SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For Quarter Ended: September 30, 2003 No. 0-422
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MIDDLESEX WATER COMPANY
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(Exact name of registrant as specified in its charter)
INCORPORATED IN NEW JERSEY 22-1114430
- -------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 RONSON ROAD, ISELIN, NJ 08830
- ---------------------------- -----
(Address of principal executive offices) (Zip Code)
(732) 634-1500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that this registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 30 days.
YES [X] NO [_]
------------. ------------.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-2 of the Securities Exchange Act of 1934). Yes[X] No [_]
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 2003
----- -------------------------------
Common Stock, No Par Value 10,547,180*
*- Outstanding share amount reflects the effect of a four-for-three stock split
effective November 14, 2003.
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements:
Consolidated Statements of Income 1
Consolidated Balance Sheets 2
Consolidated Statements of Capitalization and Retained Earnings 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures of Market Risk 13
Item 4. Controls and Porcedures 14
PART II. OTHER INFORMATION 15
SIGNATURE 15
CERTIFICATIONS 16-19
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Nine Months Twelve Months
Ended September 30, Ended September 30, Ended September 30,
2003 2002 2003 2002 2003 2002
----------- ----------- ----------- ----------- ----------- -----------
Operating Revenues $17,585,575 $16,983,016 $48,564,914 $46,737,754 $63,759,946 $62,412,869
----------- ----------- ----------- ----------- ----------- -----------
Operating Expenses:
Operations 8,687,828 7,995,208 24,292,699 22,733,489 31,478,131 30,277,791
Maintenance 830,877 684,530 2,612,556 2,001,929 3,457,835 2,735,295
Depreciation 1,342,059 1,072,630 3,960,856 3,681,178 5,242,946 4,958,813
Other Taxes 2,157,060 2,096,025 6,088,669 5,915,163 8,032,379 7,936,667
Federal Income Taxes 1,067,414 1,381,791 2,626,345 3,089,880 3,414,042 4,106,216
----------- ----------- ----------- ----------- ----------- -----------
Total Operating Expenses 14,085,238 13,230,184 39,581,125 37,421,639 51,625,333 50,014,782
----------- ----------- ----------- ----------- ----------- -----------
Operating Income 3,500,337 3,752,832 8,983,789 9,316,115 12,134,613 12,398,087
Other Income:
Allowance for Funds Used During Construction 95,448 34,465 253,253 186,439 336,482 249,014
Other - Net 40,721 77,893 15,188 110,621 76,777 27,786
----------- ----------- ----------- ----------- ----------- -----------
Total Other Income 136,169 112,358 268,441 297,060 413,259 276,800
Income Before Interest Charges 3,636,506 3,865,190 9,252,230 9,613,175 12,547,872 12,674,887
----------- ----------- ----------- ----------- ----------- -----------
Interest Charges 1,243,888 1,293,379 3,830,926 3,875,299 5,099,090 5,159,272
----------- ----------- ----------- ----------- ----------- -----------
Net Income 2,392,618 2,571,811 5,421,304 5,737,876 7,448,782 7,515,615
Preferred Stock Dividend Requirements 63,697 63,697 191,090 191,090 254,786 254,786
----------- ----------- ----------- ----------- ----------- -----------
Earnings Applicable to Common Stock $ 2,328,921 $ 2,508,114 $ 5,230,214 $ 5,546,786 $ 7,193,996 $ 7,260,829
=========== =========== =========== =========== =========== ===========
Earnings per share of Common Stock*:
Basic $ 0.22 $ 0.24 $ 0.50 $ 0.54 $ 0.69 $ 0.71
Diluted $ 0.22 $ 0.24 $ 0.50 $ 0.54 $ 0.68 $ 0.71
Average Number of
Common Shares Outstanding* :
Basic 10,505,517 10,315,812 10,448,226 10,258,049 10,472,573 10,233,060
Diluted 10,848,657 10,658,952 10,791,366 10,601,189 10,815,713 10,576,200
Cash Dividends Paid per Common Share* $ 0.161 $ 0.158 $ 0.484 $ 0.473 $ 0.645 $ 0.630
* All share and per share amounts reflect the four-for-three common stock
split effective November 14, 2003.
