132,167 

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

4
Index

 

MIDDLESEX WATER COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Basis of Presentation and Recent Developments

 

Middlesex Water Company (Middlesex or the Company) 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 Twin Lakes Utilities, Inc. (Twin Lakes). 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 2011 Annual Report on Form 10-K (the 2011 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 (including normal recurring accruals) to present fairly the financial position as of September 30, 2012, the results of operations for the three and nine month periods ended September 30, 2012 and 2011 and cash flows for the nine month periods ended September 30, 2012 and 2011. Information included in the Condensed Consolidated Balance Sheet as of December 31, 2011, has been derived from the Company’s audited financial statements for the year ended December 31, 2011 included in the 2011 Form 10-K.

 

Contract Awarded to USA

In March 2012, the Borough of Avalon, New Jersey (Avalon) awarded a ten-year operations and maintenance contract to USA for the Avalon water utility, sewer utility and storm water system. In addition to performing the day to day operations, USA is responsible for all billing, collections, customer service, emergency responses and management of capital projects funded by Avalon. USA began operating the systems on July 1, 2012.

 

Investment in Ridgewood Green RME, LLC

Middlesex and NSU Ridgewood, LLC, a wholly-owned subsidiary of Natural Systems Utilities, LLC, formed a joint venture, Ridgewood Green RME, LLC, (Ridgewood Green), which entered into a 20-year public-private partnership with the Village of Ridgewood, New Jersey (Ridgewood) whereby Ridgewood Green will design, build, own and operate facilities to optimize the production of electricity at Ridgewood’s municipal wastewater treatment plant. Operation of the facilities is expected to begin in the first quarter of 2013.   

 

Recent Accounting Guidance

Fair Value Measurements and Disclosures – In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2011-04, which amends Accounting Standards Codification 820, Fair Value Measurements and Disclosures, to update guidance related to fair value measurements and disclosures as a step towards achieving convergence between generally accepted accounting principles and international financial reporting standards. ASU 2011-04 clarifies intent about application of existing fair value measurements and disclosures, changes certain requirements for fair value measurements and requires expanded disclosures. ASU 2011-04 was effective for interim and annual periods beginning after December 15, 2011. The Company’s adoption of ASU 2011-04 resulted in expanded fair value disclosures and did not have any impact on the Company’s results of operations, cash flows or financial position.

 

Note 2 – Rate Matters

 

Middlesex - In September 2012, Middlesex filed an application with the New Jersey Board of Public Utilities (NJBPU) seeking permission to establish a Purchased Water Adjustment Clause and implement a tariff rate sufficient to recover increased costs of $0.1 million to purchase untreated water from the New Jersey Water Supply Authority (NJWSA) and treated water from a non-affiliated regulated water utility. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the request.

5
Index

 

In July 2012, the NJBPU approved an $8.1 million increase in Middlesex’s base water rates. A base rate increase request of $11.3 million was filed in January 2012 to seek recovery of increased costs of operations, chemicals and fuel, electricity, taxes, labor and benefits, decreases in industrial and commercial customer demand patterns, as well as capital investment. The new base water rates are designed to recover these increased costs, as well as a return on invested capital in rate base of $202.4 million based on a return on equity of 10.15%. The rate increase became effective on July 20, 2012.

 

Pinelands - In August 2012, Pinelands Water and Pinelands Wastewater filed applications with the NJBPU seeking permission to increase base rates by approximately $0.2 million and $0.1 million per year, respectively. These requests were made as a result of capital investments Pinelands Water and Pinelands Wastewater have made, or have committed to make, as well as increased operations and maintenance costs for both companies. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the request. A decision by the NJBPU is not expected until the first half of 2013.

 

Tidewater – In June 2012, the Delaware Public Service Commission (DEPSC) approved a $3.9 million increase in Tidewater’s base water rates. A base rate increase request of $6.9 million was filed in September 2011 to seek recovery of increased costs for operations, maintenance and taxes, as well as capital investment. Under PSC regulations, Tidewater had implemented interim rates in November 2011, which amounted to approximately $2.5 million on an annual basis. The new final base rates will reflect the remaining $1.4 million and became effective June 19, 2012.

 

TESI – In June 2012, the DEPSC approved a $0.6 million increase in TESI’s base wastewater rates, a portion of which is to be phased in through 2015. A base rate increase request of $0.8 million was filed in July 2011 to seek recovery of increased operation and maintenance costs, as well as capital investment. Under PSC regulations, TESI had implemented interim rates in September 2011, which amounted to approximately $0.1 million on an annual basis. The new final base rates became effective June 5, 2012.

 

Note 3 – Capitalization

 

Common Stock

During the nine months ended September 30, 2012, there were 64,034 common shares (approximately $1.2 million) issued under the Company’s Amended and Restated Dividend Reinvestment and Common Stock Purchase Plan.

