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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Name of each exchange on which registered:
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par Value
--------------------------
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes |X| No |_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant at June 30, 2004 was $212,760,366 based on the closing market price
of $19.41 per share.
The number of shares outstanding for each of the registrant's classes of common
stock, as of March 1, 2005:
Common Stock, No par Value: 11,377,403 shares outstanding
Documents Incorporated by Reference
-----------------------------------
Proxy Statement to be filed in connection with the Registrant's Annual Meeting
of Shareholders to be held on May 25, 2005, which will be filed with the
Securities and Exchange Commission within 120 days, is incorporated as to Part
III.
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MIDDLESEX WATER COMPANY
FORM 10-K
INDEX
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PAGE
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Forward-Looking Statements 1
PART I
Item 1. Business:
Overview 2
Financial Information 4
Water Supplies and Contracts 4
Employees 6
Competition 6
Regulation 6
Management 8
Risk Factors 10
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchase of
Equity Securities 15
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 7A. Qualitative and Quantitative Disclosure About Market Risk 26
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 48
Item 9A. Controls and Procedures 48
Item 9B. Other Information 51
PART III
Item 10. Directors and Executive Officers of the Registrant 52
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners
and Management 52
Item 13. Certain Relationships and Related Transactions 52
Item 14. Principal Accountant Fees and Services 52
PART IV
Item 15. Exhibits and Financial Statement Schedules 53
Signatures 54
Exhibit Index 55
Forward-Looking Statements
Certain statements contained in this annual 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 annual 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 Company's understanding
as of the date of this annual 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 annual 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 1. Business- Risk Factors.
1
PART I
Item 1. Business.
Overview
Middlesex Water Company was incorporated as a water utility company in 1897 and
owns and operates regulated water utility systems in central and southern New
Jersey and in Delaware as well as a regulated wastewater utility in southern New
Jersey. We also operate water and wastewater systems on behalf of others in New
Jersey and Delaware.
The terms "the Company," "we," "our," and "us" refer to Middlesex Water Company
and its subsidiaries, including Tidewater Utilities, Inc. (Tidewater) and
Tidewater's wholly-owned subsidiaries, Southern Shores Water Company, LLC
(Southern Shores) and White Marsh Environmental Systems, Inc. (White Marsh),
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 (Bayview).
We recently created a new wholly-owned Delaware corporation named Tidewater
Environmental Services, Inc. (TESI), which will be used to own and operate
regulated wastewater systems in Delaware (see Regulation for further
discussion).
Middlesex principal executive offices are located at 1500 Ronson Road, Iselin,
New Jersey 08830. Our telephone number is (732) 634-1500. Our internet website
address is http://www.middlesexwater.com. We make available, free of charge
through our internet website, reports and amendments filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, after such
material is electronically filed with or furnished to the Securities and
Exchange Commission (SEC).
Middlesex System
The Middlesex System provides water services to approximately 58,000 retail
customers, primarily in eastern Middlesex County, New Jersey and provides water
under contract to the Township of Edison, the Boroughs of Highland Park and
Sayreville, and both the Old Bridge and the Marlboro Township Municipal
Utilities Authorities. The Middlesex System treats, stores and distributes water
for residential, commercial, industrial and fire prevention purposes. Under a
special contract, the Middlesex System also provides water treatment and pumping
services to the Township of East Brunswick. The Middlesex System, through its
retail and contract sales, produced approximately 67% of our 2004 revenue.
The Middlesex System's retail customers are located in an area of approximately
55 square miles in Woodbridge Township, the City of South Amboy, the Boroughs of
Metuchen and Carteret, portions of Edison Township and the Borough of South
Plainfield in Middlesex County and, to a minor extent, a portion of the Township
of Clark in Union County. The retail customers include a mix of residential
customers, large industrial concerns and commercial and light industrial
facilities. These retail customers are located in generally well-developed areas
of central New Jersey. The contract customers of the Middlesex System comprise
an area of approximately 141 square miles with a population of approximately
267,000. Contract sales to Edison, Sayreville, Old Bridge and Marlboro are
supplemental to the existing water systems of these customers. The State of New
Jersey in the mid-1980's approved plans to increase available surface water
supply to the South River Basin area of the state to permit a reduced use of
ground water in this area. The Middlesex System
2
provides treated surface water under long-term agreements to East Brunswick,
Marlboro, Old Bridge and Sayreville consistent with the state-approved plan.
Tidewater System
Tidewater, together with its wholly-owned subsidiary, Southern Shores Water
Company, LLC, provides water services to approximately 26,000 retail customers
for domestic, commercial and fire protection purposes in over 250 separate
community water systems in New Castle, Kent and Sussex Counties, Delaware.
Tidewater has another wholly-owned subsidiary, White Marsh Environmental
Systems, Inc., which operates water and wastewater systems under contract for
approximately 4,500 customers and also owns the office building that Tidewater
uses as its business office. White Marsh's rates for water and wastewater
operations are not regulated by the Delaware Public Service Commission (PSC).
The Tidewater System produced approximately 17% of our total revenue in 2004.
Utility Service Affiliates (Perth Amboy)
USA-PA operates the City of Perth Amboy's water and wastewater systems under a
20-year agreement, which expires in 2018. Perth Amboy has a population of 40,000
and has approximately 9,600 customers, most of whom are served by both systems.
The agreement was effected under New Jersey's Water Supply Public-Private
Contracting Act and the New Jersey Wastewater Public/Private Contracting Act and
requires USA-PA to lease from Perth Amboy all of its employees who currently
work on the Perth Amboy water and wastewater systems. Under the agreement,
USA-PA receives both fixed and variable fees based on increased system billing.
Fixed fee payments began at $6.4 million in the first year and are to increase
over the term of the 20-year contract to $10.2 million. USA-PA produced
approximately 11% of our total revenue in 2004.
In connection with the agreement, we guaranteed a series of bonds in the
principal amount of approximately $26.3 million, of which approximately $23.9
million remains outstanding. In addition to 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 system. The
subcontract provides for the sharing of certain fixed and variable fees and
operating expenses.
Pinelands System
Pinelands Water provides water services to approximately 2,400 residential
customers in Burlington County, New Jersey. Pinelands Water produced less than
1% of our total revenue in 2004.
Pinelands Wastewater provides wastewater services to approximately 2,400
primarily residential retail customers. Under contract, it also services one
municipal wastewater system in Burlington County, New Jersey with about 200
residential customers. Pinelands Wastewater produced approximately 1% of our
total revenue in 2004.
Utility Service Affiliates, Inc.
In 1999, we implemented a franchise agreement with the City of South Amboy
(South Amboy) to provide water service and install water system facilities in
South Amboy. The South Amboy franchise was approved by the Board of Public
Utilities (BPU) and its implementation significantly impacted two existing
agreements entered into by the parties. The first agreement was for the sale of
water to South Amboy on a wholesale basis. The second agreement was for the
provision of management services for a fixed fee.
USA provides customers within the Middlesex System a service line maintenance
program called LineCare(SM). LineCare(SM) is an affordable maintenance program
that covers all parts, material and labor required to repair or replace specific
elements of the customer's water service line and customer shut-off value.
3
Middlesex and USA have entered into a venture with an entity that provides meter
installation and related services. This venture seeks to obtain competitively
bid service contracts with municipalities in the Mid-Atlantic and New England
regions. The contract work may include any or all of the following: meter
purchases, replacement meter program, new meter program and meter testing. These
businesses contributed approximately 3% of our total revenue in 2004.
Bayview System
Bayview provides water service to approximately 300 customers in Cumberland
County, New Jersey. Bayview produced less than 1% of our total revenue in 2004.
Financial Information
Consolidated operating revenues and operating income are as follows:
(Thousands of Dollars)
Years Ended December 31,
------------------------
2004 2003 2002
------- ------- -------
Operating Revenues $70,991 $64,111 $61,933
Operating Income $13,119 $11,500 $12,467
Operating revenues were earned from the following sources:
Years Ended December 31,
------------------------
2004 2003 2002
----- ----- -----
Residential 39.9% 39.4% 40.0%
Commercial 9.5 9.8 9.7
Industrial 10.9 11.1 11.9
Fire Protection 10.2 10.7 10.5
Contract Sales 12.8 13.2 14.1
Contract Operations 11.2 12.6 12.1
Other 5.5 3.2 1.7
----- ----- -----
TOTAL 100.0% 100.0% 100.0%
----- ----- -----
Water Supplies and Contracts
Our New Jersey and Delaware water supply systems are physically separate and are
not interconnected. In New Jersey, the Pinelands System and Bayview System are
not interconnected with the Middlesex System or each other. We believe we have
adequate sources of water supply to meet the current and anticipated future
service requirements of our present customers in New Jersey and Delaware.
Middlesex System
Our Middlesex System, which produced 16,623 million gallons in 2004, obtains
water from surface sources and wells, which we call groundwater sources. In
2004, surface sources of water provided approximately 70% of the
4
Middlesex System's water supply, groundwater from wells provided approximately
23% and the balance of 7% was purchased from a nonaffiliated water utility.