See Notes to Consolidated Financial Statements.
1
MIDDLESEX WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS AND OTHER DEBITS
(Unaudited)
September 30, December 31,
2003 2002
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UTILITY PLANT:
Water Production $ 73,067,120 $ 72,212,878
Transmission and Distribution 166,715,720 158,412,075
General 24,649,224 18,618,211
Construction Work in Progress 3,713,271 6,619,767
------------ ------------
TOTAL 268,145,335 255,862,931
Less Accumulated Depreciation 51,321,248 47,919,527
------------ ------------
UTILITY PLANT-NET 216,824,087 207,943,404
------------ ------------
NONUTILITY ASSETS-NET 3,759,656 3,424,492
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CURRENT ASSETS:
Cash and Cash Equivalents 2,974,948 2,937,894
Temporary Cash Investments-Restricted 4,891,680 6,146,699
Accounts Receivable (net of allowance
for doubtful accounts) 6,768,240 6,028,302
Unbilled Revenues 3,871,539 3,181,091
Materials and Supplies (at average cost) 1,327,434 1,190,337
Prepayments and Other Current Assets 1,150,375 815,392
------------ ------------
TOTAL CURRENT ASSETS 20,984,216 20,299,715
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DEFERRED CHARGES:
Unamortized Debt Expense 3,308,823 3,239,364
Preliminary Survey and Investigation Charges 1,744,127 1,098,468
Regulatory Assets
Income Taxes 6,287,873 6,287,873
Post Retirement Costs 804,604 869,260
Other 1,291,988 1,441,656
------------ ------------
TOTAL DEFERRED CHARGES 13,437,415 12,936,621
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TOTAL $255,005,374 $244,604,232
============ ============
See Notes to Consolidated Financial Statements.
2
MIDDLESEX WATER COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND OTHER CREDITS
(Unaudited)
September 30, December 31,
2003 2002
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CAPITALIZATION (see accompanying statements) $181,180,178 $168,047,689
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CURRENT LIABILITIES:
Current Portion of Long-term Debt 1,060,537 639,427
Notes Payable 12,500,000 17,650,000
Accounts Payable 3,232,842 2,059,877
Taxes Accrued 6,828,887 5,898,751
Interest Accrued 738,945 1,614,278
Other 1,601,092 1,716,270
------------ ------------
TOTAL CURRENT LIABILITIES 25,962,303 29,578,603
------------ ------------
DEFERRED CREDITS:
Customer Advances for Construction 11,341,532 10,881,815
Accumulated Deferred Investment Tax Credits 1,794,836 1,853,799
Accumulated Deferred Federal Income Taxes 13,532,194 13,241,901
Employee Benefit Plans 4,989,536 5,279,737
Other 790,036 814,897
------------ ------------
TOTAL DEFERRED CREDITS 32,448,134 32,072,149
------------ ------------
CONTRIBUTIONS IN AID OF CONSTRUCTION 15,414,759 14,905,791
------------ ------------
TOTAL $255,005,374 $244,604,232
============ ============
See Notes to Consolidated Financial Statements.
