UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended JuneSeptember 30, 2015

 

OR

 

      ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________________ to______________________

 

Commission File Number     0-422

 

MIDDLESEX WATER COMPANY

(Exact name of registrant as specified in its charter)

New Jersey

(State of incorporation)

22-1114430

(IRS employer identification no.)

 

1500 Ronson Road, Iselin, New Jersey 08830

(Address of principal executive offices, including zip code)

(732) 634-1500

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ  No¨

 

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

Yesþ  No¨

 

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

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

 

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

Yes¨  Noþ

The number of shares outstanding of each of the registrant's classes of common stock, as of JulyOctober 31, 2015: Common Stock, No Par Value: 16,164,09916,211,304 shares outstanding.

 

INDEX

 

PART I.FINANCIAL INFORMATIONPAGE
   
Item 1.Financial Statements (Unaudited): 
   
 Condensed Consolidated Statements of Income1
   
 Condensed Consolidated Balance Sheets2
   
 Condensed Consolidated Statements of Cash Flows3
   
 Condensed Consolidated Statements of Capital Stock  and Long-Term Debt4
   
 Notes to Unaudited Condensed Consolidated Financial Statements5
   
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations1314
   
Item 3.Quantitative and Qualitative Disclosures of Market Risk2122
   
Item 4.Controls and Procedures2122
   
PART II.OTHER INFORMATION 
   
Item 1.Legal Proceedings2223
   
Item 1A.Risk Factors2223
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2223
   
Item 3.Defaults upon Senior Securities2223
   
Item 4.Mine Safety Disclosures2223
   
Item 5.Other Information2223
   
Item 6.Exhibits2223
   
SIGNATURES2324

 

Index
 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share amounts)

 

 Three Months Ended June 30, Six Months Ended June 30, Three Months Ended September 30, Nine Months Ended September 30,
 2015 2014 2015 2014 2015 2014 2015 2014
                
Operating Revenues $31,666  $29,190  $60,446  $56,363  $34,654  $32,669  $95,100  $89,032 
                                
Operating Expenses:                                
Operations and Maintenance  16,229   14,563   32,317   30,000   16,772   14,956   49,089   44,957 
Depreciation  2,982   2,837   5,930   5,652   3,032   2,880   8,962   8,532 
Other Taxes  3,220   3,043   6,280   5,997   3,390   3,213   9,671   9,210 
                                
Total Operating Expenses  22,431   20,443   44,527   41,649   23,194   21,049   67,722   62,699 
                                
Operating Income  9,235   8,747   15,919   14,714   11,460   11,620   27,378   26,333 
                                
Other Income (Expense):                                
Allowance for Funds Used During Construction  103   66   185   133   113   80   297   213 
Other Income  43   135   82   146 
Other Expense  (18)  (155)  (83)  (175)
Other Income (Expense), net  108   5   108   (23)
                                
Total Other Income, net  128   46   184   104   221   85   405   190 
                                
Interest Charges  1,496   1,515   2,554   2,618   1,505   1,516   4,058   4,134 
                                
Income before Income Taxes  7,867   7,278   13,549   12,200   10,176   10,189   23,725   22,389 
                                
Income Taxes  2,778   2,550   4,825   4,303   3,433   3,431   8,258   7,735 
                                
Net Income  5,089   4,728   8,724   7,897   6,743   6,758   15,467   14,654 
                                
Preferred Stock Dividend Requirements  36   36   72   79   36   36   108   115 
                                
Earnings Applicable to Common Stock $5,053  $4,692  $8,652  $7,818  $6,707  $6,722  $15,359  $14,539 
                                
Earnings per share of Common Stock:                                
Basic $0.31  $0.29  $0.54  $0.49  $0.41  $0.42  $0.95  $0.91 
Diluted $0.31  $0.29  $0.53  $0.49  $0.41  $0.42  $0.95  $0.90 
                                
Average Number of                                
Common Shares Outstanding :                                
Basic  16,149   16,018   16,141   15,996   16,202   16,097   16,161   16,030 
Diluted  16,305   16,199   16,297   16,190   16,358   16,253   16,317   16,211 
                                
Cash Dividends Paid per Common Share $0.1925  $0.1900  $0.3850  $0.3800  $0.1925  $0.1900  $0.5775  $0.5700 

 

See Notes to Condensed Consolidated Financial Statements.

1 

Index

1
Index

 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED  BALANCE SHEETS

(Unaudited)

(In thousands)

 

  June 30, December 31,  September 30, December 31,
ASSETS  2015 2014  2015 2014
UTILITY PLANT: Water Production $140,271  $138,242  Water Production $140,417  $138,242 
 Transmission and Distribution  386,015   378,154  Transmission and Distribution  388,433   378,154 
 General  59,666   58,851  General  60,461   58,851 
 Construction Work in Progress  9,527   8,145  Construction Work in Progress  12,564   8,145 
 TOTAL  595,479   583,392  TOTAL  601,875   583,392 
 Less Accumulated Depreciation  121,935   117,986  Less Accumulated Depreciation  124,037   117,986 
 UTILITY PLANT - NET  473,544   465,406  UTILITY PLANT - NET  477,838   465,406 
                  
CURRENT ASSETS: Cash and Cash Equivalents  5,774   2,673  Cash and Cash Equivalents  4,651   2,673 
 Accounts Receivable, net  10,481   10,012  Accounts Receivable, net  12,830   10,012 
 Unbilled Revenues  7,592   5,937  Unbilled Revenues  7,991   5,937 
 Materials and Supplies (at average cost)  2,323   2,253  Materials and Supplies (at average cost)  2,681   2,253 
 Prepayments  2,880   1,989  Prepayments  2,736   1,989 
 TOTAL CURRENT ASSETS  29,050   22,864  TOTAL CURRENT ASSETS  30,889   22,864 
                  
DEFERRED CHARGES Unamortized Debt Expense  3,376   3,474  Unamortized Debt Expense  3,391   3,474 
AND OTHER ASSETS: Preliminary Survey and Investigation Charges  2,102   2,211  Preliminary Survey and Investigation Charges  2,045   2,211 
 Regulatory Assets  65,811   66,216 
 Regulatory Assets  64,875   66,216  Operations Contracts, Developer and Other Receivables  3,241   3,313 
 Operations Contracts, Developer and Other Receivables  3,260   3,313  Restricted Cash  439   2,573 
 Restricted Cash  455   2,573  Non-utility Assets - Net  9,236   9,197 
 Non-utility Assets - Net  9,292   9,197  Federal Income Tax Receivable  9,756   — 
 Other  453   518  Other  433   518 
 TOTAL DEFERRED CHARGES AND OTHER ASSETS  83,813   87,502  TOTAL DEFERRED CHARGES AND OTHER ASSETS  94,352   87,502 
 TOTAL ASSETS $586,407  $575,772  TOTAL ASSETS $603,079  $575,772 
                  
CAPITALIZATION AND LIABILITIES
CAPITALIZATION: Common Stock, No Par Value $149,739  $148,668  Common Stock, No Par Value $150,251  $148,668 
 Retained Earnings  51,062   48,623  Retained Earnings  54,628   48,623 
 TOTAL COMMON EQUITY  200,801   197,291  TOTAL COMMON EQUITY  204,879   197,291 
 Preferred Stock  2,436   2,436  Preferred Stock  2,436   2,436 
 Long-term Debt  136,065   136,039  Long-term Debt  135,240   136,039 
 TOTAL CAPITALIZATION  339,302   335,766  TOTAL CAPITALIZATION  342,555   335,766 
                    
CURRENT Current Portion of Long-term Debt  5,692   5,910  Current Portion of Long-term Debt  5,725   5,910 
LIABILITIES: Notes Payable  18,000   19,000  Notes Payable  18,000   19,000 
 Accounts Payable  8,925   6,354  Accounts Payable  8,609   6,354 
 Accrued Taxes  12,500   8,948  Accrued Taxes  11,337   8,948 
 Accrued Interest  1,118   1,134  Accrued Interest  411   1,134 
 Unearned Revenues and Advanced Service Fees  861   839  Unearned Revenues and Advanced Service Fees  872   839 
 Other  2,318   1,687  Other  1,946   1,687 
 TOTAL CURRENT LIABILITIES  49,414   43,872  TOTAL CURRENT LIABILITIES  46,900   43,872 
                  
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
                  
DEFERRED CREDITS Customer Advances for Construction  21,979   21,978  Customer Advances for Construction  20,921   21,978 
AND OTHER LIABILITIES: Accumulated Deferred Investment Tax Credits  871   910  Accumulated Deferred Investment Tax Credits  851   910 
 Accumulated Deferred Income Taxes  48,171   47,306  Accumulated Deferred Income Taxes  64,103   47,306 
 Employee Benefit Plans  44,196   45,135  Employee Benefit Plans  43,647   45,135 
 Regulatory Liability - Cost of Utility Plant Removal  10,609   10,273  Regulatory Liability - Cost of Utility Plant Removal  10,772   10,273 
 Other  1,659   1,277  Other  1,638   1,277 
 TOTAL DEFERRED CREDITS AND OTHER LIABILITIES  127,485   126,879  TOTAL DEFERRED CREDITS AND OTHER LIABILITIES  141,932   126,879 
                  
CONTRIBUTIONS IN AID OF CONSTRUCTIONCONTRIBUTIONS IN AID OF CONSTRUCTION  70,206   69,255 CONTRIBUTIONS IN AID OF CONSTRUCTION  71,692   69,255 
 TOTAL CAPITALIZATION AND LIABILITIES $586,407  $575,772  TOTAL CAPITALIZATION AND LIABILITIES $603,079  $575,772 

 

See Notes to Condensed Consolidated Financial Statements.