 

The Company maintains a stock plan for its non-management directors (Outside Director Stock Compensation Plan). In May 2012, the Company granted and issued 5,768 shares of common stock (approximately $0.1 million) to the non-management directors under the plan.

 

Long-term Debt

In September 2012, Middlesex received approval from the NJBPU to redeem and refinance up to $60 million of First Mortgage Bonds (Bonds) issued through the New Jersey Economic Development Authority (NJEDA). The refinancing of five series of Bonds totaling $57.5 million is expected to be completed in the fourth quarter of 2012.

 

In May 2012, Middlesex borrowed $3.9 million through the New Jersey Environmental Infrastructure Trust under the New Jersey State Revolving Fund (SRF) loan program and issued Bonds designated as Series OO ($3.0 million) and Series PP ($0.9 million).  The interest rate on the Series OO Bonds is zero and the interest rate on the Series PP Bonds ranges from 2.0% to 5.0% depending on the serial maturity date. The final maturity date for the Bonds is August 1, 2031. Proceeds may only be used for the Middlesex 2012 RENEW Program, which is Middlesex’s program to clean and cement unlined mains in the Middlesex system.

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Index

 

In March 2011, Tidewater closed on a $2.8 million loan with the Delaware SRF program which allows, but does not obligate, Tidewater to draw against a General Obligation Note for a specific project. The interest rate on any draw will be set at 3.75% with a final maturity of July 1, 2031 on the amount actually borrowed. As of September 30, 2012, Tidewater has borrowed $2.7 million against this loan.

 

In March 2011, Southern Shores closed on a $1.6 million loan with the Delaware SRF program, which allows, but does not obligate, Southern Shores to draw against a General Obligation Note for a specific. The interest rate on any draw will be set at 3.75% with a final maturity of November 30, 2030 on the amount actually borrowed. As of September 30, 2012, Southern Shores has borrowed $1.4 million against this loan.

 

Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments for which it is practicable to estimate that value. The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, trade receivables, accounts payable and notes payable approximate their respective fair values due to the short-term maturities of these instruments. The fair value of the Company’s long-term debt relating to Bonds and SRF Notes is based on quoted market prices for similar issues. Under the fair value hierarchy, the fair value of cash and cash equivalents is classified as a Level 1 measurement and the fair value of notes payable and the Bonds and SRF Notes in the table below are classified as Level 2 measurements. The carrying amount and fair market value of the Company’s bonds were as follows:

 

   (Thousands of Dollars)
   September 30, 2012  December 31, 2011
   Carrying  Fair  Carrying  Fair
   Amount  Value  Amount  Value
Bonds  $88,275   $89,422   $86,577   $87,283 
SRF Notes  $709   $712   $793   $799 

 

For other long-term debt for which there was no quoted market price, it was not practicable to estimate their fair value. The carrying amount of these instruments was $48.5 million at September 30, 2012 and $49.3 million at December 31, 2011. Customer advances for construction have a carrying amount of $22.0 million and $21.9 million, respectively, at September 30, 2012 and December 31, 2011. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases.

 

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Index

 

Note 4 – Earnings Per Share

 

Basic earnings per share (EPS) are computed on the basis of the weighted average number of shares outstanding during the period presented. 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 per Share Amounts)
   Three Months Ended September 30,
   2012  2011
Basic:  Income  Shares  Income  Shares
Net Income  $6,138    15,741   $5,143    15,622 
Preferred Dividend   (52)        (52)     
Earnings Applicable to Common Stock  $6,086    15,741   $5,091    15,622 
                     
Basic EPS  $0.39        $0.33      
                     
Diluted:                    
Earnings Applicable to Common Stock  $6,086    15,741   $5,091    15,622 
$7.00 Series Preferred Dividend   24    167    24    167 
$8.00 Series Preferred Dividend   14    96    14    96 
Adjusted Earnings Applicable to  Common Stock  $6,124    16,004   $5,129    15,885 
                     
Diluted EPS  $0.38        $0.32      

 

 

   (In Thousands Except per Share Amounts)
   Nine Months Ended September 30,
   2012  2011
Basic:  Income  Shares  Income  Shares
Net Income  $11,670    15,717   $11,398    15,599 
Preferred Dividend   (155)        (155)     
Earnings Applicable to Common Stock  $11,515    15,717   $11,243    15,599 
                     
Basic EPS  $0.73        $0.72      
                     
Diluted:                    
Earnings Applicable to Common Stock  $11,515    15,717   $11,243    15,599 
$7.00 Series Preferred Dividend   73    167    73    167 
$8.00 Series Preferred Dividend   42    96    42    96 
Adjusted Earnings Applicable to  Common Stock  $11,630    15,980   $11,358    15,862 
                     
Diluted EPS  $0.73        $0.72      

 