Middlesex System's distribution storage facilities are used to supply water to
its customers at times of peak demand, outages and emergencies.
The principal source of surface water supply for the Middlesex System is the
Delaware & Raritan Canal, which is owned by the State of New Jersey and operated
as a water resource by the New Jersey Water Supply Authority. Middlesex renewed
and modified its agreement with the New Jersey Water Supply Authority, which was
effective January 1, 2004 and expires November 30, 2023, and provides for an
average purchase of 27 million gallons per day of untreated water from the
Delaware & Raritan Canal, augmented by the Round Valley/Spruce Run Reservoir
System. Surface water is pumped to and treated at the Carl J. Olsen (CJO) Plant.
Middlesex also has an agreement with a nonaffiliated water utility for the
purchase of treated water. This agreement, which expires December 31, 2005,
provides for the minimum purchase of 3 million gallons per day of treated water
with provisions for additional purchases. Purchased water costs are shown below:
(Millions of Dollars)
Years Ended December 31,
------------------------
Purchased Water 2004 2003 2002
--------------- ---- ---- ----
Untreated $2.2 $2.0 $1.9
Treated 2.0 1.8 1.8
---- ---- ----
Total Costs $4.2 $3.8 $3.7
==== ==== ====
Our Middlesex System also derives water from groundwater sources equipped with
electric motor-driven, deepwell turbine-type pumps. The Middlesex System has 31
wells, which provide an aggregate pump capacity of approximately 27 million
gallons per day.
The Middlesex System's groundwater sources are:
2004
Maximum Use
No.of Per Day Pumpage Pump
Source Wells (millions of gallons) Capacity (mgd) Location
------ ----- --------------------- -------------- --------
Park Avenue 15 8.3 15.2 South Plainfield
Tingley Lane North 4 2.8 2.8 Edison
Tingley Lane South 5 2.1 2.6 Edison
Spring Lake 4 0.0 2.8 South Plainfield
Sprague Avenue #1 1 1.1 1.1 South Plainfield
Sprague Avenue #2 1 1.3 1.3 South Plainfield
Maple Avenue 1 0.0 0.9 South Plainfield
-- ---- ----
Totals 31 15.6 26.7
Tidewater System
Our Tidewater System, which produced 1,517 million gallons in 2004, obtains 100%
of its water from 202 wells. In 2004, we placed 11 new wells in service and also
deactivated, sealed and abandoned 18 wells. Tidewater continues to submit
applications to Delaware regulatory authorities for the approval of additional
wells as growth, demand and water quality warrants. The Tidewater System does
not have a central treatment facility but has several regional filter plants.
Several of its water systems in New Castle, Kent and Sussex Counties, Delaware
have interconnected transmission systems.
5
Pinelands System
Water supply to our Pinelands System is derived from four wells drilled into the
Mt. Laurel aquifer which provided overall system delivery of 179 million gallons
in 2004. The pump capacity for the four wells is 2.2 million gallons per day.
Bayview System
Water supply to Bayview customers is derived from two wells, which provided an
overall system delivery of 11 million gallons in 2004. Each well has treatment
facilities.
Pinelands Wastewater System
The Pinelands Wastewater System discharges into the South Branch of the Rancocas
Creek through a tertiary treatment plant that provides clarification,
sedimentation, filtration and disinfection. The total capacity of the plant is
0.5 million gallons per day. Current average flow is 0.3 million gallons per
day. Pinelands has a current valid discharge permit issued by the New Jersey
Department of Environmental Protection (DEP).
Employees
As of December 31, 2004, we had a total of 149 employees in New Jersey, and a
total of 71 employees in Delaware. In addition, we lease 22 employees under the
USA-PA contract with the City of Perth Amboy, New Jersey. No employees are
represented by a union except the leased employees. We believe our employee
relations are good. Wages and benefits, other than for leased employees, are
reviewed annually and are considered competitive within the industry.
Competition
Our business in our franchised service area is substantially free from direct
competition with other public utilities, municipalities and other entities.
However, our ability to provide some contract water supply and wastewater
services and operations and maintenance services is subject to competition from
other public utilities, municipalities and other entities. Although Tidewater
has been granted an exclusive franchise for each of its existing community water
systems, its ability to expand service areas can be affected by the PSC awarding
franchises to other regulated water utilities.
Regulation
We are regulated as to rates charged to customers for water and wastewater
services in New Jersey and for water services in Delaware, as to the quality of
water service we provide and as to certain other matters. Only our USA, USA-PA
and White Marsh subsidiaries are not regulated utilities. We are subject to
environmental and water quality regulation by the United States Environmental
Protection Agency (EPA), and the DEP with respect to operations in New Jersey
and the Delaware Department of Natural Resources and Environmental Control
(DNREC), Delaware Department of Health and Social Services-Division of Public
Health (DPH), and the Delaware River Basin Commission (DRBC) with respect to
operations in Delaware. In addition, our issuances of securities are subject to
the prior approval of the Securities and Exchange Commission and the BPU or the
PSC.
During 2004, the PSC assumed regulatory authority over wastewater services in
Delaware and issued proposed rules and regulations similar to the water systems
it regulates.
6
Regulation of Rates and Services
New Jersey water and wastewater service operations (excluding the operations of
USA-PA) are subject to regulation by the BPU. Similarly, our Delaware water
service operations, and beginning in 2005, wastewater services to be offered by
TESI, are subject to regulation by the PSC. These regulatory authorities have
jurisdiction with respect to rates, service, accounting procedures, the issuance
of securities and other matters of utility companies operating within the States
of New Jersey and Delaware, respectively. For ratemaking purposes, we account
separately for operations in New Jersey and Delaware to facilitate independent
ratemaking by the BPU for New Jersey operations and the PSC for Delaware
operations.
In determining our rates, the BPU and the PSC consider the income, expenses,
rate base of property used and useful in providing service to the public and a
fair rate of return on that property each within its separate jurisdiction. Rate
determinations by the BPU do not guarantee particular rates of return to us for
our New Jersey operations nor do rate determinations by the PSC guarantee
particular rates of return for our Delaware operations. Thus, we may not achieve
the rates of return permitted by the BPU or the PSC.
Effective May 27, 2004, Middlesex Water Company received approval from the BPU
for a 9.5%, or $4.3 million increase in its water rates. This increase
represents a portion of the Company's November 2003 request for a total rate
increase of 17.8% to cover the costs of its increased capital investment, as
well as maintenance and operating expenses.
Effective June 24, 2004, Pinelands Water and Pinelands Wastewater received
approval from the BPU for increases of 9.2% and 9.9%, respectively, or
approximately $131,000 in the aggregate. This increase represents a portion of
Pinelands' December 2003 request for a total base rate increase of approximately
$250,000 to help offset the increased costs associated with capital
improvements, and the operation and maintenance of their systems.
Effective June 25, 2004, Tidewater received approval from the PSC for an interim
increase of 15%, or $1.5 million in its water rates, which includes 4.89% of
previously Distribution System Improvement Charges (DSIC). On October 19, 2004,
the PSC approved a settlement between Tidewater and the interveners in the
matter. The settlement allowed the interim rates to become permanent. This
increase represents a portion of Tidewater's April 2004 request for at 24% rate
increase to accommodate the growth of Tidewater's customer base, improvements to
water treatment, fire protection and to interconnect systems for service
reliability and back-up. As part of the settlement, Tidewater will be eligible
to apply for a second phase rate increase of $0.5 million, provided it completes
a number of capital projects within a specified time schedule. Tidewater must
file an application for this increase no earlier than March 2005 or later than
May 2005. Upon verification of project completion, new rates will become
effective 30 days after the filing date. 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 1, 2006.
In accordance with the tariff established for Southern Shores, a rate increase
of 2.8% based on the Consumer Price Index was implemented on January 1, 2004.
Other than rates for the Southern Shores system, there can be no assurance that
any future rate increases will be granted or, if granted, that they will be in
the amounts we requested.
Water Quality and Environmental Regulations
Both the EPA and the DEP regulate our operations in New Jersey with respect to
water supply, treatment and distribution systems and the quality of the water,
as do the EPA, DNREC, DPH and DRBC with respect to operations in Delaware.
7
Federal, New Jersey and Delaware regulations adopted relating to water quality
require us to perform expanded types of testing to ensure that our water meets
state and federal water quality requirements. In addition, environmental
regulatory agencies are reviewing current regulations governing the limits of
certain organic compounds found in the water as byproducts of treatment. We
participate in industry-related research to identify the various types of
technology that might reduce the level of organic, inorganic and synthetic
compounds found in the water. The cost to water companies of complying with the
proposed water quality standards depends in part on the limits set in the
regulations and on the method selected to implement such reduction. We believe
the CJO Plant capabilities put us in a strong position to meet any such future
standards with regard to our Middlesex System. We use regular testing of our
water to determine compliance with existing federal, New Jersey and Delaware
primary water quality standards.