2 

2
Index
Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 Six Months Ended June 30, Nine Months Ended September 30,
 2015 2014 2015 2014
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net Income $8,724  $7,897  $15,467  $14,654 
Adjustments to Reconcile Net Income to                
Net Cash Provided by Operating Activities:                
Depreciation and Amortization  6,680   6,038   9,990   9,091 
Provision for Deferred Income Taxes and Investment Tax Credits  1,093   1,335   17,631   2,107 
Equity Portion of Allowance for Funds Used During Construction (AFUDC)  (113)  (84)  (179)  (138)
Cash Surrender Value of Life Insurance  (96)  (70)  (51)  (81)
Stock Compensation Expense  337   299   468   430 
Changes in Assets and Liabilities:                
Accounts Receivable  (416)  796   (2,746)  687 
Unbilled Revenues  (1,655)  (1,402)  (2,054)  (1,775)
Materials & Supplies  (70)  (374)  (428)  (154)
Prepayments  (891)  (1,310)  (747)  (1,253)
Accounts Payable  2,571   347   2,255   867 
Accrued Taxes  3,552   1,820   2,389   2,431 
Accrued Interest  (16)  (1)  (723)  (720)
Employee Benefit Plans  151   (1,232)  (3,122)  (2,720)
Unearned Revenue & Advanced Service Fees  22   (59)
Unearned Revenue and Advanced Service Fees  33   15 
Federal Income Tax Receivable  (9,756)  — 
Other Assets and Liabilities  307   (192)  725   (1,002)
                
NET CASH PROVIDED BY OPERATING ACTIVITIES  20,180   13,808   29,152   22,439 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Utility Plant Expenditures, Including AFUDC of $72 in 2015, $49 in 2014  (12,646)  (8,505)
Utility Plant Expenditures, Including AFUDC of $118 in 2015, $75 in 2014  (19,297)  (15,783)
Restricted Cash  1,375   (2,464)  1,391   (965)
Distribution from Joint Venture  —   765 
Distribution From Joint Venture  —   782 
                
NET CASH USED IN INVESTING ACTIVITIES  (11,271)  (10,204)  (17,906)  (15,966)
CASH FLOWS FROM FINANCING ACTIVITIES:                
Redemption of Long-term Debt  (2,735)  (1,726)  (5,358)  (4,678)
Proceeds from Issuance of Long-term Debt  3,000   4,398   5,000   4,398 
Net Short-term Bank Borrowings  (1,000)  (450)  (1,000)  2,050 
Deferred Debt Issuance Expense  (4)  (8)  (66)  (69)
Common Stock Issuance Expense  (22)  — 
Restricted Cash  743   —   744   — 
Proceeds from Issuance of Common Stock  734   719   1,115   1,120 
Payment of Common Dividends  (6,212)  (6,071)  (9,331)  (9,130)
Payment of Preferred Dividends  (72)  (79)  (108)  (115)
Construction Advances and Contributions-Net  (262)  (150)  (242)  169 
                
NET CASH USED IN FINANCING ACTIVITIES  (5,808)  (3,367)  (9,268)  (6,255)
NET CHANGES IN CASH AND CASH EQUIVALENTS  3,101   237   1,978   218 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  2,673   4,834   2,673   4,834 
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,774  $5,071  $4,651  $5,052 
                
                
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:                
Utility Plant received as Construction Advances and Contributions $1,214  $1,130  $1,622  $1,797 
Long-term Debt Deobligation $457  $—  $466  $— 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:                
Cash Paid During the Year for:                
Interest $2,683  $2,770  $4,897  $4,971 
Interest Capitalized $72  $49  $118  $75 
Income Taxes $901  $2,215  $1,136  $3,775 

 

See Notes to Condensed Consolidated Financial Statements.

3

3 

Index
Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK

AND LONG-TERM DEBT

(Unaudited)

(In thousands)

 

 June 30, December 31,  September 30, December 31,
 2015 2014  2015 2014
Common Stock, No Par ValueCommon Stock, No Par Value        Common Stock, No Par Value    
Shares Authorized -40,000        40,000    
Shares Outstanding - 2015 - 16,161 $149,739  $148,668 2015 - 16,210 $150,251  $148,668 
2014 - 16,124        2014 - 16,124        
                 
Retained EarningsRetained Earnings  51,062   48,623 Retained Earnings  54,628   48,623 
TOTAL COMMON EQUITYTOTAL COMMON EQUITY $200,801  $197,291 TOTAL COMMON EQUITY $204,879  $197,291 
                 
Cumulative Preferred Stock, No Par Value:Cumulative Preferred Stock, No Par Value:        Cumulative Preferred Stock, No Par Value:        
Shares Authorized -126        126        
Shares Outstanding -24        24        
Convertible: Convertible:        Convertible:        
Shares Outstanding, $7.00 Series - 10Shares Outstanding, $7.00 Series - 10  1,007   1,007 Shares Outstanding, $7.00 Series - 10  1,007   1,007 
Shares Outstanding, $8.00 Series - 3Shares Outstanding, $8.00 Series - 3  349   349 Shares Outstanding, $8.00 Series - 3  349   349 
Nonredeemable: Nonredeemable:        Nonredeemable:        
Shares Outstanding, $7.00 Series - 1Shares Outstanding, $7.00 Series - 1  80   80 Shares Outstanding, $7.00 Series - 1  80   80 
Shares Outstanding, $4.75 Series - 10Shares Outstanding, $4.75 Series - 10  1,000   1,000 Shares Outstanding, $4.75 Series - 10  1,000   1,000 
TOTAL PREFERRED STOCKTOTAL PREFERRED STOCK $2,436  $2,436 TOTAL PREFERRED STOCK $2,436  $2,436 
                 