Note 5 – Business Segment Data

 

The Company has identified two reportable segments. One is the regulated business of collecting, treating and distributing water on a retail and wholesale basis to residential, commercial, industrial and fire protection customers in parts of New Jersey, Delaware and Pennsylvania. This segment also includes regulated wastewater systems in New Jersey and Delaware. The Company is subject to regulations as to its rates, services and other matters by New Jersey, Delaware and Pennsylvania with respect to utility services within these states. The other segment is primarily comprised of non-regulated contract services for the operation and maintenance of municipal and private water and wastewater systems in New Jersey and Delaware. Inter-segment transactions relating to operational costs are treated as pass-through expenses. Finance charges on inter-segment loan activities are based on interest rates that are below what would normally be charged by a third party lender.

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Index

 

   (In Thousands)
   Three Months Ended
September 30,		  Nine Months Ended
September 30,
Operations by Segments:  2012  2011  2012  2011
Revenues:                    
  Regulated  $29,085   $26,262   $74,385   $70,935 
  Non – Regulated   3,441    2,605    9,288    8,220 
Inter-segment Elimination   (173)   (196)   (373)   (386)
Consolidated Revenues  $32,353   $28,671   $83,300   $78,769 
                     
Operating Income:                    
  Regulated  $10,417   $8,241   $20,798   $18,893 
  Non – Regulated   426    275    1,132    1,129 
Consolidated Operating Income  $10,843   $8,516   $21,930   $20,022 
                     
Net Income:                    
  Regulated  $5,926   $4,630   $11,070   $10,375 
  Non – Regulated   212    513    600    1,023 
Consolidated Net Income  $6,138   $5,143   $11,670   $11,398 
                     
Capital Expenditures:                    
  Regulated  $5,229   $6,389   $17,564   $17,245 
  Non – Regulated   83    219    322    402 
Total Capital Expenditures  $5,312   $6,608   $17,886   $17,647 

 

  

 

As of

September 30,

2012

 

 

As of

December 31,

2011

Assets:          
  Regulated  $546,879   $539,947 
  Non – Regulated   11,321    10,325 
Inter-segment Elimination   (10,150)   (12,736)
Consolidated Assets  $548,050   $537,536 

 

Note 6 – Short-term Borrowings

 

As of September 30, 2012, the Company has established lines of credit aggregating $60.0 million. At September 30, 2012, the outstanding borrowings under these credit lines were $27.8 million at a weighted average interest rate of 1.41%.

 

The weighted average daily amounts of borrowings outstanding under the Company’s credit lines and the weighted average interest rates on those amounts were as follows:

 

   ($ In Thousands)
   Three Months Ended
September 30,		  Nine Months Ended
September 30,
   2012  2011  2012  2011
             
Average Daily Amounts Outstanding  $26,867   $21,995   $25,122   $19,629 
Weighted Average Interest Rates   1.52%   1.32%   1.41%   1.50%

 

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Index

The maturity dates for the $27.8 million outstanding as of September 30, 2012 are all in October 2012 and are extendable at the discretion of the Company.

 

Interest rates for short-term borrowings under the lines of credit are below the prime rate with no requirement for compensating balances.

 

Note 7 – Commitments and Contingent Liabilities

 

Contract Operations - USA-PA operates the City of Perth Amboy, New Jersey’s water and wastewater systems under a 20-year agreement, which expires in 2018. In connection with the agreement with Perth Amboy, USA-PA entered into a 20-year subcontract with a wastewater operating company for the operation and maintenance of the Perth Amboy wastewater collection system. The subcontract provides for the sharing of certain fixed and variable fees and operating expenses.

 

Water Supply

Middlesex has an agreement with the NJWSA for the purchase of untreated water through November 30, 2023, which provides for an average purchase of 27 million gallons a day (mgd). Pricing is set annually by the NJWSA through a public rate making process. The agreement has provisions for additional pricing in the event Middlesex overdrafts or exceeds certain monthly and annual thresholds.

 

Middlesex also has an agreement with a non-affiliated regulated water utility for the purchase of treated water. This agreement, which expires February 27, 2016, provides for the minimum purchase of 3 mgd of treated water with provisions for additional purchases.

 

Purchased water costs are shown below:

 

   (In Thousands)
   Three Months Ended
September 30,		  Nine Months Ended
September 30,
   2012  2011  2012  2011
             
Treated  $772   $682   $2,266   $1,974 
Untreated   663    672    1,791    1,794 
Total Costs  $1,435   $1,354   $4,057   $3,768 

 

Construction

The Company has budgeted approximately $21.8 million on its construction program in 2012. The actual amount and timing of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain projects.

 

Litigation

The Company is a defendant in lawsuits in the normal course of business. We believe the resolution of pending claims and legal proceedings will not have a material adverse effect on the Company’s consolidated financial statements.