Well water treatment in our Tidewater System is by chlorination and, in some
cases, pH correction and filtration for nitrate and iron removal.
Well water treatment in the Pinelands and Bayview Systems (disinfection only) is
done at individual well sites.
The DEP and the DPH monitor our activities and review the results of water
quality tests that are performed for adherence to applicable regulations. Other
regulations applicable to us include the Lead and Copper Rule, the maximum
contaminant levels established for various volatile organic compounds, the
Federal Surface Water Treatment Rule and the Total Coliform Rule.
Management
This table lists information concerning our senior management team:
Name Age Principal Position(s)
- ------------------ --- -----------------------------------------------------
Dennis G. Sullivan 63 President and Chief Executive Officer
Dennis W. Doll 46 Executive Vice President
A. Bruce O'Connor 46 Vice President and Chief Financial Officer
Ronald F. Williams 55 Vice President-Operations and Chief Operating Officer
Kenneth J. Quinn 57 Vice President, General Counsel, Secretary and Treasurer
James P. Garrett 59 Vice President-Human Resources
Richard M. Risoldi 48 Vice President- Subsidiary Operations
Gerard L. Esposito 53 President, Tidewater Utilities, Inc.
Dennis G. Sullivan - Mr. Sullivan has been a Director of Middlesex since 1999.
Mr. Sullivan was hired in 1984 as Corporate Attorney, responsible for general
corporate internal legal matters. He was elected Assistant Secretary-Assistant
Treasurer in 1988 and Vice President and General Counsel in 1990. He was elected
President and General Counsel in 2001 and became President and Chief Executive
Officer in January 2003. He is Chairman of the Board and a Director of Tidewater
Utilities, Inc., Tidewater Environmental Services, Inc., White Marsh
Environmental Systems, Inc., Pinelands Water Company, Pinelands Wastewater
Company, Utility Service Affiliates, Inc., Utility Service Affiliates (Perth
Amboy) Inc. and Bayview Water Company. He is also a Director of the New Jersey
Utilities Association and the National Association of Water Companies.
Dennis W. Doll - Mr. Doll, a Certified Public Accountant, joined the Company in
November 2004 as Executive Vice President. Prior to joining the Company Mr. Doll
was employed by Elizabethtown Water Company since 1985, serving most recently as
a member of the senior leadership team of the Northeast Region of American
Water, which was comprised of Elizabethtown Water Company, New Jersey-American
Water Company and
8
Long Island Water Corporation and included other regulated and non-regulated
subsidiaries. In this capacity, Mr. Doll served as Vice President - Finance &
Controller and served previously, as Vice President - Merger Integration. Prior
to 2001, Mr. Doll served as Vice President & Controller of Elizabethtown,
Elizabethtown's parent company, E'town Corporation, and various other regulated
and non-regulated subsidiaries, primarily engaged in the water and wastewater
fields.
A. Bruce O'Connor - Mr. O'Connor, a Certified Public Accountant, joined the
Company in 1990 as Assistant Controller and was elected Controller in 1992 and
Vice President in 1995. He was elected Vice President and Controller and Chief
Financial Officer in 1996. In July 2004, his Controller responsibilities were
assigned to the newly created Corporate Controller position. He is responsible
for financial reporting, customer service, rate cases, cash management and
financings. He is Treasurer and a Director of Tidewater Utilities, Inc.,
Tidewater Environmental Services, Inc., Bayview Water Company, Utility Service
Affiliates, Inc., and White Marsh Environmental Systems, Inc. He is Vice
President, Treasurer and a Director of Utility Service Affiliates (Perth Amboy)
Inc., Pinelands Water Company and Pinelands Wastewater Company.
Ronald F. Williams - Mr. Williams was hired in 1995 as Assistant Vice
President-Operations, responsible for the Company's Engineering and Distribution
Departments. He was elected Vice President-Operations in October 1995. Mr.
Williams was elected to the additional posts of Assistant Secretary and
Assistant Treasurer for Middlesex in 2004. He was formerly employed with the
Garden State Water Company as President and Chief Executive Officer. He is a
Director and President of Utility Service Affiliates (Perth Amboy) Inc., and
Director of Utility Service Affiliates, Inc., Pinelands Water Company, Pinelands
Wastewater Company, and Bayview Water Company.
Kenneth J. Quinn - Mr. Quinn joined the Company in 2002 as General Counsel and
was elected Assistant Secretary in 2003. In 2004, Mr. Quinn was elected Vice
President, Secretary and Treasurer for Middlesex and Secretary and Assistant
Treasurer for all subsidiaries of Middlesex. He has been engaged in the practice
of law for 29 years and prior to joining the Company he had been employed by the
law firm of Schenck, Price, Smith and King in Morristown, New Jersey. Prior to
that, Mr. Quinn spent 10 years as in-house counsel to two major banking
institutions located in New Jersey. In May 2003, he was elected Assistant
Secretary of Tidewater Utilities, Inc., Pinelands Water Company, Pinelands
Wastewater Company, Utility Service Affiliates (Perth Amboy) Inc., Bayview Water
Company and White Marsh Environmental Systems, Inc. He is a Director of Utility
Service Affiliates (Perth Amboy) Inc., Utility Service Affiliates, Inc.,
Pinelands Water Company, Pinelands Wastewater Company, and Bayview Water
Company. He is a member of the New Jersey State Bar Association and is also a
member of the Public Utility Law Section of the Bar.
James P. Garrett - Mr. Garrett joined the Company in 2003 as Assistant Vice
President-Human Resources. In May 2004, he was elected Vice President- Human
Resources. Prior to his hire, Mr. Garrett was employed by Toys "R" Us, Inc. for
23 years, most recently as Director of Organizational Development. Mr. Garrett
is responsible for all human resource programs and activities at Middlesex Water
Company and its subsidiaries.
Richard M. Risoldi - Mr. Risoldi joined the Company in 1989 as Director of
Production, responsible for the operation and maintenance of the Company's
treatment and pumping facilities. He was appointed Assistant Vice President of
Operations in 2003. He was elected Vice President in May 2004, responsible for
regulated subsidiary operations and business development. He is a Director of
Tidewater Utilities, Inc., Tidewater Environmental Services, Inc., White Marsh
Environmental Systems Inc and USA-PA. He also serves as Director and President
of Pinelands Water Company, Pinelands Wastewater Company, Bayview Water Company
and Utility Service Affiliates, Inc.
Gerard L. Esposito - Mr. Esposito joined Tidewater Utilities, Inc. in 1998 as
Executive Vice President. He was elected President of Tidewater and White Marsh
Environmental Systems, Inc. in 2003 and elected President of Tidewater
Environmental Services, Inc. in January 2005 . Prior to joining the Company he
worked for 22 years
9
in various executive positions for Delaware environmental protection and water
quality governmental agencies. He is a Director of Tidewater Utilities, Inc.,
Tidewater Environmental Services, Inc., and White Marsh Environmental Systems,
Inc.
Risk Factors
Our revenue and earnings depend on the rates we charge our customers. We cannot
raise utility rates without filing a petition with the appropriate governmental
agency. If these agencies modify, delay, or deny our petition, our revenues will
not increase and our earnings will decline unless we are able to reduce costs.
The BPU regulates all of our public utility companies in New Jersey with respect
to rates and charges for service, classification of accounts, awards of new
service territory, acquisitions, financings and other matters. That means, for
example, that we cannot raise the utility rates we charge to our customers
without first filing a petition with the BPU and going through a lengthy
administrative process. In much the same way, the PSC regulates our public
utility companies in Delaware. We cannot give assurances of when we will request
approval for any such matter, nor can we predict whether the BPU or PSC will
approve, deny or reduce the amount of such requests.
Certain costs of doing business are not within our control. The failure to
obtain any rate increase would prevent us from increasing our revenues and,
unless we are able to reduce costs, would result in reduced earnings.
We are subject to penalties unless we comply with environmental laws and
regulations, including water quality regulations. Compliance with those laws and
regulations impose costs on us.
The EPA and DEP regulate our operations in New Jersey with respect to water
supply, treatment and distribution systems and the quality of the water, as do
the EPA, DNREC, DPH and DRBC with respect to operations in Delaware. Federal,
New Jersey and Delaware regulations relating to water quality require us to
perform expanded types of testing to ensure that our water meets state and
federal water quality requirements. We are subject to EPA regulations under the
Federal Safe Drinking Water Act, which include the Lead and Copper Rule, the
maximum contaminant levels established for various volatile organic compounds,
the Federal Surface Water Treatment Rule and the Total Coliform Rule. There are
also similar state regulations by the DEP in New Jersey. The DEP and DPH monitor
our activities and review the results of water quality tests that we perform for
adherence to applicable regulations. In addition, environmental regulatory
agencies are reviewing current regulations governing the limits of certain
organic compounds found in the water as byproducts of treatment.
The cost to water companies of complying with the proposed water quality
standards depends in part on the limits set in the regulations and on the method
selected to implement them. Those costs could be very high and make us less
profitable if we cannot recover those costs through our rates that we charge our
customers.