Long-term Debt:Long-term Debt:        Long-term Debt:        
8.05%, Amortizing Secured Note, due December 20, 2021 8.05%, Amortizing Secured Note, due December 20, 2021 $1,730  $1,825  8.05%, Amortizing Secured Note, due December 20, 2021 $1,680  $1,825 
6.25%, Amortizing Secured Note, due May 19, 2028 6.25%, Amortizing Secured Note, due May 19, 2028  5,425   5,635  6.25%, Amortizing Secured Note, due May 19, 2028  5,320   5,635 
6.44%, Amortizing Secured Note, due August 25, 2030 6.44%, Amortizing Secured Note, due August 25, 2030  4,247   4,387  6.44%, Amortizing Secured Note, due August 25, 2030  4,177   4,387 
6.46%, Amortizing Secured Note, due September 19, 2031 6.46%, Amortizing Secured Note, due September 19, 2031  4,527   4,667  6.46%, Amortizing Secured Note, due September 19, 2031  4,457   4,667 
4.22%, State Revolving Trust Note, due December 31, 2022 4.22%, State Revolving Trust Note, due December 31, 2022  399   421  4.22%, State Revolving Trust Note, due December 31, 2022  399   421 
3.60%, State Revolving Trust Note, due May 1, 2025 3.60%, State Revolving Trust Note, due May 1, 2025  2,366   2,463  3.60%, State Revolving Trust Note, due May 1, 2025  2,366   2,463 
3.30% State Revolving Trust Note, due March 1, 2026 3.30% State Revolving Trust Note, due March 1, 2026  487   506  3.30% State Revolving Trust Note, due March 1, 2026  469   506 
3.49%, State Revolving Trust Note, due January 25, 2027 3.49%, State Revolving Trust Note, due January 25, 2027  518   536  3.49%, State Revolving Trust Note, due January 25, 2027  501   536 
4.03%, State Revolving Trust Note, due December 1, 2026 4.03%, State Revolving Trust Note, due December 1, 2026  674   697  4.03%, State Revolving Trust Note, due December 1, 2026  674   697 
4.00% to 5.00%, State Revolving Trust Bond, due August 1, 2021 4.00% to 5.00%, State Revolving Trust Bond, due August 1, 2021  299   299  4.00% to 5.00%, State Revolving Trust Bond, due August 1, 2021  254   299 
0.00%, State Revolving Fund Bond, due August 1, 2021 0.00%, State Revolving Fund Bond, due August 1, 2021  236   241  0.00%, State Revolving Fund Bond, due August 1, 2021  203   241 
3.64%, State Revolving Trust Note, due July 1, 2028 3.64%, State Revolving Trust Note, due July 1, 2028  304   313  3.64%, State Revolving Trust Note, due July 1, 2028  304   313 
3.64%, State Revolving Trust Note, due January 1, 2028 3.64%, State Revolving Trust Note, due January 1, 2028  101   104  3.64%, State Revolving Trust Note, due January 1, 2028  101   104 
3.45%, State Revolving Trust Note, due August 1, 2031 3.45%, State Revolving Trust Note, due August 1, 2031  1,090   1,115  3.45%, State Revolving Trust Note, due August 1, 2031  1,066   1,115 
6.59%, Amortizing Secured Note, due April 20, 2029 6.59%, Amortizing Secured Note, due April 20, 2029  4,825   4,999  6.59%, Amortizing Secured Note, due April 20, 2029  4,738   4,999 
7.05%, Amortizing Secured Note, due January 20, 2030 7.05%, Amortizing Secured Note, due January 20, 2030  3,646   3,771  7.05%, Amortizing Secured Note, due January 20, 2030  3,583   3,771 
5.69%, Amortizing Secured Note, due January 20, 2030 5.69%, Amortizing Secured Note, due January 20, 2030  7,479   7,735  5.69%, Amortizing Secured Note, due January 20, 2030  7,350   7,735 
4.46%, Amortizing Secured Note, due April 20, 2040 4.46%, Amortizing Secured Note, due April 20, 2040  10,927   8,000  4.46%, Amortizing Secured Note, due April 20, 2040  12,817   8,000 
3.75%, State Revolving Trust Note, due July 1, 2031 3.75%, State Revolving Trust Note, due July 1, 2031  2,357   2,411  3.75%, State Revolving Trust Note, due July 1, 2031  2,357   2,411 
3.75%, State Revolving Trust Note, due November 30, 2030 3.75%, State Revolving Trust Note, due November 30, 2030  1,246   1,276  3.75%, State Revolving Trust Note, due November 30, 2030  1,246   1,276 
First Mortgage Bonds: First Mortgage Bonds:         First Mortgage Bonds:        
0.00%, Series X, due September 1, 2018 0.00%, Series X, due September 1, 2018  211   215  0.00%, Series X, due September 1, 2018  162   215 
4.25% to 4.63%, Series Y, due September 1, 2018 4.25% to 4.63%, Series Y, due September 1, 2018  245   245  4.25% to 4.63%, Series Y, due September 1, 2018  185   245 
0.00%, Series Z, due September 1, 2019 0.00%, Series Z, due September 1, 2019  548   559  0.00%, Series Z, due September 1, 2019  446   559 
5.25% to 5.75%, Series AA, due September 1, 2019 5.25% to 5.75%, Series AA, due September 1, 2019  700   700  5.25% to 5.75%, Series AA, due September 1, 2019  565   700 
0.00%, Series BB, due September 1, 2021 0.00%, Series BB, due September 1, 2021  827   845  0.00%, Series BB, due September 1, 2021  723   845 
4.00% to 5.00%, Series CC, due September 1, 2021 4.00% to 5.00%, Series CC, due September 1, 2021  1,025   1,025  4.00% to 5.00%, Series CC, due September 1, 2021  895   1,025 
0.00%, Series EE, due August 1, 2023 0.00%, Series EE, due August 1, 2023  3,468   3,550  0.00%, Series EE, due August 1, 2023  3,132   3,550 
3.00% to 5.50%, Series FF, due August 1, 2024 3.00% to 5.50%, Series FF, due August 1, 2024  3,690   4,900  3.00% to 5.50%, Series FF, due August 1, 2024  3,690   4,900 
0.00%, Series GG, due August 1, 2026 0.00%, Series GG, due August 1, 2026  1,064   1,083  0.00%, Series GG, due August 1, 2026  993   1,083 
4.00% to 5.00%, Series HH, due August 1, 2026 4.00% to 5.00%, Series HH, due August 1, 2026  1,390   1,390  4.00% to 5.00%, Series HH, due August 1, 2026  1,300   1,390 
0.00%, Series II, due August 1, 2024 0.00%, Series II, due August 1, 2024  861   881  0.00%, Series II, due August 1, 2024  789   881 
3.40% to 5.00%, Series JJ, due August 1, 2027 3.40% to 5.00%, Series JJ, due August 1, 2027  1,090   1,090  3.40% to 5.00%, Series JJ, due August 1, 2027  1,010   1,090 
0.00%, Series KK, due August 1, 2028 0.00%, Series KK, due August 1, 2028  1,233   1,255  0.00%, Series KK, due August 1, 2028  1,167   1,255 
5.00% to 5.50%, Series LL, due August 1, 2028 5.00% to 5.50%, Series LL, due August 1, 2028  1,435   1,435  5.00% to 5.50%, Series LL, due August 1, 2028  1,365   1,435 
0.00%, Series MM, due August 1, 2030 0.00%, Series MM, due August 1, 2030  1,504   1,537  0.00%, Series MM, due August 1, 2030  1,437   1,537 
3.00% to 4.375%, Series NN, due August 1, 2030 3.00% to 4.375%, Series NN, due August 1, 2030  1,755   1,755  3.00% to 4.375%, Series NN, due August 1, 2030  1,675   1,755 
0.00%, Series OO, due August 1, 2031 0.00%, Series OO, due August 1, 2031  2,508   2,559  0.00%, Series OO, due August 1, 2031  2,408   2,559 
2.00% to 5.00%, Series PP, due August 1, 2031 2.00% to 5.00%, Series PP, due August 1, 2031  850   850  2.00% to 5.00%, Series PP, due August 1, 2031  815   850 
5.00%, Series QQ, due October 1, 2023 5.00%, Series QQ, due October 1, 2023  9,915   9,915  5.00%, Series QQ, due October 1, 2023  9,915   9,915 
3.80%, Series RR, due October 1, 2038 3.80%, Series RR, due October 1, 2038  22,500   22,500  3.80%, Series RR, due October 1, 2038  22,500   22,500 
4.25%, Series SS, due October 1, 2047 4.25%, Series SS, due October 1, 2047  23,000   23,000  4.25%, Series SS, due October 1, 2047  23,000   23,000 
0.00%, Series TT, due August 1, 2032 0.00%, Series TT, due August 1, 2032  2,659   2,709  0.00%, Series TT, due August 1, 2032  2,559   2,709 
3.00% to 3.25%, Series UU, due August 1, 2032 3.00% to 3.25%, Series UU, due August 1, 2032  975   975  3.00% to 3.25%, Series UU, due August 1, 2032  935   975 
0.00%, Series VV, due August 1, 2033 0.00%, Series VV, due August 1, 2033  2,672   2,720  0.00%, Series VV, due August 1, 2033  2,577   2,720 
3.00% to 5.00%, Series WW, due August 1, 2033 3.00% to 5.00%, Series WW, due August 1, 2033  935   935  3.00% to 5.00%, Series WW, due August 1, 2033  900   935 
SUBTOTAL LONG-TERM DEBTSUBTOTAL LONG-TERM DEBT  139,943   140,029 SUBTOTAL LONG-TERM DEBT  139,205   140,029 
Add: Premium on Issuance of Long-term DebtAdd: Premium on Issuance of Long-term Debt  1,814   1,920 Add: Premium on Issuance of Long-term Debt  1,760   1,920 
Less: Current Portion of Long-term DebtLess: Current Portion of Long-term Debt  (5,692)  (5,910)Less: Current Portion of Long-term Debt  (5,725)  (5,910)
TOTAL LONG-TERM DEBTTOTAL LONG-TERM DEBT $136,065  $136,039 TOTAL LONG-TERM DEBT $135,240  $136,039 

 

See Notes to Condensed Consolidated Financial Statements.

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MIDDLESEX WATER COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Basis of Presentation and Recent Developments

 

Middlesex Water Company (Middlesex or the Company) is the parent company and sole shareholder of Tidewater Utilities, Inc. (Tidewater), Tidewater Environmental Services, Inc. (TESI), Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), Utility Service Affiliates, Inc. (USA), Utility Service Affiliates  (Perth Amboy) Inc. (USA-PA), and Twin Lakes Utilities, Inc. (Twin Lakes). Southern Shores Water Company, LLC (Southern Shores) and White Marsh Environmental Systems, Inc. (White Marsh) are wholly-owned subsidiaries of Tidewater. The financial statements for Middlesex and its wholly-owned subsidiaries (the Company) are reported on a consolidated basis. All significant intercompany accounts and transactions have been eliminated.

 

The consolidated notes within the 2014 Annual Report on Form 10-K (the 2014 Form 10-K) are applicable to these financial statements and, in the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (including normal recurring accruals) to present fairly the financial position as of JuneSeptember 30, 2015, the results of operations for the three month and sixnine month periods ended JuneSeptember 30, 2015 and 2014 and cash flows for the sixthnine month periods ended JuneSeptember 30, 2015 and 2014. Information included in the Condensed Consolidated Balance Sheet as of December 31, 2014, has been derived from the Company’s audited financial statements for the year ended December 31, 2014 included in the 2014 Form 10-K.

 

Recent Accounting Guidance

As previously disclosed in the 2014 Form 10-K, in May 2014, the Financial Accounting Standards Board (FASB)issued an update to authoritative guidance related to revenue from contracts with customers. The update replaces most of the existing guidance with a single set of principles for recognizing revenue from contracts with customers. The FASB has deferred the effective date of these new revenue recognition standards by one year to January 1, 2018.

 

In April 2015, the FASB issued an update to authoritative guidance related to the presentation of debt issuance costs on the balance sheet, requiring companies to present debt issuance costs as a direct deduction from the carrying value of debt, which the Company will adopt beginning January 1, 2016. The new guidance must be applied retrospectively to each prior period presented. The adoption of this guidance will have no impact on the Company’s statement of income or cash flows and will not have a material impact on the Company’s balance sheet.

 

There are no other new adopted or proposed accounting guidance that the Company is aware of that could have a material impact on the Company’s financial statements.