3
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION AND RETAINED EARNINGS
(Unaudited)
September 30, December 31,
2003 2002
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CAPITALIZATION:
Common Stock, No Par Value
Shares Authorized, 20,000,000
Shares Outstanding - 2003 - 10,523,511 * $ 56,294,195 $ 53,314,169
2002 - 10,356,489 *
Retained Earnings 23,367,224 23,187,076
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TOTAL COMMON STOCK AND RETAINED EARNINGS 79,661,419 76,501,245
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Cumulative Preference Stock, No Par Value
Shares Authorized, 100,000; Shares Outstanding, None
Cumulative Preferred Stock, No Par Value
Shares Authorized - 140,497
Convertible:
Shares Outstanding, $7.00 Series - 14,881 1,562,505 1,562,505
Shares Outstanding, $8.00 Series - 12,000 1,398,857 1,398,857
Nonredeemable:
Shares Outstanding, $7.00 Series - 1,017 101,700 101,700
Shares Outstanding, $4.75 Series - 10,000 1,000,000 1,000,000
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TOTAL CUMULATIVE PREFERRED STOCK 4,063,062 4,063,062
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Long-term Debt:
8.05% Amortizing Secured Note, due December 20, 2021 3,153,815 3,203,401
6.25% Amortizing Secured Note, due May 22, 2028 10,360,000 --
4.22% State Revolving Trust Note, due December 31, 2022 192,281 67,350
3.60% State Revolving Trust Note, due May 1, 2025 530,637 --
0.00% NJEIT Fund Loan, due September 1, 2021 690,833 730,017
4.00% NJEIT Trust Loan, due September 1, 2021 820,000 850,000
First Mortgage Bonds:
5.20%, Series S, due October 1, 2022 12,000,000 12,000,000
5.25%, Series T, due October 1, 2023 6,500,000 6,500,000
6.40%, Series U, due February 1, 2009 15,000,000 15,000,000
5.25%, Series V, due February 1, 2029 10,000,000 10,000,000
5.35%, Series W, due February 1, 2038 23,000,000 23,000,000
0.00%, Series X, due September 1, 2018 807,956 862,088
4.25%, Series Y, due September 1, 2018 965,000 1,010,000
0.00%, Series Z, due September 1, 2019 1,792,435 1,907,568
5.25%, Series AA, due September 1, 2019 2,175,000 2,265,000
0.00%, Series BB, due September 1, 2021 2,168,277 2,287,385
4.00%, Series CC, due September 1, 2021 2,360,000 2,440,000
5.10%, Series DD, due January 1, 2032 6,000,000 6,000,000
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SUBTOTAL LONG-TERM DEBT 98,516,234 88,122,809
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Less: Current Portion of Long-term Debt (1,060,537) (639,427)
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TOTAL LONG-TERM DEBT 97,455,697 87,483,382
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TOTAL CAPITALIZATION $ 181,180,178 $ 168,047,689
============= =============
Nine Months Ended Year Ended
September 30, December 31,
2003 2002
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RETAINED EARNINGS:
BALANCE AT BEGINNING OF PERIOD $ 23,187,076 $ 22,190,691
Net Income 5,421,304 7,765,353
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TOTAL 28,608,380 29,956,044
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Cash Dividends:
Cumulative Preferred Stock 191,090 254,786
Common Stock 5,050,066 6,510,494
Common Stock Expenses -- 3,688
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TOTAL DEDUCTIONS 5,241,156 6,768,968
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BALANCE AT END OF PERIOD $ 23,367,224 $ 23,187,076
============= =============
* All share amounts reflect the four-for-three common stock split effective
November 14, 2003.
See Notes to Consolidated Financial Statements.