We depend upon our ability to raise money in the capital markets to finance some
of the costs of complying with laws and regulations, including environmental
laws and regulations or to pay for some of the costs of improvements or the
expansion of our utility system assets. We cannot issue debt or equity
securities without regulatory approval.
We require financing to fund the ongoing capital program for the improvement of
our utility system assets and for planned expansion of that system. We project
that we may expend approximately $74.4 million for existing capital projects. We
must have regulatory approval to sell debt or equity securities to raise money
for these projects. If sufficient capital is not available or the cost of
capital is too high, or if the regulatory authorities deny a petition of ours to
sell debt or equity securities, we would not be able to meet the cost of
complying with
10
environmental laws and regulations or the costs of improving and expanding our
utility system assets. This might result in the imposition of fines or
restrictions on our operations and may curtail our ability to improve upon and
expand our utility system assets.
Weather conditions and overuse of underground aquifers may interfere with our
sources of water, demand for water services, and our ability to supply water to
customers.
Our ability to meet the existing and future water demands of our customers
depends on an adequate supply of water. Unexpected conditions may interfere with
our water supply sources. Drought and overuse of underground aquifers may limit
the availability of ground and surface water. These factors might adversely
affect our ability to supply water in sufficient quantities to our customers.
Governmental drought restrictions might result in decreased use of water
services and can adversely affect our revenue and earnings. Additionally, cool
and wet weather may reduce consumption demands, also adversely affecting our
revenue and earnings. Freezing weather may also contribute to water transmission
interruptions caused by pipe and main breakage. Any interruption in our water
supply could cause a reduction in our revenue and profitability.
Our water sources may become contaminated by naturally-occurring or man-made
compounds and events. This may cause disruption in services and impose costs to
restore the water to required levels of quality.
Our sources of water may become contaminated by naturally-occurring or man-made
compounds and events. In the event that our water supply is contaminated, we may
have to interrupt the use of that water supply until we are able to install
treatment equipment or substitute the flow of water from an uncontaminated water
source through our transmission and distribution systems. We may also incur
significant costs in treating the contaminated water through the use of our
current treatment facilities, or development of new treatment methods. Our
inability to substitute water supply from an uncontaminated water source, or to
adequately treat the contaminated water source in a cost-effective manner may
reduce our revenues and make us less profitable.
The necessity for increased security has and may continue to result in increased
operating costs.
In the wake of the September 11, 2001 terrorist attacks and the ensuing threats
to the health and security of the United States of America, we have taken steps
to increase security measures at our facilities and heighten employee awareness
of threats to our water supply. We have tightened our security measures
regarding the delivery and handling of certain chemicals used in our business.
We are at risk for terrorist attacks and have and will continue to incur
increased costs for security precautions to protect our facilities, operations
and supplies from such risks.
We face competition from other utilities and service providers which might
hinder our growth and reduce our profitability.
We face risks of competition from other utilities authorized by federal, state
or local agencies. Once a utility regulator grants a service territory to a
utility, that utility is usually the only one to service that territory.
Although a new territory offers some protection against competitors, the pursuit
of service territories is competitive, especially in Delaware where new
territories may be awarded to utilities based upon competitive negotiation.
Competing utilities have challenged, and may in the future challenge, our
applications for new service territories. Also, third parties entering into
long-term agreements to operate municipal systems might adversely affect us and
our long-term agreements to supply water on a contract basis to municipalities.
We have a long-term contractual obligation for water and wastewater system
operation and maintenance under which we may incur costs in excess of payments
received.
11
Middlesex Water Company and USA-PA operate and maintain the water and wastewater
systems of the City of Perth Amboy, New Jersey under a multi-year contract. This
contract does not protect us against incurring costs in excess of payments we
will receive pursuant to the contract. There can be no assurance that we will
not experience losses resulting from this contract. Losses under this contract
or our failure or inability to perform may have a material adverse effect on our
financial condition and results of operations. Also, as of December 31, 2004,
approximately $23.9 million of Perth Amboy's bonds we have guaranteed remain
outstanding. If Perth Amboy defaults on its obligations to pay the bonds we have
guaranteed, we would have to raise funds to meet our obligations under that
guarantee,
An important element of our growth strategy is the acquisition of water and
wastewater systems. Any pending or future acquisitions we decide to undertake
may involve risks.
The acquisition of water and wastewater systems is an important element in our
growth strategy. This strategy depends on identifying suitable acquisition
opportunities and reaching mutually agreeable terms with acquisition candidates.
The negotiation of potential acquisitions as well as the integration of acquired
businesses could require us to incur significant costs and cause diversion of
our management's time and resources. Further, acquisitions may result in
dilution of our equity securities, incurrence of debt and contingent
liabilities, fluctuations in quarterly results and other acquisition related
expenses. In addition, the business and other assets we acquire may not achieve
the sales and profitability expected.
We have restrictions on our dividends. There can also be no assurance that we
will continue to pay dividends in the future or, if dividends are paid, that
they will be in amounts similar to past dividends.
Our Restated Certificate of Incorporation and our Indenture of Mortgage dated as
of April 1, 1927, as supplemented impose conditions on our ability to pay
dividends. We have paid dividends on our common stock each year since 1912 and
have increased the amount of dividends paid each year since 1973. Our earnings,
financial condition, capital requirements, applicable regulations and other
factors, including the timeliness and adequacy of rate increases, will determine
both our ability to pay dividends on common stock and the amount of those
dividends. There can be no assurance that we will continue to pay dividends in
the future or, if dividends are paid, that they will be in amounts similar to
past dividends.
We are subject to anti-takeover measures that may be used by existing management
to discourage, delay or prevent changes of control that might benefit
non-management shareholders.
Subsection 10A of the New Jersey Business Corporation Act, known as the
Shareholder Protection Act, applies to us. The Shareholder Protection Act deters
merger proposals, tender offers or other attempts to effect changes in our
control that are not negotiated and approved by our Board of Directors. In
addition, we have a classified Board of Directors, which means only one-third of
the Directors are elected each year. A classified Board can make it harder for
an acquirer to gain control by voting its candidates onto the Board of Directors
and may also deter merger proposals and tender offers. Our Board of Directors
also has the ability, subject to obtaining BPU approval, to issue one or more
series of preferred stock having such number of shares, designation,
preferences, voting rights, limitations and other rights as the Board of
Directors may fix. This could be used by the Board of Directors to discourage,
delay or prevent an acquisition that might benefit non-management shareholders.
12
Item 2. Properties.
Utility Plant
The water utility plant in our systems consist of source of supply, pumping,
water treatment, transmission and distribution, general facilities and all
appurtenances, including all connecting pipes.
Middlesex System
The Middlesex System's principal source of surface supply is the Delaware &
Raritan Canal owned by the State of New Jersey and operated as a water resource
by the New Jersey Water Supply Authority.
Water is withdrawn from the Delaware & Raritan Canal at New Brunswick, New
Jersey through our intake and pumping station, which has a design capacity of 80
million gallons per day and is located on state-owned land bordering the canal.
The four electric motor-driven, vertical turbine pumps presently installed have
an aggregate design capacity of 82 million gallons per day. Water is transported
through our 4,900 foot 54-inch reinforced concrete supply main for treatment and
distribution at our CJO Plant in Edison, New Jersey. The design capacity of our
raw water supply main is 55 million gallons per day.
In the Spring of 2004, the Company began construction on a second raw water
pipeline from the intake and pumping station to the CJO Plant. The pipeline,
which is approximately 6,100 feet of 60-inch ductile iron pipe, will provide for
redundancy, additional security, and additional capacity. The project, which
includes renovations to the intake and pumping station, is scheduled to be
completed in the Spring of 2005 (see Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation- Liquidity and Capital
Resources- Capital Expenditures and Commitments for additional discussion).
The CJO Plant includes chemical storage and chemical feed equipment, two dual
rapid mixing basins, four upflow clarifiers which are also called
superpulsators, four underground reinforced chlorine contact tanks, twelve rapid
filters containing gravel, sand and anthracite for water treatment and a steel
washwater tank. The CJO Plant also includes a computerized Supervisory Control
and Data Acquisitions system to monitor and control the CJO Plant and the water
supply and distribution system in the Middlesex System. There is an on site
State certified laboratory capable of performing bacteriological, chemical,
process control and advanced instrumental chemical sampling and analysis. The
firm design capacity of the CJO Plant is 45 million gallons per day (60 million
gallons per day maximum capacity). The main pumping station at the CJO Plant has
a design capacity of 90 million gallons per day. The four electric motor-driven,
vertical turbine pumps presently installed have an aggregate capacity of 72
million gallons per day.
In addition, there is a 15 million gallon per day auxiliary pumping station
located in a separate building at the CJO Plant location. It has a dedicated
substation and emergency power supply provided by a diesel-driven generator. It
pumps from the 10 million gallon distribution storage reservoir directly into
the distribution system.