 

Note 2– Rate and Regulatory Matters

 

Middlesex -In MarchAugust 2015, Middlesex filed a petition withMiddlesex’s Petition to the New Jersey Board of Public Utilities (NJBPU) seeking permission to increase its base water rates by approximatelywas concluded, based on a negotiated settlement, resulting in an increase in annual operating revenues of $5.0 million. The base water rate increase request of $9.5 million, per year.  The requestfiled in March 2015, was necessitated by declining consumption in itsby Middlesex’s Commercial and Industrial class customers, increasing benefit costs for active and retired employee benefits,employees, capital infrastructure investments Middlesex has made, or has committed to make, and regulation-driven increases in other operations and maintenance costs. In July 2015, a Stipulation of Settlement (the Settlement) between Middlesex and the intervening parties was approved in an initial decision by an Administrative Law Judge.  The Settlement recommends a $5.0 million increase in Middlesex’snew base water rates.rates are designed to recover the increased costs and lost revenues, as well as a return on invested capital in rate base of $219.0 million, based on a return on equity of 9.75%. The Settlement must now be presented for consideration and approval by the NJBPU, which the Company expects will occur in the third quarter of 2015.  We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the Settlement.  NJPBU approval of a base water rate increase would concurrentlybecame effective on August 29, 2015. Concurrent with the increase Middlesex was required to reset Middlesex’sits Distribution System Improvement Charge (DSIC) to zero. A DSIC is a rate-mechanism that allows water utilities to recover investments in, and generate a return on, qualifying capital improvements to their water distribution system made between base rate proceedings. The Middlesex DSIC hashad been in effect since May 12, 2015, and hashad generated less than $0.1 million of revenues to date.revenues.

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Tidewater -Effective July 1, 2015,Tidewater’s Delaware Public Service Commission-approved DSIC was increased from 0.31% to 0.37%. Total annual revenues under the Tidewater DSIC are expected to amount to approximately $0.1 million.

 

Pinelands–In October 2015, Pinelands Water and Pinelands Wastewater filed separate petitions with the NJBPU seeking permission to increase base rates by approximately $0.3 million and $0.2 million per year, respectively. These requests were necessitated by capital infrastructure investments both companies have made, or have committed to make, increased operations and maintenance costs and lower non-fixed fee revenues for both companies. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the requests. A decision by the NJBPU in either matter is not expected until the third quarter of 2016.

Note 3 – Capitalization

 

Common Stock

During the sixnine months ended JuneSeptember 30, 2015 and 2014, there were 32,58548,414 common shares (approximately $0.7$1.1 million) and 35,07854,627 common shares (approximately $0.7$1.1 million), respectively, issued under the Middlesex Water Company Investment Plan (the Investment Plan), a direct share purchase and sale and dividend reinvestment plan for Middlesex common stock. In July 2015, the Company filed a registration statement with the United States Securities and Exchange Commission registering an additional 700,000 common shares for potential issuance under the Investment Plan.

 

Long-term Debt

In December 2014, the NJBPU approved Middlesex’s request to borrow up to $5.0 million through the New Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey State Revolving Fund (SRF) loan program. This loan was intended to fund the current year RENEW Program, which is our ongoing initiative to clean and cement all unlined mains in the Middlesex system. Due to administrative changes in the New Jersey SRF loan program, participants are now required to complete construction of the qualifying project prior to closing on a long-term loan or, in the alternative, enter into a construction loan agreement with the NJEIT until the project is complete. At that time, the construction loan can be rolled into the next NJEIT long-term loan. Middlesex is currently reviewing the impact of these new requirements. These changes, along with an assessment of the condition of the mains subject to rehabilitation under the current year RENEW Program, will delay the project until 2016. During the second halffourth quarter of 2015, Middlesex expects to file an update to its petition with the NJPBU seeking approval to modify the previous granted financing timetable to accommodate the New Jersey SRF loan program changes.

 

In the second quarter of 2015, the NJEIT de-obligated future principal payments of $0.5 million on Series FF SRF long-term debt.

 

In October 2014, Tidewater completed a $15.0 million debt transaction. The loan agreement, as amended, allows Tidewater to borrow, in increments at its discretion, until October 30, 2015. Through JuneSeptember 30, 2015, Tidewater has drawn down $11.0$13.0 million, including $3.0$5.0 million for the sixnine months ended JuneSeptember 30, 2015,2015. $11.0 million of the loan is at a fixed interest rate of 4.46%. and $2.0 million is at a market-based variable interest rate. The proceeds were used to pay down short-term debt and for other general corporate purposes. In JulyOctober 2015, Tidewater borrowed an additional $2.0 million under this loan agreement. The interest rate on any borrowings fromdrew down the remaining $2.0 million proceeds will be set at the time of the borrowing.a market-based variable interest rate. Those funds are expected to be used to fund a portion offor general corporate purposes. The interest rates on loans that are variable can be fixed at Tidewater’s ongoing capital program.discretion. The final maturity date of all borrowings under this loan agreement is April 2040.

 

Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments for which it is practicable to estimate that value. The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, trade receivables, accounts payable and notes payable approximate their respective fair values due to the short-term maturities of these instruments. The fair value of the Company’s long-term debt relating to First Mortgage and SRF Bonds (Bonds) is based on quoted market prices for similar

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issues. Under the fair value hierarchy, the fair value of cash and cash equivalents is classified as a Level 1 measurement and the fair value of the Bonds in the table below are classified as Level 2 measurements. The carrying amount and fair value of the Company’s bonds were as follows:

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 June 30, 2015 December 31, 2014 September 30, 2015 December 31, 2014
 Carrying Fair Carrying Fair Carrying Fair Carrying Fair
 Amount Value Amount Value Amount Value Amount Value
First Mortgage Bonds $87,061  $86,859  $88,628  $90,115  $85,143  $87,054  $88,628  $90,115 
SRF Bonds $535  $537  $540  $542  $457  $459  $540  $542 

 

For other long-term debt for which there was no quoted market price and there is not an active trading market, it was not practicable to estimate their fair value (for details, including carrying value, interest rate and due date on these series of long-term debt, please refer to those series noted as “Amortizing Secured Note” and “State Revolving Trust Note” on the Condensed Consolidated Statements of Capital Stock and Long-Term Debt). The carrying amount of these instruments was $52.3$53.6 million at JuneSeptember 30, 2015 and $50.8 million at December 31, 2014. Customer advances for construction have carrying amounts of $20.9 million and $22.0 million at both JuneSeptember 30, 2015 and December 31, 2014.2014, respectively. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases.

 

Note 4 – Earnings Per Share

 

Basic earnings per share (EPS) are computed on the basis of the weighted average number of shares outstanding during the period presented. Diluted EPS assumes the conversion of both the Convertible Preferred Stock $7.00 Series and the Convertible Preferred Stock $8.00 Series.

 

 (In Thousands Except per Share Amounts) (In Thousands Except per Share Amounts)
 Three Months Ended June 30, Three Months Ended September 30,
 2015 2014 2015 2014
Basic:  Income Shares Income Shares Income Shares Income Shares
Net Income $5,089   16,149  $4,728   16,018  $6,743   16,202  $6,758   16,097 
Preferred Dividend  (36)      (36)      (36)      (36)    
Earnings Applicable to Common Stock $5,053   16,149  $4,692   16,018  $6,707   16,202  $6,722   16,097 
                                
Basic EPS $0.31      $0.29      $0.41      $0.42     
                                
Diluted:                                
Earnings Applicable to Common Stock $5,053   16,149  $4,692   16,018  $6,707   16,202  $6,722   16,097 
$7.00 Series Preferred Dividend  17   115   17   140   17   115   17   115 
$8.00 Series Preferred Dividend  6   41   6   41   6   41   6   41 
Adjusted Earnings Applicable to Common Stock $5,076   16,305  $4,715   16,199  $6,730   16,358  $6,745   16,253 
                                
Diluted EPS $0.31      $0.29      $0.41      $0.42     

 

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  (In Thousands Except per Share Amounts)
  Six Months Ended June 30,
  2015 2014
Basic:  Income Shares Income Shares
Net Income $8,724   16,141  $7,897   15,996 
Preferred Dividend  (72)      (79)    
Earnings Applicable to Common Stock $8,652   16,141  $7,818   15,996 
                 
Basic EPS $0.54      $0.49     
                 
Diluted:                
Earnings Applicable to Common Stock $8,652   16,141  $7,818   15,996 
$7.00 Series Preferred Dividend  34   115   41   153 
$8.00 Series Preferred Dividend  12   41   12   41 
Adjusted Earnings Applicable to  Common Stock $8,698   16,297  $7,871   16,190 
                 
Diluted EPS $0.53      $0.49     

  (In Thousands Except per Share Amounts)
  Nine Months Ended September 30,
  2015 2014
Basic:  Income Shares Income Shares
Net Income $15,467   16,161  $14,654   16,030 
Preferred Dividend  (108)      (115)    
Earnings Applicable to Common Stock $15,359   16,161  $14,539   16,030 
                 
Basic EPS $0.95      $0.91     
                 
Diluted:                
Earnings Applicable to Common Stock $15,359   16,161  $14,539   16,030 
$7.00 Series Preferred Dividend  50   115   57   140 
$8.00 Series Preferred Dividend  18   41   18   41 
Adjusted Earnings Applicable to  Common Stock $15,427   16,317  $14,614   16,211 
                 
Diluted EPS $0.95      $0.90     

  

Note 5 – Business Segment Data

 

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

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 (In Thousands)     (In Thousands)
 Three Months Ended Six Months Ended Three Months Ended Nine Months Ended
 June 30, June 30, September 30, September 30,
Operations by Segments: 2015 2014 2015 2014 2015 2014 2015 2014
Revenues:                                
Regulated $27,972  $25,720  $52,878  $49,373  $31,120  $29,346  $83,998  $78,719 
Non – Regulated  3,804   3,624   7,795   7,261   3,650   3,492   11,445   10,752 
Inter-segment Elimination  (110)  (154)  (227)  (271)  (116)  (169)  (343)  (439)
Consolidated Revenues $31,666  $29,190  $60,446  $56,363  $34,654  $32,669  $95,100  $89,032 
                                
Operating Income:                                
Regulated $8,672  $8,144  $14,835  $13,547  $10,938  $11,039  $25,774  $24,585 
Non – Regulated  563   603   1,084   1,167   522   581   1,604   1,748 
Consolidated Operating Income $9,235  $8,747  $15,919  $14,714  $11,460  $11,620  $27,378  $26,333 
                                