 

Change in Control Agreements

The Company has Change in Control Agreements with certain of its officers that provide compensation and benefits in the event of termination of employment in connection with a change in control of the Company.

 

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Index

 

Note 8 – Employee Benefit Plans

 

Pension Benefits

The Company’s Pension Plan covers substantially all employees hired prior to March 31, 2007. Employees hired after March 31, 2007 are not eligible to participate in this plan, but do participate in a defined contribution plan that provides an annual contribution into a self-directed retirement account at the discretion of the Company, based upon a percentage of the participants’ compensation. In order to be eligible for contribution, the participating employee must be employed by the Company on December 31st of the year to which the award relates. For each of the three months ended September 30, 2012 and 2011, the Company made Pension Plan cash contributions of $1.8 million. For each of the nine months ended September 30, 2012 and 2011, the Company made Pension Plan cash contributions of $2.5 million. The Company expects to make additional Pension Plan cash contributions of approximately $1.0 million over the remainder of the current year. The Company also maintains an unfunded supplemental retirement benefit plan for certain active and retired Company officers and currently pays $0.3 million in annual benefits to the retired participants.

 

Other Benefits

The Company’s Other Benefits Plan covers substantially all of its retired employees. Employees hired after March 31, 2007 are not eligible to participate in this plan. Coverage includes healthcare and life insurance. For the three months ended September 30, 2012 and 2011, the Company made Other Benefits Plan cash contributions of $1.8 million and $1.5 million, respectively. For the nine months ended September 30, 2012 and 2011, the Company made Other Benefits Plan cash contributions of $2.5 million and $2.0 million, respectively. The Company expects to make additional Other Benefits Plan cash contributions of approximately $1.0 million over the remainder of the current year.

 

The following tables set forth information relating to the Company’s periodic costs for its employee retirement benefit plans:

 

   (In Thousands)
   Pension Benefits  Other Benefits
   Three Months Ended September 30,
   2012  2011  2012  2011
             
Service Cost  $550   $394   $446   $326 
Interest Cost   604    566    467    401 
Expected Return on Assets   (615)   (571)   (314)   (256)
Amortization of Unrecognized Losses   387    141    441    219 
Amortization of Unrecognized Prior Service Cost   2    2    —    — 
Amortization of Transition Obligation   —    —    33    33 
Net Periodic Benefit Cost  $928   $532   $1,073   $723 
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Index

 

       
   (In Thousands)
   Pension Benefits  Other Benefits
   Nine Months Ended September 30,
   2012  2011  2012  2011
             
Service Cost  $1,649   $1,181   $1,338   $979 
Interest Cost   1,812    1,696    1,401    1,203 
Expected Return on Assets   (1,844)   (1,712)   (943)   (769)
Amortization of Unrecognized Losses   1,162    424    1,324    658 
Amortization of Unrecognized Prior Service Cost   7    7    —    — 
Amortization of Transition Obligation   —    —    101    101 
Net Periodic Benefit Cost  $2,786   $1,596   $3,221   $2,172 

 

 

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Index

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 Middlesex Water Company (Middlesex or the Company) included elsewhere herein and with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Forward-Looking Statements

Certain statements contained in this periodic report and in the documents incorporated by reference constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. 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, including the recovery of certain costs recorded as regulatory assets;
-statements as to the Company’s expected liquidity needs during the upcoming fiscal year 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 amount of cash contributions to fund the Company’s retirement benefit plans, 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 rate increase requests;
-new or additional water quality standards;
-weather variations and other natural phenomena;
-the existence of growth opportunities and the risks involved in pursuing those opportunities;
-acts of war or terrorism;
-significant changes in the pace of housing development in Delaware;
-the availability and cost of capital resources;
-the ability to translate Preliminary Survey & Investigation (PS&I) charges into viable projects; and
-other factors discussed elsewhere in this quarterly report.

 

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Index

 

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 Company’s understanding as of the date of this 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 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 Item 1A. - Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

Overview

 

Middlesex has operated as a water utility in New Jersey since 1897, in Delaware through our wholly-owned subsidiary, Tidewater Utilities, Inc. (Tidewater), since 1992 and in Pennsylvania through our wholly-owned subsidiary, Twin Lakes Utilities, Inc. (Twin Lakes), since 2009. We are in the business of collecting, treating and distributing 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, as to the quality of water service we provide and as to certain other matters in New Jersey, Delaware and Pennsylvania. Only our Utility Services Affiliates, Inc. (USA), Utility Services Affiliates (Perth Amboy), Inc. (USA-PA) and White Marsh Environmental Systems, Inc. (White Marsh) subsidiaries are not regulated utilities.

 

Our New Jersey water utility system (the Middlesex System) provides water services to approximately 60,000 retail customers, primarily in central New Jersey. The Middlesex System also provides water service under contract to several municipalities in central New Jersey. 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 Bayview system provides water services in Downe Township, New Jersey. Our other New Jersey subsidiaries, Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), provide water and wastewater services to residents in Southampton Township, New Jersey.