4
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Sept. 30, Twelve Months Ended Sept. 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,421,304 $ 5,737,876 $ 7,448,782 $ 7,515,615
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 4,288,489 3,969,132 5,282,624 5,231,161
Provision for Deferred Income Taxes 231,330 38,765 340,589 112,598
Allowance for Funds Used During Construction (253,254) (186,439) (336,482) (249,014)
Changes in Current Assets and Liabilities:
Accounts Receivable (739,938) (197,149) 94,629 102,232
Accounts Payable 1,172,965 (302,023) 1,138,530 188,881
Accrued Taxes 930,136 574,585 (76,575) (99,894)
Accrued Interest (875,333) (1,120,674) 45,723 (50,862)
Unbilled Revenues (690,448) (624,776) (445,748) (484,392)
Employee Benefit Plans (290,201) (116,387) (156,752) (30,458)
Other-Net (575,877) (574,807) (816,808) 173,882
------------ ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,619,173 7,198,103 12,518,512 12,409,749
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (13,121,493) (12,820,622) (16,789,966) (16,713,628)
Proceeds from Real Estate Dispositions 344,972 -- 344,972 --
Preliminary Survey and Investigation Charges (645,659) 62,669 (863,174) 4,187
Other-Net (169,003) 12,737 (152,798) 431,414
------------ ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (13,591,183) (12,745,216) (17,460,966) (16,278,027)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (762,143) (6,428,035) (777,944) (6,442,480)
Proceeds from Issuance of Long-term Debt 11,155,568 6,066,065 11,156,853 12,456,960
Short-term Bank Borrowings (5,150,000) 4,025,000 (4,750,000) 5,550,000
Deferred Debt Issuance Expenses (196,935) (501,558) (206,195) (508,259)
Temporary Cash Investments-Restricted 1,255,019 1,385,213 2,933,390 (5,222,350)
Proceeds from Issuance of Common Stock-Net 2,980,026 2,840,631 3,350,256 3,155,895
Payment of Common Dividends (5,050,066) (4,842,862) (6,717,698) (6,442,287)
Payment of Preferred Dividends (191,090) (191,089) (254,786) (254,785)
Construction Advances and Contributions-Net 968,685 436,441 1,406,449 742,581
------------ ------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 5,009,064 2,789,806 6,140,325 3,035,275
------------ ------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 37,054 (2,757,307) 1,197,871 (833,003)
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,937,894 4,534,384 1,777,077 2,610,080
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,974,948 $ 1,777,077 $ 2,974,948 $ 1,777,077
============ ============ ============ ============
* Excludes Allowance for Funds Used During Construction
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Period for:
Interest (net of amounts capitalized) $ 4,511,199 $ 4,752,593 $ 4,592,725 $ 5,055,192
Income Taxes $ 1,615,000 $ 2,729,500 $ 3,122,500 $ 4,431,500
See Notes to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Organization - Middlesex Water Company (Middlesex) is the parent company and
sole shareholder of Tidewater Utilities, Inc. (Tidewater), Pinelands Water
Company, Pinelands Wastewater Company, Utility Service Affiliates, Inc. (USA),
Utility Service Affiliates (Perth Amboy) Inc. (USA-PA) and Bayview Water Company
(Bayview). Southern Shores Water Company, LLC and White Marsh Environmental
Systems, Inc. are wholly-owned subsidiaries of Tidewater. The financial
statements for Middlesex and its wholly-owned subsidiaries (the Company) are
reported on a consolidated basis. All intercompany accounts and transactions
have been eliminated.
The consolidated notes accompanying the financial statements included in the
2002 Form 10-K are applicable to this report and, in the opinion of Management,
the accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the financial position as of September 30, 2003 and the results of
operations and cash flows for the three, nine and twelve month periods ended
September 30, 2003 and 2002. Information included in the Balance Sheet as of
December 31, 2002, has been derived from the Company's audited financial
statements included in its annual report on Form 10-K for the year ended
December 31, 2002.
Note 2 - Capitalization
Common Stock - During the nine months ended September 30, 2003, 167,022 common
shares ($2.9 million) were issued under the Company's Dividend Reinvestment and
Common Stock Purchase Plan. The Plan had offered a 5% discount on optional cash
payments and reinvested dividends that ended on September 2, 2003. The New
Jersey Board of Public Utilities approved the Company's request for a
four-for-three stock split of its common stock, effective November 14, 2003 for
shareholders of record on November 1, 2003. All share and per share amounts have
been restated to reflect this split.
Long-term Debt - Tidewater received approval from the Delaware Public Service
Commission (PSC) to borrow $13.8 million to fund a portion of its multi-year
capital program and refinance some of its short-term debt. Subsequent to the PSC
approval, Tidewater closed on a Delaware State Revolving Fund (SRF) loan of $3.3
million. The Delaware SRF program will allow, but does not obligate, Tidewater
to draw down against a General Obligation Note for six specific projects.