The transmission and distribution system is comprised of 722 miles of mains and
includes 23,200 feet of 48-inch reinforced concrete transmission main connecting
the CJO Plant to our distribution pipe network and related storage facilities.
Also included is a 58,600 foot transmission main and a 38,800 foot transmission
main, augmented with a long-term, non-exclusive agreement with the East
Brunswick system to transport water to several of our contract customers.
Middlesex System's storage facilities consist of a 10 million gallon reservoir
at the CJO Plant, 5 million gallon and 2 million gallon reservoirs in Edison
(Grandview), a 5 million gallon reservoir in Carteret (Eborn) and a 2 million
gallon reservoir at the Park Avenue Well Field.
13
In New Jersey, we own the properties on which Middlesex System's 31 wells are
located, the properties on which our storage tanks are located as well as the
property where the CJO Plant is located. We also own our headquarters complex
located at 1500 Ronson Road, Iselin, New Jersey, consisting of a 27,000 square
foot, two story office building and an adjacent 16,500 square foot maintenance
facility.
Tidewater System
The Tidewater System's is comprised of 91 production plants that vary in pumping
capacity from 40,000 gallons per day to 1.5 million gallons per day. Water is
transported to our customers through 446 miles of transmission and distribution
mains. Storage facilities include 38 tanks, with an aggregate capacity of 4.7
million gallons. Our Delaware operations are managed from Tidewater's leased
offices in Dover, Delaware and Millsboro, Delaware. Tidewater's Dover, Delaware
office property, located on property owned by White Marsh, consists of a 6,800
square foot office building situated on an eleven-acre lot. White Marsh also
owns another business site for which it is exploring several options for future
use.
Pinelands System
Pinelands Water owns well site and storage properties that are located in
Southampton Township, New Jersey. The Pinelands Water storage facility is a 1.2
million gallon standpipe. Water is transported to our customers through 18 miles
of transmission and distribution mains.
Pinelands Wastewater System
Pinelands Wastewater owns a 12 acre site on which its 0.5 million gallons per
day capacity tertiary treatment plant and connecting pipes are located. Its
wastewater collection system is comprised of approximately 24.5 miles of main.
Bayview System
Bayview owns two wells, which are located in Downe Township, Cumberland County,
New Jersey. Water is transported to its customers through our 3.5 mile
distribution system.
USA-PA, USA and White Marsh
Our non-regulated subsidiaries, namely USA-PA, USA and White Marsh, do not own
utility plant property.
Item 3. Legal Proceedings
A lawsuit was filed in 1998 against the Company for damages involving the break
of both a Company water line and an underground electric power cable containing
both electric lines and petroleum based insulating fluid. The electric utility
also asserted claims against the Company. The lawsuit was settled in 2003, and
by agreement, the electric utility's counterclaim for approximately $1.1 million
in damages was submitted to binding arbitration, in which the agreed maximum
exposure of the Company is $0.3 million, which the Company has accrued for.
While we are unable to predict the outcome of the arbitration, we believe that
we have substantial defenses.
A claim involving a construction subcontractor, the Company's general contractor
and the Company concerning a major construction project was settled during
October 2004. The matter was instituted in 2001, and related to work required to
be performed under a construction contract and related subcontracts and included
payment
14
issues and timing/delay issues. The amount that was determined to be due from us
for the work performed was $1.4 million and was recorded as an addition to
utility plant in service during fiscal 2004.
The Company is 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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
(a) Market Information
The Company's common stock is traded on the NASDAQ Stock Market, under the
symbol MSEX. The following table shows the range of high and low share prices
per share for the common stock and the dividend paid to shareholders in such
quarter.
2004 High Low Dividend
---- ---- --- --------
Fourth Quarter $ 20.72 $ 17.06 $0.1675
Third Quarter 19.50 16.65 0.1650
Second Quarter 21.81 18.83 0.1650
First Quarter 21.32 19.38 0.1650
2003 High Low Dividend
---- ---- --- --------
Fourth Quarter $ 21.12 $ 18.19 $0.1650
Third Quarter 21.23 17.72 0.1613
Second Quarter 18.49 16.32 0.1613
First Quarter 18.00 15.77 0.1613
(b) Approximate Number of Equity Security Holders as of December 31,
2004
Number of
Title of Class Record Holders
-------------- --------------
Common Stock, No Par Value 2,077
Cumulative Preferred Stock, No Par Value:
$7.00 Series 14
$4.75 Series 1
Cumulative Convertible Preferred Stock, No Par Value:
$7.00 Series 4
$8.00 Series 3
15
(c) Dividends
The Company has paid dividends on its common stock each year since 1912.
Although it is the present intention of the Board of Directors of the Company to
continue to pay regular quarterly cash dividends on its common stock, the
payment of future dividends is contingent upon the future earnings of the
Company, its financial condition and other factors deemed relevant by the Board
of Directors at its discretion.
If four or more quarterly dividends are in arrears, the preferred shareholders,
as a class, are entitled to elect two members to the Board of Directors in
addition to Directors elected by holders of the common stock. In the event
dividends on the preferred stock are in arrears, no dividends may be declared or
paid on the common stock of the Company. Substantially all of the Utility Plant
of the Company is subject to the lien of its mortgage, which also includes
certain restrictions as to cash dividend payments and other distributions on
common stock.
(d) Restricted Stock Plan
The Company maintains a shareholder approved restricted Stock Plan, under which
65,233 shares of the Company's common stock are held in escrow by the Company
for key employees. Such stock is subject to an agreement requiring forfeiture by
the employee in the event of termination of employment within five years of the
grant other than as a result of retirement, death or disability. The maximum
number of shares authorized for grant under this plan is 240,000 shares.
(e) Sale of Unregistered Securities
The Company did not issue any shares of unregistered securities during fiscal
years 2004, 2003, or 2002.
(f) Issuer Purchases of Equity Securities
The Company did not purchase any shares of its equity securities during fiscal
year 2004.
16
Item 6. Selected Financial Data
CONSOLIDATED SELECTED FINANCIAL DATA
(Thousands of Dollars Except per Share Data)
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Operating Revenues $ 70,991 $ 64,111 $ 61,933 $ 59,638 $ 54,477
- ----------------------------------------------------------------------------------------------------
Operating Expenses:
Operations and Maintenance 39,984 36,195 32,767 31,740 30,269
Depreciation 5,846 5,363 4,963 5,051 4,701
Other Taxes 8,228 7,816 7,737 7,594 6,916
Income Taxes 3,814 3,237 3,999 3,760 2,653
- ----------------------------------------------------------------------------------------------------
Total Operating Expenses 57,872 52,611 49,466 48,145 44,539
- ----------------------------------------------------------------------------------------------------
Operating Income 13,119 11,500 12,467 11,493 9,938
Other Income, Net 795 358 442 502 364
Interest Charges 5,468 5,227 5,144 5,042 4,997
- ----------------------------------------------------------------------------------------------------
Net Income 8,446 6,631 7,765 6,953 5,305
Preferred Stock Dividend 255 255 255 255 255
- ----------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 8,191 $ 6,376 $ 7,510 $ 6,698 $ 5,050
- ----------------------------------------------------------------------------------------------------
Earnings per Share:
Basic $ 0.74 $ 0.61 $ 0.73 $ 0.66 $ 0.50
Diluted $ 0.73 $ 0.61 $ 0.73 $ 0.66 $ 0.50
Average Shares Outstanding:
Basic 11,080 10,475 10,280 10,131 10,044
Diluted 11,423 10,818 10,623 10,474 10,387
Dividends Declared and Paid $ 0.663 $ 0.649 $ 0.634 $ 0.623 $ 0.613
Total Assets $299,129 $263,192 $248,962 $240,312 $222,815
Convertible Preferred Stock $ 2,961 $ 2,961 $ 2,961 $ 2,961 $ 2,961
Long-term Debt $115,281 $ 97,377 $ 87,483 $ 88,140 $ 82,109
- ----------------------------------------------------------------------------------------------------
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussions of the Company's historical results of operations and
financial condition should be read in conjunction with the Company's
consolidated financial statements and related notes.
Overview
Middlesex Water Company has operated as a water utility in New Jersey since
1897, and in Delaware, through our wholly-owned subsidiary, Tidewater, since
1992. We are in the business of collecting, treating, distributing and selling
water for domestic, commercial, municipal, industrial and fire protection
purposes. We also operate a New Jersey municipal water and wastewater system
under contract and provide wastewater services in New Jersey and Delaware
through our subsidiaries. We are regulated as to rates charged to customers for
water and wastewater services in New Jersey and for water services in Delaware,
as to the quality of water service we provide and as to certain other matters.
Our TESI subsidiary is expected to commence operations during 2005 as a
regulated wastewater utility in Delaware. Only our USA, USA-PA and White Marsh
subsidiaries are not regulated utilities.