 

USA offers residential customers in New Jersey and Delaware water service line and sewer lateral maintenance programs, which are serviced by HomeServe USA (HomeServe), a leading provider of home maintenance service programs. HomeServe has recently expanded its maintenance offerings under the program to include other household services. USA receives a service fee for the billing, cash collection and other administrative matters associated with HomeServe’s service contracts. In February 2012, USA began to operate a wastewater treatment facility under contract at an industrial site in Southern New Jersey. In July 2012, USA began operating the water and sewer utilities and storm water system of the Borough of Avalon, New Jersey.

 

Our Delaware subsidiaries, Tidewater and Southern Shores Water Company, LLC (Southern Shores), provide water services to approximately 36,000 retail customers in New Castle, Kent and Sussex Counties, Delaware. Tidewater’s subsidiary, White Marsh, services an additional 4,700 customers in Kent and Sussex Counties through various operations and maintenance contracts.

 

Our Tidewater Environmental Services, Inc. (TESI) subsidiary provides wastewater services to approximately 2,200 residential retail customers. We expect our regulated wastewater operations in Delaware will eventually become a more significant component of our operations.

 

Our Pennsylvania subsidiary, Twin Lakes, provides water services to approximately 120 retail customers in the Township of Shohola, Pike County, Pennsylvania.

14
Index

 

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 four factors: weather, adequate and timely rate relief, effective cost management, and customer growth. These factors are evident in the discussions below which compare our results of operations with prior periods.

 

Recent Developments

 

Rate Matters

Middlesex – In September 2012, Middlesex filed an application with the New Jersey Board of Public Utilities (NJBPU) seeking permission to establish a Purchased Water Adjustment Clause and implement a tariff rate sufficient to recover increased costs of $0.1 million to purchase untreated water from the New Jersey Water Supply Authority and treated water from a non-affiliated regulated water utility. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the request.

 

In July 2012, the NJBPU approved an $8.1 million increase in Middlesex’s base water rates. A base rate increase request of $11.3 million was filed in January 2012 to seek recovery of increased costs of operations, chemicals and fuel, electricity, taxes, labor and benefits, decreases in industrial and commercial customer demand patterns, as well as capital investment. The new base water rates are designed to recover these increased costs, as well as a return on invested capital in rate base of $202.4 million based on a return on equity of 10.15%. The rate increase became effective on July 20, 2012.

 

Pinelands - In August 2012, Pinelands Water and Pinelands Wastewater filed applications with the NJBPU seeking permission to increase base rates by approximately $0.2 million and $0.1 million per year, respectively. These requests were made as a result of capital investments Pinelands Water and Pinelands Wastewater have made, or have committed to make, as well as increased operations and maintenance costs, for both companies. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the request. A decision by the NJBPU is not expected until the first half of 2013.

 

Tidewater – In June 2012, the Delaware Public Service Commission (DEPSC) approved a $3.9 million increase in Tidewater’s base water rates. A base rate increase request of $6.9 million was filed in September 2011 to seek recovery of increased costs for operations, maintenance and taxes, as well as capital investment. Under PSC regulations, Tidewater had implemented interim rates in November 2011, which amounted to approximately $2.5 million on an annual basis. The new final base rates will reflect the remaining $1.4 million and became effective June 19, 2012.

 

TESI – In June 2012, the DEPSC approved a $0.6 million increase in TESI’s base wastewater rates, a portion of which is to be phased in through 2015. A base rate increase request of $0.8 million was filed in July 2011 to seek recovery of increased operation and maintenance costs, as well as capital investment. Under PSC regulations, TESI had implemented interim rates in September 2011, which amounted to approximately $0.1 million on an annual basis. The new final base rates became effective June 5, 2012.

 

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Index

 

Long-Term Debt Refinancing

In September 2012, Middlesex received approval from the NJBPU to redeem and refinance up to $60 million of First Mortgage Bonds (Bonds) issued through the New Jersey Economic Development Authority. The refinancing of five series of Bonds totaling $57.5 million is expected to be completed in the fourth quarter of 2012.

 

Contract Awarded to USA

In March 2012, the Borough of Avalon, New Jersey (Avalon) awarded a ten-year operations and maintenance contract to USA for the Avalon water utility, sewer utility and storm water system. In addition to performing the day to day operations, USA is responsible for all billing, collections, customer service, emergency responses and management of capital projects funded by Avalon. USA began operating the systems on July 1, 2012. The contract is expected to contribute less than $0.01 to annual earnings per share. The contract also provides for opportunities to earn additional revenues associated with supplemental work.