Net Income:                                
Regulated $4,809  $4,416  $8,185  $7,297  $6,466  $6,458  $14,653  $13,753 
Non – Regulated  280   312   539   600   277   300   814   901 
Consolidated Net Income $5,089  $4,728  $8,724  $7,897  $6,743  $6,758  $15,467  $14,654 
                                
Capital Expenditures:                                
Regulated $7,734  $4,339  $12,619  $8,474  $6,613  $7,211  $19,232  $15,685 
Non – Regulated  27   —   27   31   38   67   65   98 
Total Capital Expenditures $7,761  $4,339  $12,646  $8,505  $6,651  $7,278  $19,297  $15,783 

 

 As of As of  As of As of 
 June 30, December 31,  September 30, December 31, 
 2015 2014  2015 2014 
Assets:                  
Regulated $582,618  $574,854   $600,452  $574,854  
Non – Regulated  8,150   7,252    6,991   7,252  
Inter-segment Elimination  (4,361)  (6,334)   (4,364)  (6,334) 
Consolidated Assets $586,407  $575,772   $603,079  $575,772  

 

Note 6 – Short-term Borrowings

 

As of JuneSeptember 30, 2015, the Company has established lines of credit aggregating $60.0 million. At JuneSeptember 30, 2015, the outstanding borrowings under these credit lines were $18.0 million at a weighted average interest rate of 1.19%1.20%.

 

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

 

 (In Thousands)
 Three Months Ended Six Months Ended (In Thousands)
 June 30, June 30, Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2015 2014 2015 2014 2015 2014 2015 2014
Average Daily Amounts Outstanding $15,769  $26,874  $16,834  $27,435  $17,304  $28,832  $16,992  $27,906 
Weighted Average Interest Rates  1.18%   1.42%   1.18%   1.44%   1.19%   1.44%   1.18%   1.44% 

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The maturity dates for the $18.0 million outstanding as of JuneSeptember 30, 2015 are all in JulyOctober 2015 and are extendable at the discretion of the Company.

 

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

 

Note 7 – Commitments and Contingent Liabilities

 

Water Supply

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

 

Middlesex also has an agreement with a non-affiliated regulated water utility for the purchase of treated water. This agreement, which expires February 27, 2021, provides for the minimum purchase of 3 mgd of treated water with provisions for additional purchases.

 

Tidewater contracts with the City of Dover, Delaware to purchase 15.0 million gallons of treated water annually.

 

Purchased water costs are shown below:

 

 (In Thousands) (In Thousands)
 Three Months Ended Six Months Ended Three Months Ended Nine Months Ended
 June 30, June 30, September 30, September 30,
 2015 2014 2015 2014 2015 2014 2015 2014
                
Treated $766  $802  $1,495  $1,580  $775  $764  $2,271  $2,344 
Untreated  552   515   1,195   1,121   674   642   1,869   1,763 
Total Costs $1,318  $1,317  $2,690  $2,701  $1,449  $1,406  $4,140  $4,107 

 

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

 

Guarantees -In September 2013, Middlesex entered into an agreement with the County of Monmouth, New Jersey (Monmouth County) to serve as guarantor of the performance of Applied Water Management, Inc. (AWM) to design, construct and operate a leachate pretreatment facility at the Monmouth County Reclamation Center in Tinton Falls, New Jersey. Middlesex expects to act as guarantor of AWM’s performance through at least August 2018 and is contractually obligated to act as guarantor of AWM’s performance through 2028 unless another guarantor acceptable to Monmouth County is identified. Construction of the facility, which is being financed by Monmouth County, is substantially complete and beganthe facility is currently in September 2014. In addition,the testing phase. Middlesex also entered into agreements with AWM and Natural Systems Utilities, Inc. (NSU), the parent company of AWM, whereby,AWM. Under these agreements, Middlesex earns a fee for providing the guaranty of AWM’s performance to Monmouth County, Middlesex provides operational support to the project, and AWM and NSU, serving as guarantor to Middlesex with respect to the performance of AWM, indemnify Middlesex against any claims that may arise under the Middlesex guaranty to Monmouth County.

 

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Middlesex believes it is unlikely any payments would need to be made under Middlesex’s guaranty of AWM’s performance to Monmouth County. If asked to perform under the guaranty to Monmouth County, and, if AWM and NSU, as guarantor to Middlesex, do not fulfill their obligations to indemnify Middlesex against any claims that may arise under the Middlesex guaranty to Monmouth County, Middlesex would be required to fulfill the construction and operational commitments of AWM. As of JuneSeptember 30, 2015 and December 31, 2014, the liability recognized in Other Non-Current Liabilities on the balance sheet for the guaranty is approximately $0.2 million and $0.3 million.million, respectively.

 

Construction

The Company has budgeted approximately $24.2$22.4 million for its construction program in 2015. The actual timing and amount of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain projects.

 

Litigation

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

 

Change in Control Agreements

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

 

Note 8 – Employee Benefit Plans

 

Pension Benefits

The Company’s Pension Plan covers all active employees hired prior to April 1, 2007. Employees hired after March 31, 2007 are not eligible to participate in this plan, but do participate in a defined contribution plan that provides an annual contribution at the discretion of the Company, based upon a percentage of the participants’ compensation. In order to be eligible for contribution, the eligible employee must be employed by the Company on December 31st of the year to which the contribution relates. For the three months ended June 30, 2015 and 2014, the Company made Pension Plan cash contributions of $1.0 million and $0.8 million, respectively. For the six months ended JuneSeptember 30, 2015 and 2014, the Company made Pension Plan cash contributions of $1.0 million and $1.3 million, respectively. For the nine months September 30, 2015 and 2014, the Company made Pension Plan cash contributions of $2.0 million and $2.5 million, respectively. The Company expects to make Pension Plan cash contributions of approximately $2.3$1.3 million over the remainder of the current calendar year. The Company also maintains an unfunded supplemental retirement benefit plan for certain active and retired Company officers and currently pays $0.3 million in annual benefits to the retired participants.

 

Other Postretirement Benefits

The Company’s retirement plan other than pensions (Other Benefits Plan) covers substantially all of its current retired employees. Employees hired after March 31, 2007 are not eligible to participate in this plan. Coverage includes healthcare and life insurance. For the three months ended JuneSeptember 30, 2015, the Company did not make any Other Benefits Plan cash contributions. For the three months ended September 30, 2014, the Company made Other Benefits Plan cash contributions of $0.5 million. For the nine months ended September 30, 2015 and 2014, the Company made Other Benefits Plan cash contributions of $0.8 million and $0.2 million, respectively. For the six months ended June 30, 2015 and 2014, the Company made Other Benefits Plan cash contributions of $0.8 million and $0.4$0.9 million, respectively. The Company expects to make Other Benefits Plan cash contributions of approximately $0.9$0.3 million over the remainder of the current calendar year.

 

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

 

 (In Thousands) (In Thousands)
 Pension Benefits Other Benefits Pension Benefits Other Benefits
 Three Months Ended June 30, Three Months Ended September 30,
 2015 2014 2015 2014 2015 2014 2015 2014
                
Service Cost $639  $474  $343  $258  $639  $473  $343  $258 
Interest Cost  724   671   480   448   724   670   480   448 
Expected Return on Assets  (980)  (884)  (527)  (484)  (980)  (883)  (527)  (484)
Amortization of Unrecognized Losses  411   104   565   353   411   104   565   353 
Amortization of Unrecognized Prior Service Cost (Credit)  —   —   (432)  (432)  —   1   (432)  (432)
Net Periodic Benefit Cost $794  $365  $429  $143  $794  $365  $429  $143 

 

 (In Thousands) (In Thousands)
 Pension Benefits Other Benefits Pension Benefits Other Benefits
 Six Months Ended June 30, Nine Months Ended September 30,
 2015 2014 2015 2014 2015 2014 2015 2014
                
Service Cost $1,279  $947  $686  $516  $1,918  $1,420  $1,029  $774 
Interest Cost  1,447   1,341   961   896   2,171   2,011   1,441   1,344 
Expected Return on Assets  (1,959)  (1,767)  (1,053)  (969)  (2,939)  (2,650)  (1,580)  (1,453)
Amortization of Unrecognized Losses  823   208   1,131   707   1,234   312   1,696   1,060 
Amortization of Unrecognized Prior Service Cost (Credit)  —   1   (864)  (864)  —   2   (1,296)  (1,296)
Net Periodic Benefit Cost $1,590  $730  $861  $286  $2,384  $1,095  $1,290  $429 

 

Note 9 – Income Taxes

 

The Internal Revenue Service (IRS) has issued final regulations pertaining to the deductibility of costs that qualify as repairs on tangible property. The regulations, which the Company will adoptadopted by filing a change in accounting method request with its 2014 Federal income tax return, redefine the characteristics previously used by the Company to determine tax deductibility of expenditures associated with tangible property. Under the regulations, the IRS has provided guidelines for certain industries, but not for regulated public water utilities. Consequently, the Company undertook a comprehensive study to support the adoption and integration of the new regulations into its tax policies prospectively, and to also determine the level of deductibility for income tax purposes if any, for expenditures incurred on projects completed in prior years where such expenditures were capitalized, but may now be considered currently deductible as repairs under the new regulations. The Company is currently preparingIncluded in its 2014 Federal income tax return, filed in September 2015, the Company submitted support which results in a net reduction of $17.6 million in taxes due to the federal government. While the Company believes that the deduction for qualifying tangible property repair costs included in its tax return is expectedproper, it could be challenged under an examination by the IRS. Therefore, the Company has recorded a provision of $2.3 million against refundable taxes. The Company believes that the net operating loss carry-forward resulting from adoption of the regulations (approximately $7.8 million) is more likely than not to be filed on or before September 15, 2015, and will include the final determined amount of expenditures deductible under the new regulations. Results from the aforementioned study, which is subject to completion and requires filing with the IRS, preliminarily indicate there may be approximately $19.0 million of refundable taxes previously paid to the IRS. However, itrecovered.