Our New Jersey water utility system (the Middlesex System) provides water
services to approximately 58,000 retail customers, primarily in central New
Jersey. The Middlesex System also provides water service under contract to
municipalities in central New Jersey with a total population of approximately
267,000. In partnership with our subsidiary, USA-PA, we operate the water supply
system and wastewater system for the City of Perth Amboy, New Jersey. Our other
New Jersey subsidiaries, Pinelands Water and Pinelands Wastewater, provide water
and wastewater services to residents in Southampton Township, New Jersey.
Our Delaware subsidiaries, Tidewater and Southern Shores, provide water services
to approximately 26,000 retail customers in New Castle, Kent and Sussex
Counties, Delaware. Our other Delaware subsidiary, White Marsh, services an
additional 4,500 customers in Kent and Sussex Counties.
The majority of our revenue is generated from retail and contract water services
to customers in our service areas. We record water service revenue as such
service is rendered and include estimates for amounts unbilled at the end of the
period for services provided after the last billing cycle. Fixed service charges
are billed in advance by our subsidiary, Tidewater, and are recognized in
revenue as the service is provided.
Our ability to increase operating income and net income is based significantly
on three factors: weather, adequate and timely rate increases, and customer
growth. These factors are evident in the discussions below which compare our
results of operations from prior years.
Results of Operations in 2004 Compared to 2003
Operating revenues for the year rose $6.9 million, or 10.7% over the same period
in 2003. Water sales improved by $2.9 million in our Middlesex system, which was
primarily a result of base rate increases. Customer growth of 10.4% in Delaware
provided additional consumption revenues of $1.2 million and higher base rates
provided $0.8 million. Our meter services venture provided $2.0 million of
additional revenues for completed meter installations. New unregulated
wastewater contracts in Delaware provided $0.3 million in additional revenues.
Base rate increases for our Pinelands system contributed $0.1 million of
additional revenues. Revenues from our operations and maintenance contracts
decreased $0.4 million due to scheduled reductions in fixed fees under the City
of Perth Amboy contract.
While we anticipate continued growth in the number of customers and increased
water consumption among our Delaware systems, such growth and increased
consumption cannot be guaranteed. Weather conditions may
18
adversely impact future consumption even with an anticipated growth in the
number of customers. Our New Jersey systems are also highly dependent on the
effects of weather. Our ability to generate operating revenues by our meter
services venture is dependent upon our ability to obtain additional contracts,
however USA did not submit bids for any meter service contracts during fiscal
2004 and currently does not expect to submit any bids during fiscal 2005. The
existing meter services contracts were substantially completed during the fourth
quarter of 2004.
Operating expenses increased by $5.3 million, or 10.0% as compared to the same
period in 2003. Operation and maintenance expenses increased $3.8 million or
10.5%. In New Jersey, payroll costs, employee benefits and corporate governance
related fees increased costs by $1.1 million. Source of supply and pumping costs
for the Middlesex system increased by $0.7 million combined due to increased
costs for electricity and purchased water. Costs to operate the Tidewater
system, as well as an increase in our Delaware employee base, general wage
increases and higher costs associated with employee medical and retirement
benefits increased costs by $0.6 million. The costs of our meter services
venture increased $1.6 million due to completed installations. The costs of our
non-regulated wastewater operations and maintenance contracts increased $0.3
million due to additional contracts obtained during the year. These increases
were partially offset by $0.4 million of reduced costs related to our City of
Perth Amboy contract due to reduced water treatment costs and a decrease of $0.1
million for water main repair costs in our Middlesex system.
Going forward we anticipate an increase in New Jersey's electric generation
costs due to deregulation of electricity. These increasing costs, in addition to
higher business insurance and corporate governance costs, as well as completion
of the new raw water pipeline during the second quarter of 2005 will require us
to file for a base rate increase with the BPU for Middlesex during 2005. We
cannot predict whether the BPU will approve, deny or reduce the amount of any
request.
Depreciation expense for 2004 increased by $0.5 million, or 9.0%, due to a
higher level of utility plant in service. Allowance for funds used during
construction rose by $0.3 million for the year, due to large construction
projects in New Jersey for the RENEW program and a new raw water pipeline (see
Liquidity and Capital Resources for additional discussion of capital spending).
As our investments in utility plant and operating expenses increase, we continue
to seek timely rate relief through base rate filings as discussed above.
Other taxes increased by $0.4 million generally reflecting additional taxes on
higher taxable gross revenues, payroll and real estate. Improved operating
results in 2004 compared to 2003 led to higher income taxes of $0.8 million,
which was partially offset by $0.2 million of tax benefits.
Other income increased $0.1 million, primarily due the recognition of a gain on
the sale of real estate that had previously been deferred pending the outcome of
the Middlesex rate case.
Interest expense increased by $0.2 million, primarily due to higher average
long-term borrowings as compared to the prior year period.
Net income increased by 27.4% to $8.4 million from $6.6 million in the prior
year, and basic earnings per share increased from $0.61 to $0.74. Diluted
earnings per share increased from $0.61 to $0.73. The increase in earnings per
share was impacted by the higher number of shares outstanding during the current
year as a result of the sale of 700,000 shares of common stock in May 2004.
19
Results of Operations in 2003 Compared to 2002
Operating revenues for the year rose $2.2 million, or 3.5% over the same period
in 2002. Customer growth of 10.9% in Delaware provided additional facility
charges and connection fees of $1.4 million. Higher base rates in our Delaware
service territories provided $0.6 million of the increase. For the year ended
December 31, 2003, cool wet weather in the Mid-Atlantic region pushed
Tidewater's consumption revenue down by $0.3 million and Middlesex consumption
revenue down by $0.5 million. Despite such adverse weather conditions, revenues
from our operations and maintenance contracts rose $0.5 million due to scheduled
increases in fixed fees under the City of Perth Amboy contract.
New unregulated wastewater operations in Delaware provided $0.1 million in
additional revenues. Our new meter services venture provided $0.3 million in
additional revenues. All other operations accounted for $0.1 million of the
higher revenues.
Operating expenses increased by $3.1 million, or 6.4%. Costs related to main
breaks resulting from severe winter weather conditions in the first quarter of
2003 contributed to additional expenses of $0.4 million. There were also higher
sewer disposal fees and security costs for USA-PA that helped increase costs by
$0.6 million. An increase in our Delaware employee base, general wage increases
and higher costs associated with employee medical and retirement benefits pushed
up costs by $0.7 million. In New Jersey, payroll costs, employee benefits and
legal fees pushed up costs by $0.9 million. Non-regulated operations of meter
installations and wastewater, which began in 2003, contributed $0.3 million of
the overall expense increase. Water treatment, source of supply and pumping
costs increased by $0.5 million combined.
Depreciation expense for 2003 increased by $0.4 million, or 8.1%, due to a
higher level of utility plant in service. Allowance for funds used during
construction rose 17% for the year as Tidewater's capital program included
larger projects with longer construction schedules.
Other taxes increased by $0.1 million generally due to higher payroll related
taxes and real estate taxes in both New Jersey and Delaware. Lower federal
income taxes of $0.8 million over last year are attributable to the reduced
operating results for 2003 as compared to 2002.
Other income decreased by $0.1 million as interest rates fell on short-term cash
balance investments. Interest expense increased by $0.1 million due to a higher
level of overall debt outstanding as compared to last year.
Net income decreased to $6.6 million from $7.8 million and basic and diluted
earnings per share decreased by $0.12 to $0.61 due to lower earnings.
Outlook
In addition to some of the factors previously discussed under "Results of
Operations in 2004 Compared to 2003," our revenues are expected to increase in
2005 from anticipated customer growth in Delaware for our regulated operations
and, to a lesser degree, from growth of non-regulated operations in Delaware and
elsewhere. We settled four rate cases during 2004, from which we expect to
receive the full annualized benefit in 2005. Revenues and earnings will also be
influenced by weather. Changes in these factors, as well as increases in capital
expenditures and operating costs are the primary factors that determine the need
for rate increase filings. The level of revenues and earnings will be impacted
by the ultimate timing and outcome of the anticipated base rate filing in New
Jersey during 2005.
We continue to explore viable plans to streamline operations and reduce costs,
particularly in Delaware, where customer growth continues to exceed industry
averages. Part of the challenge is that our Delaware operations are a
combination of over 91 stand-alone production and distribution systems serving
250 communities.
20
As a result of anticipated regulation of wastewater services in Delaware, we
have established a new regulated wastewater operation that will commence
operations during fiscal 2005. Due to the start-up nature of this operation, we
expect our expenses with respect to this subsidiary to exceed its revenues in
the near term.
We expect our interest expense to increase during 2005 as a result of incurring
a full year of interest expense on the approximately $19.0 million of long-term
debt we financed during fiscal 2004 and higher expected average borrowings and
interest rates on short-term credit facilities in order to finance a portion of
our capital expenditures during the coming year (see Liquidity and Capital
Resources).
Our strategy includes continued revenue growth through acquisitions, internal
expansion, contract operations and when necessary, rate relief. We will continue
to pursue opportunities in both the regulated and non-regulated sectors that are
financially sound, complement existing operations and increase shareholder
value.