 

Investment in Ridgewood Green RME, LLC

Middlesex and NSU Ridgewood, LLC, a wholly-owned subsidiary of Natural Systems Utilities, LLC, formed a joint venture, Ridgewood Green RME, LLC, (Ridgewood Green), which entered into a 20-year public-private partnership with the Village of Ridgewood, New Jersey (Ridgewood) whereby Ridgewood Green will design, build, own and operate facilities to optimize the production of electricity at Ridgewood’s municipal wastewater treatment plant. Operation of the facilities is expected to begin in the first quarter of 2013.   

 

Outlook

 

Revenues for 2012 and 2013 are expected to be favorably impacted from approved rate increases at Middlesex, Tidewater, TESI, Southern Shores and Twin Lakes. In addition, Pinelands Water and Pinelands Wastewater filed for base rate increases in the third quarter of 2012. Any decision on the Pinelands’ rate filings is expected in 2013.

 

Ongoing economic conditions continue to negatively impact our customers’ water consumption, particularly the level of water usage by our commercial and industrial customers in our Middlesex system. We are unable to determine when these customers’ water demands may fully return to previous levels, or if a reduced level of demand will continue indefinitely. We were given appropriate recognition for this decrease in customer consumption in Middlesex’s July 2012 rate increase.

 

Revenues and earnings are influenced by weather. Changes in usage patterns, as well as increases in capital expenditures and operating costs, are the primary factors in determining the need for rate increase requests. We continuously implement plans to streamline operations and reduce operating costs.

 

Changes in certain actuarial assumptions, including a lower discount rate and revised plan participant mortality factors, as well as a lower actual return in 2011 on assets held in our retirement plan funds, resulted in a significant increase in our underfunded employee benefit plan obligation and will result in higher employee benefit plan expense and cash contributions in 2012.  The rate increases recently approved for Tidewater and Middlesex reflected the resulting increased employee benefit plan expenses. 

 

As noted above, Middlesex plans to refinance $57.5 million of its Bonds. This refinancing is expected to result in lower annual interest costs.

 

As a result of ongoing challenging economic conditions impacting the pace of new residential home construction, there may be an increase in the amount of PS&I costs that will not be currently recoverable in rates. If it is determined that recovery is unlikely, the PS&I costs deemed unrecoverable will be charged against income in the period of determination.

 

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Index

 

Our strategy is focused on four key areas:

 

  · Serve as a trusted and continually-improving provider of safe, reliable and cost-effective water, wastewater and related services;

 

  · Provide a comprehensive suite of water and wastewater solutions in the continually-developing Delaware market that results in profitable growth;

 

  · Pursue profitable growth in our core states of New Jersey and Delaware, as well as additional states; and

 

  · Invest in products, services and other viable opportunities that complement our core competencies.

 

Operating Results by Segment

 

The discussion of the Company’s operating results is on a consolidated basis and includes significant factors by subsidiary. The Company has two operating segments, Regulated and Non-Regulated.

 

The segments in the tables included below consist of the following companies: Regulated-Middlesex, Tidewater, Pinelands, Southern Shores, TESI and Twin Lakes; Non-Regulated- USA, USA-PA, and White Marsh.

 

Results of Operations – Three Months Ended September 30, 2012

       
   (In Thousands)
   Three Months Ended September 30,
   2012  2011
   Regulated  Non-
Regulated		 

 

Total

  Regulated  Non-
Regulated		  Total
Revenues  $29,002   $3,351   $32,353   $26,119   $2,552   $28,671 
Operations and maintenance expenses   12,792    2,808    15,600    12,492    2,175    14,667 
Depreciation expense   2,586    43    2,629    2,386    35    2,421 
Other taxes   3,207    74    3,281    3,000    67    3,067 
  Operating income   10,417    426    10,843    8,241    275    8,516 
                               
Other income, net   197    15    212    336    638    974 
Interest expense   1,784    24    1,808    1,680    23    1,703 
Income taxes   2,904    205    3,109    2,267    377    2,644 
  Net income  $5,926   $212   $6,138   $4,630   $513   $5,143 

 

Operating Revenues

 

Operating revenues for the three months ended September 30, 2012 increased $3.7 million from the same period in 2011. This increase was primarily related to the following factors:

 

·Middlesex System revenues increased $1.9 million, primarily due to:
oSales to General Metered Service (GMS) customers increased by $1.4 million, primarily due to the July 2012 base water rate increase; and
oContract Sales to Municipalities increased by $0.5 million, primarily due to the July 2012 base water rate increase;
17
Index
·Tidewater System revenues increased $1.0 million, primarily due to interim and final rate increases that went into effect in November 2011 and June 2012, respectively, and increased connection fees;
·USA’s revenues increased $0.6 million, primarily due to revenues earned under our contracts to operate the Avalon water utility, sewer utility and storm water system and the Eagle Point Biological Wastewater Treatment Facility, both of which commenced in 2012;
·USA-PA’s revenues increased $0.2 million, primarily from scheduled increases in the fixed fees paid under contract with the City of Perth Amboy;
·Revenues in Southern Shores, TESI and Twin Lakes collectively increased $0.1 million, primarily due to rate increases that went into effect in 2012; and
·Operating revenues for all other categories decreased $0.1 million.