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It is probable that any net tax benefits that may resultresulted from adopting the study findings will be considered in determining the revenue requirement used to set base rates for the Company in a future regulatory proceeding. Consequently, adoption of the new regulations did not and will not have a significant impact on the Company’s financial statements or effective tax rate.Adoption of these new regulations resulted in a $10.3 million receivable for federal income taxes ($0.5 million of which is current), a $1.5 million increase in regulatory assets for additional expenses incurred expected to be recovered from customers in the future, a $5.0 million decrease in accrued taxes for the amount of refund applied against future tax payments and a $16.8 million increase in accumulated deferred income taxes.

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of Middlesex Water Company (Middlesex or the Company) included elsewhere herein and with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Forward-Looking Statements

Certain statements contained in this periodic report and in the documents incorporated by reference constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The Company intends that these statements be covered by the safe harbors created under those laws.  These statements include, but are not limited to:

 

-statements as to expected financial condition, performance, prospects and earnings of the Company;
-statements regarding strategic plans for growth;
-statements regarding the amount and timing of rate increases and other regulatory matters, including the recovery of certain costs recorded as regulatory assets;
-statements as to the Company’s expected liquidity needs during the upcoming fiscal year and beyond and statements as to the sources and availability of funds to meet its liquidity needs;
-statements as to expected customer rates, consumption volumes, service fees, revenues, margins, expenses and operating results;
-statements as to financial projections;
-statements as to the expected amount of cash contributions to fund the Company’s retirement benefit plans, anticipated discount rates and rates of return on retirement benefit plan assets;
-statements as to the ability of the Company to pay dividends;
-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 the Company’s plans to renew municipal franchises and consents in the territories it serves;
-statements as to trends; and
-statements regarding the availability and quality of our water supply.

These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from anticipated results and outcomes include, but are not limited to:

 

-the effects of general economic conditions;
-increases in competition in the markets served by the Company;
-the ability of the Company to control operating expenses and to achieve efficiencies in its operations;
-the availability of adequate supplies of water;
-actions taken by government regulators, including decisions on rate increase requests;
-new or additional water quality standards;
-weather variations and other natural phenomena;
-acts of war or terrorism;
-significant changes in the pace of housing development in Delaware;development;
-the availability and cost of capital resources; and
-other factors discussed elsewhere in this quarterly report.

 

Many of these factors are beyond the Company’s ability to control or predict. Given these uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which only speak to the Company’s understanding as of the date of this report. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.

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For an additional discussion of factors that may affect the Company’s business and results of operations, see Item 1A. - Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

Overview

 

Middlesex Water Company (Middlesex) has operated as a water utility in New Jersey since 1897, in Delaware through our wholly-owned subsidiary, Tidewater Utilities, Inc. (Tidewater), since 1992 and in Pennsylvania through our wholly-owned subsidiary, Twin Lakes Utilities, Inc. (Twin Lakes), since 2009. We are in the business of collecting, treating and distributing water for domestic, commercial, municipal, industrial and fire protection purposes. We also operate two New Jersey municipal water and wastewater systems under contract and provide regulated wastewater services in New Jersey and Delaware through our subsidiaries. We are regulated as to rates charged to customers for water and wastewater services, as to the quality of water service we provide and as to certain other matters in New Jersey, Delaware and Pennsylvania. Only our Utility Service Affiliates, Inc. (USA), Utility Service Affiliates (Perth Amboy), Inc. (USA-PA) and White Marsh Environmental Services, Inc. (White Marsh) subsidiaries are not regulated utilities.

 

Our New Jersey water utility system (the Middlesex System) provides water services to approximately 60,000 retail customers, primarily in central New Jersey. The Middlesex System also provides water service under contract to municipalities in central New Jersey with a total population of approximately 219,000. Our Bayview subsidiary provides water services in Downe Township, New Jersey. Our other New Jersey subsidiaries, Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), provide water and wastewater services to residents in Southampton Township, New Jersey.

 

We have an investment in a joint venture, Ridgewood Green RME, LLC, that owns and operates facilities to optimize the production of electricity at the Village of Ridgewood, New Jersey wastewater treatment plant and other municipal facilities.

 

In partnershipconjunction with our subsidiary, USA-PA, we operate the water supply system and wastewater system for the City of Perth Amboy, New Jersey (Perth Amboy). under contract.

 

USA offers residential customers in New Jersey and Delaware water service line and sewer lateral maintenance programs (LineCare). USA entered into a marketing agreement, expiring in 2021, with HomeServe USA (HomeServe), a leading provider of home maintenance service programs to service, develop and grow USA’s LineCare customer base. USA receives a service fee for the billing, cash collection and other administrative matters associated with HomeServe’s service contracts. USA also operates the Borough of Avalon, New Jersey’s (Avalon) water utility, sewer utility and storm water system.system under contract. In addition to performing the day to day operations, USA is responsible for billing, collections, customer service, emergency responses and management of capital projects funded by Avalon. USA also provides unregulated water and wastewater services under contract with several additional New Jersey municipalities.

 

Our Delaware subsidiaries, Tidewater and Southern Shores Water Company, LLC (Southern Shores), provide water services to approximately 40,000 retail customers in New Castle, Kent and Sussex Counties, Delaware. Tidewater’s subsidiary, White Marsh, services approximately 4,000 customers in Kent and Sussex Counties through various operations and maintenance contracts.

 

Our Tidewater Environmental Services, Inc. (TESI) subsidiary provides wastewater services to approximately 3,300 residential retail customers.

 

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

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The majority of our revenue is generated from retail and contract water services to customers in our service areas. We record water service revenue as such service is rendered and include estimates for amounts unbilled at the end of the period for services provided after the last billing cycle. Fixed service charges are billed in advance by our subsidiary, Tidewater, and are recognized in revenue as the service is provided.

 

Our ability to increase operating income and net income is based significantly on four factors: weather, adequate and timely rate relief, effective cost management, and customer growth. These factors are evident in the discussions below which compare our results of operations with the prior period.

 

Recent Developments

 

Middlesex Base Water Rate FilingIncrease -In MarchAugust 2015, Middlesex filed a petition withMiddlesex’s Petition to the New Jersey Board of Public Utilities (NJBPU) seeking permission to increase its base water rates by approximatelywas concluded, based on a negotiated settlement, resulting in an increase in annual operating revenues of $5.0 million. The base water rate increase request of $9.5 million, per year.  The requestfiled in March 2015, was necessitated by declining consumption in itsby Middlesex’s Commercial and Industrial class customers, increasing benefit costs for active and retired employee benefits,employees, capital infrastructure investments, Middlesex has made, or has committed to make, and regulation-driven increases in other operations and maintenance costs. In July 2015, a Stipulation of Settlement (the Settlement) between Middlesex and the intervening parties was approved in an initial decision by an Administrative Law Judge.  The Settlement recommends a $5.0 million increase in Middlesex’snew base water rates.rates are designed to recover the increased costs and lost revenues, as well as a return on invested capital in rate base of $219.0 million, based on a return on equity of 9.75%. The Settlement must now be presented for consideration and approval by the NJBPU, which the Company expects will occur in the third quarter of 2015.  We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the Settlement.  NJPBU approval of a base water rate increase would concurrentlybecame effective on August 29, 2015. Concurrent with the increase, Middlesex was required to reset Middlesex’sits Distribution System Improvement Charge (DSIC) to zero. A DSIC is a rate-mechanism that allows water utilities to recover investments in, and generate a return on, qualifying capital improvements to their water distribution system made between base rate proceedings. The Middlesex DSIC hashad been in effect since May 12, 2015, and hashad generated less than $0.1 million of revenues to date.revenues.

 

Tidewater DSIC -Effective July 1, 2015, Tidewater’s Delaware Public Service Commission-approved DSIC was increased from 0.31% to 0.37%. Total annual revenues under the Tidewater DSIC are expected to amount to approximately $0.1 million.

 

Pinelands–In October 2015, Pinelands Water and Pinelands Wastewater filed separate petitions with the NJBPU seeking permission to increase base rates by approximately $0.3 million and $0.2 million per year, respectively. These requests were necessitated by capital investments both companies have made, or have committed to make, increased operations and maintenance costs and lower non-fixed fee revenues for both companies. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the request. A decision by the NJBPU in either matter is not expected until the third quarter of 2016.

Income Taxes -The Internal Revenue Service (IRS) has issued final regulations pertaining to the deductibility of costs that qualify as repairs on tangible property. The regulations, which the Company will adoptadopted by filing a change in accounting method request with its 2014 Federal income tax return, redefine the characteristics previously used by the Company to determine tax deductibility of expenditures associated with tangible property. Under the regulations, the IRS has provided guidelines for certain industries, but not for regulated public water utilities. Consequently, the Company undertook a comprehensive study to support the adoption and integration of the new regulations into its tax policies prospectively, and to also determine the level of deductibility for income tax purposes if any, for expenditures incurred on projects completed in prior years where such expenditures were capitalized, but may now be considered currently deductible as repairs under the new regulations. The Company is currently preparingIncluded in its 2014 Federal income tax return, filed in September 2015, the Company submitted support which results in a net reduction of $17.6 million in taxes due to the federal government. While the Company believes that the deduction for qualifying tangible property repair costs included in its tax return is expectedproper, it could be challenged under an examination by the IRS. Therefore, the Company has recorded a provision against refundable taxes of $2.3 million. The Company believes that the net operating loss carry-forward resulting from adoption of the regulations (approximately $7.8 million) is more likely than not to be filed on or before September 15, 2015, and will include the final determined amount of expenditures deductible under the new regulations. Results from the aforementioned study, which is subject to completion and requires filing with the IRS, preliminarily indicate there may be approximately $19.0 million of refundable taxes previously paid to the IRS. However, itrecovered.