Liquidity and Capital Resources
Cash flows from operations are largely based on three factors: weather, adequate
and timely rate increases, and customer growth. The effect of those factors on
net income is discussed in results of operations. For 2004, cash flows from
operating activities increased $1.4 million to $15.6 million, as compared to the
prior year. This increase was primarily attributable to improved profitability
during the current year period and the timing of payments made toward prepaid
expenses, materials and supplies, and employee benefit plans. These increases in
cash flows were partially offset by the timing of collection of customer
accounts and payments to vendors. The $15.6 million of net cash flow from
operations allowed us to fund approximately 52% of our utility plant
expenditures for the period internally, with the remainder funded with both
short-term and long-term borrowings. Net proceeds from issuing long-term debt
were used to fund the balance of those expenditures.
For 2003, net cash flow from operations of $14.2 million, which increased over
2002 due to lower working capital requirements, and proceeds from prior year
financings allowed us to find approximately 85% of our 2003 utility plant
expenditures. Net proceeds from issuing long-term debt were used to fund the
balance of those expenditures.
Increases in certain operating costs will impact our liquidity and capital
resources. As described in our results of operations discussion, during 2004 we
received rate relief for Middlesex, Tidewater and the Pinelands Companies. We
also plan to file for a base rate increase for Middlesex in 2005 in conjunction
with the completion of the raw water pipeline project (see Capital Expenditures
and Commitments). There is no certainty, however, that the BPU will approve any
or all of this or other future requested increases.
Sources of Liquidity
Short-Term Debt. The Board of Directors has authorized lines of credit for up to
an aggregate of $40.0 million. As of December 31, 2004, the Company has
established revolving lines of credit aggregating $33.0 million. At December 31,
2004, the outstanding borrowings under these credit lines were $11.0 million at
a weighted average interest rate of 3.42%. As of that date, the Company had
borrowing capacity of $22.0 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 $8.9
million and $14.0 million at 2.37% and 1.89% for the years ended December 31,
2004 and 2003, respectively.
Long-Term Debt. Subject to regulatory approval, the Company periodically
finances capital projects under State Revolving Fund (SRF) loan programs in New
Jersey and Delaware. These government programs provide
21
financing at interest rates that are typically below rates available in the
financial markets. A portion of the borrowings under the New Jersey SRF is
interest free. We participated in the SRF loan programs during 2004 and will
continue to pursue opportunities to participate as circumstances allow us in the
future.
During 2004, Middlesex closed on $16.6 million of first mortgage bonds through
the New Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey
SRF loan program in order to finance the costs of a new raw water pipeline and
our 2005 and 2006 RENEW programs (see Capital Expenditures and Commitments for
discussion of these projects). The proceeds of these bonds and any interest
earned are held by a trustee, and are classified as Restricted Cash on the
Consolidated Balance Sheet.
During 2004, Tidewater closed on a Delaware SRF loan of $0.8 million to fund a
portion of its multi-year capital program. The Delaware SRF program will allow,
but does not obligate, Tidewater to draw down against a General Obligation Note
for three specific projects.
Substantially all of the Utility Plant of the Company is subject to the lien of
its mortgage, which also includes debt service and capital ratio covenants,
certain restrictions as to cash dividend payments and other distributions on
common stock. The Company is in compliance with all of its mortgage covenants
and restrictions.
Common Stock. The Company periodically issues shares of common stock in
connection with its dividend reinvestment and stock purchase plan. Periodically,
the Company may issue additional equity to reduce short-term indebtedness and
for other general corporate purposes. During 2004, the Company issued $15.1
million of common stock, which included a common stock offering of 700,000
shares that was priced at $19.80 in May. The majority of the net proceeds of
approximately $12.9 million from the common stock offering were used to repay
most of the Company's short-term borrowings outstanding at that time.
Capital Expenditures and Commitments
As shown in the following table, we expect our capital expenditures in 2005 and
2006 to increase over 2004. These increases are attributable to a major pipeline
installation in the Middlesex system and continued customer growth and service
improvement requirements in our Tidewater systems in Delaware, where we spent
$12.8 million on utility plant in 2004. At this time we have not determined any
amounts anticipated to be spent by TESI in the table below.
(Millions of Dollars)
2005 2006 2007
----- ----- -----
Delaware Systems $16.5 $18.1 $ 9.3
Raw Water Line 3.4 -- --
RENEW Program 3.3 3.3 3.3
Scheduled Upgrades to Existing Systems 5.3 8.1 3.8
----- ----- -----
Total $28.5 $29.5 $16.4
===== ===== =====
Under our capital program for 2005, we plan to expend $16.5 million for water
system additions and improvements for our Delaware systems, which include the
construction of several storage tanks and the creation of new wells and
interconnections. We expect to spend approximately $3.4 million to complete the
new raw water line to the Middlesex primary water treatment plant that began in
2004. We expect to spend $3.3 million for the RENEW program, which is our
program to clean and cement line unlined mains in the Middlesex System. There
remains a total of approximately 129 miles of unlined mains in the 730-mile
Middlesex System. In 2004, nine miles of unlined mains were cleaned and cement
lined. The capital program also includes $5.3 million for 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 mains, $0.8 million
for
22
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 NJEIT loans (currently, $8.3 million)
and Delaware SRF loans (currently, $1.8 million). The SRF programs 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 $33.0 million of available lines of credit with four financial
institutions. As of December 31, 2004, we had $11.0 million outstanding against
the lines of credit.
Going forward into 2006 through 2007, we currently project that we will be
required to 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 the
SRF loan programs. We also expect to use internally generated funds and proceeds
from the sale of common stock through the Dividend Reinvestment and Common Stock
Purchase Plan.
Contractual Obligations
In the course of normal business activities, the Company enters into a variety
of contractual obligations and commercial commitments. Some of these items
result in direct obligations on the Company's balance sheet while others are
commitments, some firm and some based on uncertainties, which are disclosed in
the Company's underlying consolidated financial statements.
The table below presents our known contractual obligations for the periods
specified as of December 31, 2004.
Payment Due by Period
(Millions of Dollars)
Less
than 1-3 4-5 More than
Total 1 Year Years Years 5 Years
------ ------ ------ ------ -------
Long-term Debt $116.4 $ 1.1 $ 3.4 $ 3.9 $108.0
Notes Payable 11.0 11.0 -- -- --
Interest on Long-term Debt 104.0 5.6 11.2 10.2 77.0
Purchased Water Contracts 21.7 3.9 4.5 4.5 8.8
Wastewater Operations 63.0 3.8 7.8 8.3 43.1
------ ------ ------ ------ ------
Total $316.1 $ 25.4 $ 26.9 $ 26.9 $236.9
====== ====== ====== ====== ======
Guarantees
USA-PA operates the City of Perth Amboy's (Perth Amboy) water and wastewater
systems under a service contract agreement through June 30, 2018. The agreement
was effected under New Jersey's Water Supply Public/Private Contracting Act and
the New Jersey Wastewater Public/Private Contracting Act. Under the agreement,
USA-PA receives a fixed fee and a variable fee based on increased system
billing. Scheduled fixed fee payments began at $6.4 million in the first year
and will increase over the term of the contract to $10.2 million at the end of
the contract.
In connection with the agreement, Perth Amboy, through the Middlesex County
Improvement Authority, issued approximately $68.0 million in three series of
bonds. Middlesex guaranteed one of those series of bonds, designated the Series
C Serial Bonds, in the principal amount of approximately $26.3 million. Perth
Amboy guaranteed the two other series of bonds. The Series C Serial Bonds have
various maturity dates with the final
23
maturity date on September 1, 2015. As of December 31, 2004, approximately $23.9
million of the Series C Serial Bonds remained outstanding.
We are obligated to perform under the guarantee in the event notice is received
from the Series C Serial Bonds trustee of an impending debt service deficiency.
If Middlesex funds any debt service obligations as guarantor, there is a
provision in the agreement that requires Perth Amboy to reimburse us. There are
other provisions in the agreement that we believe make it unlikely that we will
be required to perform under the guarantee, such as scheduled annual rate
increases for the water and wastewater services as well as rate increases due to
unforeseen circumstances. In the event revenues from customers could not satisfy
the reimbursement requirements, Perth Amboy has Ad Valorem taxing powers, which
could be used to raise the needed amount.
Critical Accounting Policies and Estimates
The application of accounting policies and standards often requires the use of
estimates, assumptions and judgments. Changes in these variables may lead to
significantly different financial statement results. Our critical accounting
policies are set forth below.
Regulatory Accounting
We maintain our books and records in accordance with accounting principles
generally accepted in the United States of America. Middlesex and certain of its
subsidiaries, which account for 86% of Operating Revenues and 99% of Total
Assets, are subject to regulation in the states in which they operate. Those
companies are required to maintain their accounts in accordance with regulatory
authorities' rules and guidelines, which may differ from other authoritative
accounting pronouncements. In those instances, the Company follows the guidance
provided in the Financial Accounting Standards Board (FASB), Statement of
Financial Accounting Standards No. 71, "Accounting For the Effects of Certain
Types of Regulation" (SFAS 71).