 

Operation and Maintenance Expense

 

Operation and maintenance expenses for the three months ended September 30, 2012 increased $0.9 million from the same period in 2011. This increase was primarily related to the following factors:

 

·Employee benefit expenses increased $1.1 million, primarily due to changes in certain postretirement benefit plan actuarial assumptions, including a lower discount rate and revised plan participant mortality factors, as well as a lower actual return on assets held in our retirement plan funds;
·Labor costs increased $0.1 million, primarily due to higher average labor rates and lower capitalized payroll partially offset by decreased headcount;
·Costs associated with distribution system repairs decreased $0.1 million due to a lower number of main breaks in 2012; and
·Operation and maintenance expenses for all other categories decreased $0.2 million.

 

Depreciation

 

Depreciation expense for the three months ended September 30, 2012 increased $0.2 million from the same period in 2011 due to a higher level of utility plant in service.

 

Other Taxes

 

Other taxes for the three months ended September 30, 2012 increased $0.2 million from the same period in 2011, primarily due to increased revenue related taxes on higher taxable revenues in our Middlesex system.

 

Interest Charges

 

Interest charges for the three months ended September 30, 2012 increased $0.1 million from the same period in 2011, primarily due to higher average short and long term debt outstanding in the third quarter of 2012 as compared to the third quarter of 2011.

 

Other Income, net

 

Other Income, net for the three months ended September 30, 2012 decreased $0.8 million from the same period in 2011, primarily due to a gain of $0.6 million recognized in the third quarter of 2011 resulting from the sale of USA’s LineCare contracts to HomeServe.

 

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Index

 

Income Taxes

 

Income taxes for the three months ended September 30, 2012 increased $0.5 million from the same period in 2011, due to increased operating income in 2012 as compared to 2011.

 

Net Income and Earnings Per Share

 

Net income for the three months ended September 30, 2012 increased $1.0 million from the same period in 2011. Basic and diluted earnings per share increased to $0.39 and $0.38, respectively, for the three months ended September 30, 2012, as compared to $0.33 and $0.32, respectively, for the three months ended September 30, 2011.

 

Results of Operations – Nine Months Ended September 30, 2012

 

   (In Thousands)
   Nine Months Ended September 30,
   2012  2011
   Regulated  Non-
Regulated		 

 

Total

  Regulated  Non-
Regulated		  Total
Revenues  $74,232   $9,068   $83,300   $70,708   $8,061   $78,769 
Operations and maintenance expenses   37,155    7,585    44,740    36,139    6,621    42,760 
Depreciation expense   7,639    120    7,759    7,141    109    7,250 
Other taxes   8,640    231    8,871    8,535    202    8,737 
  Operating income   20,798    1,132    21,930    18,893    1,129    20,022 
                               
Other income, net   573    78    651    811    753    1,564 
Interest expense   4,870    71    4,941    4,557    74    4,631 
Income taxes   5,431    539    5,970    4,772    785    5,557 
  Net income  $11,070   $600   $11,670   $10,375   $1,023   $11,398 

 

Operating Revenues

 

Operating revenues for the nine months ended September 30, 2012 increased $4.5 million from the same period in 2011. This increase was primarily related to the following factors:

 

·Middlesex System revenues increased $1.1 million, primarily due to:
oSales to GMS customers increased by $1.0 million, primarily due to the July 2012 base water rate increase; and
oContract Sales to Municipalities increased by $0.1 million, primarily due to the July 2012 base water rate increase partially offset by lower customer demand for water;
·Tidewater System revenues increased $2.1 million, primarily due to interim and final rate increases that went into effect in November 2011 and June 2012, respectively and increased connection fees;
·USA’s revenues increased $0.8 million, primarily due to revenues earned under our contracts to operate the Avalon water utility, sewer utility and storm water system and the Eagle Point Biological Wastewater Treatment Facility, both of which commenced in 2012;
·USA-PA’s revenues increased $0.4 million, primarily from scheduled increases in the fixed fees paid under contract with the City of Perth Amboy;
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·Revenues in Southern Shores, TESI and Twin Lakes collectively increased $0.4 million, primarily due to rate increases that went into effect in 2012; and
·Revenues from all other subsidiaries decreased $0.3 million.