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It is probable that any net tax benefits that may resultresulted from adopting the study findings will be considered in determining the revenue requirement used to set base rates for the Company in a future regulatory proceeding. Consequently, adoption of the new regulations did not and will not have a significant impact on the Company’s financial statements or effective tax rate.Adoption of these new regulations resulted in a $10.3 million receivable for federal income taxes ($0.5 million of which is current), a $1.5 million increase in regulatory assets for additional expenses incurred expected to be recovered from customers in the future, a $5.0 million decrease in accrued taxes for the amount of refund applied against future tax payments and a $16.8 million increase in accumulated deferred income taxes.

 

Outlook

 

Revenues in the fourth quarter of 2015 are expected to be favorably impacted by the following:Middlesex’s August 2015 base water rate increase and Tidewater’s July 2015 DSIC rate increase (see“Recent Developments”above regardingMiddlesex’s and Tidewater’s rate increases).

·The full year effect of Middlesex’s and Tidewater’s base water rate increases, which became effective in July 2014 and August 2014, respectively, TESI’s Plantations system base wastewater rate increase effective in October 2014 and Tidewater’s Dover Air Force Base contract, which Tidewater began serving in October 2014 (see Note 2 – Rate and Regulatory Matters in Middlesex’s 2014 Annual Report on Form 10-K for further discussion on these matters);
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·If approved, either in full or partially, a Middlesex base water rate increase (see “Recent Developments-Middlesex Base Water Rate Filing” above); and
·The 2015 Tidewater DSIC and Middlesex DSIC (see“Recent Developments”above regardingTidewater’s andMiddlesex’s DSIC);

 

Revenues and earnings are influenced by weather. Changes in water usage patterns, as well as increases in capital expenditures and operating costs, are significant factors in determining the timing and extent of rate increase requests. We continue, on an ongoing basis, to implement plans to further streamlinegenerate efficiencies in our operations and further reduce operating costs.

 

A market-driven lower discount rate, combined with the adoption of a new mortality table that reflects longer life expectancies, has resulted in higher employee retirement benefit plans expense in 2015. 

 

Our strategy for profitable growth is focused on fourfive key areas:

 

·Prudent acquisitions of investor- and municipally-owned water and wastewater utilities;

·Timely and adequate recovery of prudent investments in utility plant required to maintain appropriate utility services;

 

·Operate municipal and industrial water and wastewater systems under contract;

 

·Invest in renewable energy projects that are complementary to the provision of water and wastewater services, and to our core water and wastewater competencies; and

 

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

 

Operating Results by Segment

 

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

 

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

 

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Results of Operations – Three Months Ended JuneSeptember 30, 2015

 

 (In Thousands)  (In Thousands) 
 Three Months Ended June 30,  Three Months Ended September 30, 
 2015 2014  2015  2014 
 Regulated Non-
Regulated		 Total Regulated Non-
Regulated		 Total  Regulated Non-
Regulated		 Total  Regulated Non-
Regulated		 Total 
Revenues $27,952  $3,714  $31,666  $25,656  $3,534  $29,190  $31,093  $3,561  $34,654  $29,266  $3,403  $32,669 
Operations and maintenance expenses  13,208   3,021   16,229   11,771   2,792   14,563   13,856   2,916   16,772   12,261   2,695   14,956 
Depreciation expense  2,938   44   2,982   2,790   47   2,837   2,988   44   3,032   2,835   45   2,880 
Other taxes  3,134   86   3,220   2,951   92   3,043   3,311   79   3,390   3,131   82   3,213 
Operating income  8,672   563   9,235   8,144   603   8,747   10,938   522   11,460   11,039   581   11,620 
                                                
Other income, net  133   (5)  128   51   (5)  46   195   26   221   85   —   85 
Interest expense  1,474   22   1,496   1,493   22   1,515   1,483   22   1,505   1,493   23   1,516 
Income taxes  2,522   256   2,778   2,286   264   2,550   3,184   249   3,433   3,173   258   3,431 
Net income $4,809  $280  $5,089  $4,416  $312  $4,728  $6,466  $277  $6,743  $6,458  $300  $6,758 

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Operating Revenues

 

Operating revenues for the three months ended JuneSeptember 30, 2015 increased $2.5$2.0 million from the same period in 2014. This increase was primarily related to the following factors:

 

·Middlesex System revenues increased $1.3 million, primarily due to a NJBPU-approved rate increaseincreases implemented in July 2014 ($1.20.3 million) and increasedAugust 2015 ($0.4 million) and higher customer demand primarily amongst Middlesex’sby both General Metered Service (GMS) customers ($0.3 million) and wholesale contract customers ($0.10.3 million);
·Tidewater System revenues increased $0.9$0.3 million primarily due to higher customer demand offset by decreased final rates implementedand Tidewater’s Dover Air Force Base system acquisition, which Tidewater began serving in August 2014 as compared to interim rates implemented in FebruaryOctober 2014; and
·USA-PA’s revenues increased $0.3$0.2 million, primarily from scheduled fixed fees increases under our contract with the Perth Amboy.Amboy; and
·Revenues for all other categories increased $0.2 million.

 

Operation and Maintenance ExpenseExpenses

 

Operation and maintenance expenses for the three months ended JuneSeptember 30, 2015 increased $1.7$1.8 million from the same period in 2014, primarily related to the following factors:

 

·Employee benefit expenses increased $0.7$1.0 million due to higher employee healthcare insurance costs and higher retirement plan costs resulting from a lower discount rate than in the prior year and the adoption of new mortality tables, reflecting longer life expectancies, both used in the calculation of the 2015 net periodic plan costs;
·Variable production costs increased $0.2$0.4 million primarily due to an increase in the rate the Company pays for residuals removal in our Middlesex System;
·Increased repair, inspectionSystem and preventative maintenance activity, as compared to 2014, resulted in higher costs of $0.1 millionincreased production in our Middlesex System;and Tidewater systems;
·USA-PA’s operation and maintenance costs increased $0.3$0.2 million, primarily due to higher subcontractor expenditures;
·USA’s operation and maintenance costs increased $0.1 million, due to expenditures connected withfor billable supplemental services under USA’s contract to operate the Avalon water, utility, sewer utility and storm water system;systems; and
·Operation and maintenance expenses for all other categories increased $0.3$0.1 million.

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Depreciation

 

Depreciation expense for the three months ended JuneSeptember 30, 2015 increased $0.1$0.2 million from the same period in 2014 due to a higher level of utility plant in service.

 

Other Taxes

 

Other taxes for the three months ended JuneSeptember 30, 2015 rose by $0.2 million from the same period in 2014, primarily due to higher revenue relatedrevenue-related taxes on increased revenues in our Middlesex system.

 

Other Income, net

 

Other Income, net for the three months ended JuneSeptember 30, 2015 increased $0.1 million from the same period in 2014, primarily due to higher allowance for funds used during construction, resulting from a higher averagelevel of capital projects in progress.

 

Interest Charges

 

Interest charges for the three months ended JuneSeptember 30, 2015 remained consistent withthe same period in 2014.

 

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Income Taxes

 

Income taxes for the three months ended JuneSeptember 30, 2015 increased $0.2 millionfromtheremained consistent withthe same period in 2014, primarily due to increased pre-tax operating income in 2015 as compared to 2014.

 

Net Income and Earnings Per Share (EPS)

 

Net income for the three months ended JuneSeptember 30, 2015 increased $0.4 million aswas down slightly compared with thewiththe same period in 2014. BasicA need for rate relief from our New Jersey regulators in the Middlesex system, combined with a higher number of common shares outstanding, caused basic and diluted earnings per share were $0.31 and $0.29EPS to be lower by $0.01 for the three months ended JuneSeptember 30, 2015 and(EPS $0.41) when compared to the three months ended September 30, 2014 respectively.(EPS $0.42).