In accordance with SFAS No. 71, costs and obligations are deferred if it is
probable that these items will be recognized for rate-making purposes in future
rates. Accordingly, we have recorded costs and obligations, which will be
amortized over various future periods. Any change in the assessment of the
probability of rate-making treatment will require us to change the accounting
treatment of the deferred item. We have no reason to believe any of the deferred
items that are recorded would be treated differently by the regulators in the
future.
Revenues
Revenues from metered customers include amounts billed on a cycle basis and
unbilled amounts estimated from the last meter reading date to the end of the
accounting period. The estimated unbilled amounts are determined by utilizing
factors which include historical consumption usage and current climate
conditions. Differences between estimated revenues and actual billings are
recorded in a subsequent period.
Revenues from unmetered customers are billed at a fixed tariff rate in advance
at the beginning of each service period and are recognized in revenue ratably
over the service period.
Revenues from the Perth Amboy management contract are comprised of fixed and
variable fees. Fixed fees, which have been set for the life of the contract, are
billed monthly and recorded as earned. Variable fees, which are based on
billings and other factors and are not significant, are recorded upon approval
of the amount by Perth Amboy.
24
Pension Plan
We maintain a noncontributory defined benefit pension plan which covers
substantially all employees with more than 1,000 hours of service.
The discount rate utilized for determining future pension obligations has
decreased from 6.75% at December 31, 2002 to 6.00% at December 31, 2003 to
5.875% at December 31, 2004. Lowering the discount rate by 0.5% would have
increased the net periodic pension cost by $0.1 million in 2004. Lowering the
expected long-term rate of return on the pension plans by 0.5% (from 8.0% to
7.5%) would have increased the net periodic pension cost in 2004 by
approximately $0.1 million.
The discount rate for determining future pension obligations are determined
based on market rates for long-term, high-quality corporate bonds at our
December 31 measurement date. The expected long-term rate of return for pension
assets is determined based on historical returns and our asset allocation.
Future actual pension income will depend on future investment performance,
changes in future discount rates and various other factors related to the
population participating in the pension plans.
Recent Accounting Standards
In December 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No.123(R) "Share-Based Payment", which replaces SFAS No.123, "Accounting
for Stock-Based Compensation", 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 is effective for quarters
beginning after June 15, 2005. 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 Management's discussions with its
Actuary, Management determined the effect of the Medicare Drug Act was not
considered a significant event and thus
25
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 will 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.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk.
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rates through the use of
fixed rate long-term debt and, to a lesser extent, short-term debt. The
Company's interest rate risk related to existing fixed rate, long-term debt is
not material due to the term of the majority of our First Mortgage Bonds, which
have final maturity dates ranging from 2009 to 2038. Over the next twelve
months, approximately $1.1 million of the current portion of ten existing
long-term debt instruments will mature. Combining this amount with the $11.0
million in short-term debt outstanding at December 31, 2004, and applying a
hypothetical change in the rate of interest charged by 10% on those borrowings,
would not have a material effect on our earnings.
26
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Middlesex Water Company:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capital stock and long-term debt of Middlesex Water Company and
subsidiaries (the Company) as of December 31, 2004 and 2003, and the related
consolidated statements of income, common stockholders' equity and comprehensive
income, and cash flows for each of the three years in the period ended December
31, 2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2004
and 2003, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 15, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 15, 2005
27
MIDDLESEX WATER COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 2004 2003
==================================================================================================================
UTILITY PLANT: Water Production $ 82,340,798 $ 77,265,782
Transmission and Distribution 188,026,091 174,455,437
General 20,451,215 19,776,293
Construction Work in Progress 13,013,391 2,798,070
------------------------------------------------------------------------------------
TOTAL 303,831,495 274,295,582
Less Accumulated Depreciation 52,017,761 47,510,797
------------------------------------------------------------------------------------
UTILITY PLANT - NET 251,813,734 226,784,785
------------------------------------------------------------------------------------
==================================================================================================================
CURRENT ASSETS: Cash and Cash Equivalents 4,034,768 3,005,610
Accounts Receivable, net 6,316,853 5,682,608
Unbilled Revenues 3,572,713 3,234,788
Materials and Supplies (at average cost) 1,203,906 1,419,142
Prepayments 823,976 1,009,304
------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 15,952,216 14,351,452
==================================================================================================================
DEFERRED CHARGES Unamortized Debt Expense 3,172,254 3,272,783
AND OTHER ASSETS: Preliminary Survey and Investigation Charges 1,032,182 1,380,771
Regulatory Assets 8,198,565 8,216,117
Operations Contracts Fees Receivable 685,599 699,806
Restricted Cash 13,257,106 3,825,420
Non-utility Assets - Net 4,552,023 4,147,685
Other 465,419 513,116
------------------------------------------------------------------------------------
TOTAL DEFERRED CHARGES AND OTHER ASSETS 31,363,148 22,055,698
------------------------------------------------------------------------------------
TOTAL ASSETS $299,129,098 $263,191,935
------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
==================================================================================================================
CAPITALIZATION: Common Stock, No Par Value $ 71,979,902 $ 56,924,028
Retained Earnings 23,103,908 22,668,348
Accumulated Other Comprehensive Income, net of tax 44,841 50,808
====================================================================================
TOTAL COMMON EQUITY 95,128,651 79,643,184
====================================================================================
Preferred Stock 4,063,062 4,063,062
Long-term Debt 115,280,649 97,376,847
------------------------------------------------------------------------------------
TOTAL CAPITALIZATION 214,472,362 181,083,093
==================================================================================================================
CURRENT Current Portion of Long-term Debt 1,091,351 1,067,258
LIABILITIES: Notes Payable 11,000,000 12,500,000
Accounts Payable 6,001,806 4,777,400
Accrued Taxes 6,784,380 6,258,739
Accrued Interest 1,703,131 1,810,639
Unearned Revenues and Advanced Service Fees 387,156 602,854
Other 795,456 678,596
------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 27,763,280 27,695,486
==================================================================================================================
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4)
==================================================================================================================
DEFERRED CREDITS Customer Advances for Construction 12,366,060 11,711,846
AND OTHER LIABILITIES: Accumulated Deferred Investment Tax Credits 1,696,566 1,775,183
Accumulated Deferred Income Taxes 14,556,153 14,125,970
Employee Benefit Plans 5,464,056 5,086,988
Regulatory Liability - Cost of Utility Plant Removal 5,363,152 4,830,308
Other 849,551 909,498
------------------------------------------------------------------------------------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 40,295,538 38,439,793
==================================================================================================================
CONTRIBUTIONS IN AID OF CONSTRUCTION 16,597,918 15,973,563
------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $299,129,098 $263,191,935
------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
28
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2004 2003 2002
==================================================================================================
Operating Revenues $ 70,991,146 $ 64,111,214 $ 61,932,786
- --------------------------------------------------------------------------------------------------
Operating Expenses:
Operations 36,519,355 32,666,099 29,918,921
Maintenance 3,464,036 3,529,113 2,847,209
Depreciation 5,846,191 5,362,727 4,963,268
Other Taxes 8,228,354 7,815,918 7,737,155
Income Taxes 3,814,418 3,237,218 3,999,295
- --------------------------------------------------------------------------------------------------
Total Operating Expenses 57,872,354 52,611,075 49,465,848
==================================================================================================
Operating Income 13,118,792 11,500,139 12,466,938
- --------------------------------------------------------------------------------------------------
Other Income (Expense):
Allowance for Funds Used During Construction 606,019 315,919 269,668
Other Income 221,950 131,499 249,324
Other Expense (32,676) (89,931) (77,114)
- --------------------------------------------------------------------------------------------------
Total Other Income, net 795,293 357,487 441,878
Interest Charges 5,468,576 5,227,030 5,143,463
- --------------------------------------------------------------------------------------------------
Net Income 8,445,509 6,630,596 7,765,353
Preferred Stock Dividend Requirements 254,786 254,786 254,786
- --------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 8,190,723 $ 6,375,810 $ 7,510,567
==================================================================================================
Earnings per share of Common Stock:
Basic $ 0.74 $ 0.61 $ 0.73
Diluted $ 0.73 $ 0.61 $ 0.73
Average Number of
Common Shares Outstanding :
Basic 11,079,835 10,475,295 10,280,302
Diluted 11,422,975 10,818,435 10,623,442
Cash Dividends Paid per Common Share $ 0.663 $ 0.649 $ 0.634
See Notes to Consolidated Financial Statements.
29
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended December 31,
2004 2003 2002
==============================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 8,445,509 $ 6,630,596 $ 7,765,353
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 6,387,808 5,633,863 5,436,525
Provision for Deferred Income Taxes and ITC 603,275 306,919 197,714
Allowance for Funds Used During Construction (606,019) (315,919) (269,668)
Changes in Assets and Liabilities:
Accounts Receivable (634,245) 345,694 637,418
Unbilled Revenues (337,925) (53,697) (380,076)
Materials & Supplies