 

Operation and Maintenance Expense

 

Operation and maintenance expenses for the nine months ended September 30, 2012 increased $2.0 million from the same period in 2011. This increase was primarily related to the following factors:

 

·Employee benefit expenses increased $1.7 million, primarily due to changes in certain postretirement benefit plan actuarial assumptions, including a lower discount rate and revised plan participant mortality factors, as well as a lower actual return on assets held in our retirement plan funds;
·Labor costs increased $0.1 million, primarily due to higher average labor rates partially offset by higher capitalized payroll, less overtime expended on main breaks and decreased headcount;
·Reserves for bad debts increased $0.1 million;
·Costs associated with distribution system repairs decreased $0.2 million, due to more favorable weather conditions, which led to below average number of main breaks in 2012;
·Operation and maintenance expenses for all other categories increased $0.3 million.

 

Depreciation

 

Depreciation expense for the nine months ended September 30, 2012 increased $0.5 million from the same period in 2011 due to a higher level of utility plant in service.

 

Other Taxes

 

Other taxes for the nine months ended September 30, 2012 increased $0.1 million from the same period in 2011, primarily due to increased revenue related taxes on higher taxable revenues in our Middlesex system.

 

Interest Charges

 

Interest charges for the nine months ended September 30, 2012 increased $0.3 million from the same period in 2011, primarily due to higher average short and long term debt outstanding in 2012 as compared to 2011.

 

Other Income, net

 

Other Income, net for the nine months ended September 30, 2012 decreased $0.9 million from the same period in 2011, primarily due to a gain of $0.6 million recognized in the third quarter of 2011 resulting from the sale of USA’s LineCare contracts to HomeServe and lower Allowance for Funds Used During Construction, resulting from lower average construction work in progress balances.

 

Income Taxes

 

Income taxes for the nine months ended September 30, 2012 increased $0.4 million from the same period in 2011, due to increased operating income in 2012 as compared to 2011.

 

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Net Income and Earnings Per Share

 

Net income for the nine months ended September 30, 2012 increased $0.3 million from the same period in 2011. Basic and diluted earnings per share increased to $0.73 for the nine months ended September 30, 2012 as compared to $0.72 for the nine months ended September 30, 2011.

 

Liquidity and Capital Resources

 

Operating Cash Flows

 

Cash flows from operations are largely based on four factors: weather, adequate and timely rate increases, effective cost management and customer growth. The effect of those factors on net income is discussed in “Results of Operations.”

 

For the nine months ended September 30, 2012, cash flows from operating activities increased $4.1 million to $21.2 million. Decreased operations and developer contracts receivable and timing of certain income tax payments were the primary reason for the increase in cash flow. The $21.2 million of net cash flow from operations enabled us to fund 100.0% of our utility plant expenditures internally for the period.

 

Capital Expenditures and Commitments

 

To fund our capital program, we use internally generated funds, short-term and long-term debt borrowings and, when market conditions are favorable, proceeds from sales of common stock under our Amended and Restated Dividend Reinvestment and Common Stock Purchase Plan (DRP) and common stock offerings. See below for a more detailed discussion regarding the funding of our capital program.

 

The capital investment program for 2012 is currently estimated to be $21.8 million.  Through September 30, 2012, we have expended $17.9 million and expect to incur approximately $3.9 million for capital projects for the remainder of 2012.

 

We currently project that we may expend approximately $34.0 million for capital projects in 2013 and 2014. The actual amount and timing of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain capital projects.

 

To fund our capital program for the remainder of 2012, we plan on utilizing:

·Internally generated funds
·Proceeds from the sale of common stock through the DRP
·Funds available and held in trust under existing New Jersey and Delaware State Revolving Fund (SRF) loans (currently, $2.6 million and $0.9 million, respectively). The SRF programs provide low cost financing for projects that meet certain water quality and system improvement benchmarks.
·Short-term borrowings, if necessary, through $60.0 million of available lines of credit with several financial institutions. As of September 30, 2012, the outstanding borrowings under these credit lines were $27.8 million.

 

Recent Accounting Pronouncements – See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.

 

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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 Bonds, which have final maturity dates ranging from 2018 to 2038. Over the next twelve months, approximately $5.1 million of the current portion of 35 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 our earnings.

 

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities and Exchange Act of 1934 (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 were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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.

 

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PART II.  OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

The information about risk factors does not differ materially from those set forth in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits
   
31.1 Section 302 Certification by Dennis W. Doll pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

31.2 Section 302 Certification by A. Bruce O’Connor pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

32.1 Section 906 Certification by Dennis W. Doll pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.2 Section 906 Certification by A. Bruce O’Connor pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

101.INS XBRL Instance Document

 

101.SCH XBRL Schema Document

 

101.CAL XBRL Calculation Linkbase Document

 

101.LAB XBRL Labels Linkbase Document

 

101.PRE XBRL Presentation Linkbase Document

 

101.DEF XBRL Definition Linkbase Document

 

 

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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
     (Principal Accounting Officer)

 

 

Date: October 26, 2012

 

 

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