 

Results of Operations – SixNine Months Ended JuneSeptember 30, 2015

 

  (In Thousands) 
  Six Months Ended June 30, 
  2015  2014 
  Regulated  Non-
Regulated		  Total  Regulated  Non-
Regulated		  Total 
Revenues $52,830  $7,616  $60,446  $49,281  $7,082  $56,363 
Operations and maintenance expenses  26,039   6,278   32,317   24,362   5,638   30,000 
Depreciation expense  5,843   87   5,930   5,559   93   5,652 
Other taxes  6,113   167   6,280   5,813   184   5,997 
  Operating income  14,835   1,084   15,919   13,547   1,167   14,714 
                         
Other income, net  190   (6)  184   110   (6)  104 
Interest expense  2,510   44   2,554   2,572   46   2,618 
Income taxes  4,330   495   4,825   3,788   515   4,303 
  Net income $8,185  $539  $8,724  $7,297  $600  $7,897 

  (In Thousands) 
  Nine Months Ended September 30, 
  2015  2014 
  Regulated  Non-Regulated  Total  Regulated  Non-Regulated  Total 
Revenues $83,923  $11,177  $95,100  $78,547  $10,485  $89,032 
Operations and maintenance expenses  39,894   9,195   49,089   36,624   8,333   44,957 
Depreciation expense  8,830   132   8,962   8,394   138   8,532 
Other taxes  9,425   246   9,671   8,944   266   9,210 
  Operating income  25,774   1,604   27,378   24,585   1,748   26,333 
                         
Other income, net  385   20   405   196   (6)  190 
Interest expense  3,992   66   4,058   4,066   68   4,134 
Income taxes  7,514   744   8,258   6,962   773   7,735 
  Net income $14,653  $814  $15,467  $13,753  $901  $14,654 

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Operating Revenues

 

Operating revenues for the sixnine months ended JuneSeptember 30, 2015 increased $4.1$6.1 million from the same period in 2014. This increase was primarily related to the following factors:

 

·Middlesex System revenues increased $1.8$3.2 million primarily due to a NJBPU-approved rate increaseincreases implemented in July 2014 ($2.42.7 million) partially offset by lowerand August 2015 ($0.4 million) and higher customer demand, primarily by both General Metered Service customers ($0.2 million) andMiddlesex’s wholesale contract customers ($0.2 million);
·Tidewater System revenues increased $1.5$1.8 million primarily due to higher customer demand offset by decreased final rates implementedand Tidewater’s Dover Air Force Base system acquisition, which Tidewater began serving in August 2014 as compared to interim rates implemented in FebruaryOctober 2014;
·USA-PA’s revenues increased $0.5$0.7 million, from scheduled fixed fees increases under our contract with the Perth Amboy ($0.60.8 million) partially offset by lower revenues ($0.1 million) under the same contract for supplemental services;
·USA’sTESI’s revenues increased $0.1$0.2 million, primarily due to higher supplemental services revenues earned under our contract to operate the Avalon water utility, sewer utilitybase wastewater rate increases effective in October 2014 and storm water system;April 2015; and
·All other revenues increased $0.2 million.

 

Operation and Maintenance ExpenseExpenses

 

Operation and maintenance expenses for the sixnine months ended JuneSeptember 30, 2015 increased $2.3$4.1 million from the same period in 2014, primarily related to the following factors:

 

·Employee benefit expenses increased $1.4$2.4 million due to higher employee healthcare insurance costs and higher retirement plan costs resulting from a lower discount rate than in the prior year and the adoption of new mortality tables, reflecting longer life expectancies, both used in the calculation of the 2015 net periodic plan costs;
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·Variable production costs increased $0.1$0.6 million, primarily due to an increase in the rate the Company pays for residuals removal in our Middlesex System partially offset by lower customer demandand increased production in our Middlesex System;
·Decreased cold weather main break activity, as compared to 2014, resulted in lower labor overtime costs of $0.1 million and lower non-labor costs of $0.1 million in our Middlesex System;Tidewater systems;
·USA-PA’s operation and maintenance costs increased $0.6$0.7 million, primarily due to higher subcontractor expenditures; and
·USA’s operation and maintenance costs increased $0.2$0.4 million, primarily due to expenditures for billable supplemental services under USA’s contract to serve Avalon;operate the Avalon water, sewer and
·Operation and maintenance expenses for all other categories increased $0.1 million. storm water systems.

 

Depreciation

 

Depreciation expense for the sixnine months ended JuneSeptember 30, 2015 increased $0.3$0.4 million from the same period in 2014 due to a higher level of utility plant in service.

 

Other Taxes

 

Other taxes for the sixnine months ended JuneSeptember 30, 2015 increased $0.3$0.5 million from the same period in 2014, primarily due to higher revenue related taxes on increased revenues in our Middlesex system.

 

Other Income, net

 

Other Income, net for the sixnine months ended JuneSeptember 30, 2015 increased $0.1million$0.2 million from the same period in 2014, primarily due to primarily due to higher allowance for funds used during construction, resulting from a higher averagelevel of capital projects in progress.progress, and lower business development costs at our TESI subsidiary.

 

Interest Charges

 

Interest charges for the sixnine months ended JuneSeptember 30, 2015 decreased $0.1 million fromthe same period in 2014, primarily due to lower average interest rates on decreased average total debt outstanding.

 

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Income Taxes

 

Income taxes for the sixnine months ended JuneSeptember 30, 2015 increased $0.5 millionfromthe same period in 2014, primarily due to increased pre-tax operating income in 2015 as compared to 2014.

 

Net Income and Earnings Per Share

 

Net income for the sixnine months ended JuneSeptember 30, 2015 increased $0.8 million as compared with the same period in 2014. Basic earnings per share were $0.54$0.95 and $0.49$0.91 for the sixnine months ended JuneSeptember 30, 2015 and 2014, respectively. Diluted earnings per share were $0.53$0.95 and $0.49$0.90 for the sixnine months ended JuneSeptember 30, 2015 and 2014, respectively.

 

Liquidity and Capital Resources

 

Operating Cash Flows

 

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

 

For the sixnine months ended June,September 30, 2015, cash flows from operating activities increased $6.4$6.7 million to $20.2$29.2 million. The increase in cash flows from operating activities primarily resulted from the timing of vendor andpayments, lower income tax payments.payments and higher net income. The $20.2$29.2 million of net cash flow from operations enabled us to fund all utility plant expenditures internally for the period.

 

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Capital Expenditures and Commitments

 

To fund our capital program, we use internally generated funds, short-term and long-term debt borrowings, proceeds from sales of common stock under the Middlesex Water Company Investment Plan (Investment Plan) and proceeds from sales offerings to the public of our common stock. See below for a more detailed discussion regarding the funding of our capital program.

 

The capital investment program for 2015 is currently estimated to be $24.2$22.4 million. Through JuneSeptember 30, 2015, we have expended $12.6$19.3 million and expect to incur approximately $11.6$3.1 million for capital projects for the remainder of 2015.

 

We currently project that we may expend approximately $71.4$74.5 million for capital projects in 2016 and 2017. The actual amount and timing of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain capital projects.

 

To fund our capital program for the remainder of 2015, we plan on utilizing:

·Internally generated funds.
·Proceeds from the sale of common stock through the Investment Plan.
·Remaining funds available ($4.0 million as of June 30, 2015) under Tidewater’s October 2014 loan (see“Long-Term Debt” in Note 3 – Capitalization for further discussion of this loan).
·Short-term borrowings, if necessary, through $60.0 million of available lines of credit with several financial institutions. As of JuneSeptember 30, 2015, there remains $42.0 million to draw upon.

 

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

 

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Item 3. Quantitative and Qualitative Disclosures of Market Risk

 

We are exposed to market risk associated with changes in interest rates and commodity prices. 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 2018 to 2047. Over the next twelve months, the Company will pay approximately $5.7 million of the current portion of existing long-term debt instruments. Applying a hypothetical change in the rate of interest charged by 10% on those borrowings, would not have a material effect on our earnings.

 

Our risks associated with commodity price increases for chemicals, electricity and other commodities are reduced through contractual arrangements and the ability to recover price increases through rates. Non-performance by these commodity suppliers could have a material adverse impact on our results of operations, financial position and cash flows.

 

We are exposed to credit risk for both our Regulated and Non-Regulated business segments. Our Regulated operations serve residential, commercial, industrial and municipal customers while our Non-Regulated operations engage in business activities with developers, government entities and other customers. Our primary credit risk is exposure to customer default on contractual obligations and the associated loss that may be incurred due to the non-payment of customer accounts receivable balances. Our credit risk is managed through established credit and collection policies which are in compliance with applicable regulatory requirements and involve monitoring of customer exposure and the use of credit risk mitigation measures such as letters of credit or prepayment arrangements. Our credit portfolio is diversified with no significant customer or industry concentrations. In addition, our Regulated businesses are generally able to recover all prudently incurred costs including uncollectible customer accounts receivable expenses and collection costs through rates.

 

The Company's retirement benefit plan assets are exposed to fluctuating market prices of debt and equity securities. Changes to the Company's retirement benefit plan assets’ value can impact the Company's retirement benefit plan expense, funded status and future minimum funding requirements. Our risk is reduced through our ability to recover retirement benefit plan costs through rates.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

As required by Rule 13a-15 under the Securities and Exchange Act of 1934 (the Exchange Act), an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was conducted by the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Report. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding disclosure.

 

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PART II.  OTHER INFORMATION

 

Item 1.Legal Proceedings

 

None.

 

Item 1A.Risk Factors

 

The information about risk factors does not differ materially from those set forth in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

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

 

None.

 

Item 3.Defaults Upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

None.

 

Item 6.

Exhibits

 

10.31*10.33Registration Statement No. 333-205698, Form S-3, under Securities ActUncommitted Line of 1933 filed July 31, 2015, relating to the Middlesex Water Company Investment Plan

10.32Amended and Restated LoanCredit Agreement between registrant, registrant’s subsidiaries and PNC Bank of America, N.A.

 

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

 

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

 

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

 

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

 

101.INSXBRL Instance Document

 

101.SCHXBRL Schema Document

 

101.CALXBRL Calculation Linkbase Document

 

101.LABXBRL Labels Linkbase Document

 

101.PREXBRL Presentation Linkbase Document

 

101.DEFXBRL Definition Linkbase Document

 

* Previously filed.23 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 MIDDLESEX WATER COMPANY
   
 By:/s/A. Bruce O’Connor             
  A. Bruce O’Connor
  Vice President, Treasurer and
  Chief Financial Officer
   (Principal Accounting Officer)

 

 

Date: AugustNovember 3, 2015