Tidewater will be charged an annual fee, which is a combination of interest
charges and administrative fees, of 3.60% on the outstanding principal amount.
All unpaid principal and fees must be paid on or before May 1, 2025. Tidewater
borrowed approximately $0.5 million in July 2003 for one of the projects.
In May 2003, Tidewater completed a loan transaction of $10.5 million with
CoBank, a financial institution specializing in loans to rural utilities. Terms
of the loan include an interest rate of 6.25% and a maximum loan life of
twenty-five years with monthly principal payments. The proceeds were used to
retire short-term debt.
-6-
Note 3 - Earnings Per Share
Basic earnings per share (EPS) are computed on the basis of the weighted average
number of shares outstanding. Diluted EPS assumes the conversion of both the
Convertible Preferred Stock $7.00 Series and the Convertible Preferred Stock
$8.00 Series.
(In Thousands Except for per Share Amounts)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
2003 2002 2003 2002 2003 2002
Basic: Income Shares Income Shares Income Shares Income Shares Income Shares Income Shares
- ------------------------------------------------------ ---------------------------------- -----------------------------------
Net Income $2,393 10,506 $2,572 10,315 $5,421 10,448 $5,738 10,258 $7,449 10,473 $7,516 10,233
Preferred Dividend (64) (64) (191) (191) (255) (255)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Earnings Applicable
to Common Stock $2,329 10,506 $2,508 10,315 $5,230 10,448 $5,547 10,258 $7,194 10,473 $7,261 10,233
Basic EPS $ 0.22 $ 0.24 $ 0.50 $ 0.54 $ 0.69 $0.71
- ------------------------------------------------------ ---------------------------------- -----------------------------------
Diluted:
- ------------------------------------------------------ ---------------------------------- -----------------------------------
Earnings Applicable
to Common Stock $2,329 10,506 $2,508 10,315 $5,230 10,448 $5,547 10,258 $7,194 10,473 $7,261 10,233
$7.00 Series Dividend 26 179 26 179 78 179 78 179 104 179 104 179
$8.00 Series Dividend 24 164 24 164 72 164 72 164 96 164 96 164
------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Adjusted Earnings
Applicable to
Common Stock $2,379 10,849 $2,558 10,658 $5,380 10,791 $5,697 10,601 $7,394 10,816 $7,461 10,576
Diluted EPS $ 0.22 $ 0.24 $ 0.50 $ 0.54 $ 0.68 $ 0.71
Note 4 - Business Segment Data
The Company has identified two reportable segments. One is the regulated
business of collecting, treating and distributing water on a retail and
wholesale basis to residential, commercial, industrial and fire protection
customers in parts of New Jersey and Delaware. It also operates a regulated
wastewater system in New Jersey. The Company is subject to regulations as to its
rates, services and other matters by the States of New Jersey and Delaware with
respect to utility service within these States. The other segment is the
non-regulated contract services for the operation and maintenance of municipal
and private water and wastewater systems. The accounting policies of the
segments are the same as those described in the Summary of Significant
Accounting Policies in Note 1 to the Consolidated Financial Statements.
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.
-7-
(Thousands of Dollars)
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
Operations by Segments: 2003 2002 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Revenues:
Regulated $ 15,360 $ 14,968 $ 42,427 $ 41,156 $ 55,669 $ 54,593
Non - Regulated 2,256 2,026 6,204 5,611 8,169 7,858
Inter-segment Elimination (30) (11) (66) (29) (78) (38)
--------------------------------------------------------------------
Consolidated Revenues $ 17,586 $ 16,983 $ 48,565 $ 46,738 $ 63,760 $ 62,413
--------------------------------------------------------------------
Operating Income:
Regulated $ 3,329 $ 3,661 $ 8,629 $ 9,088 $ 11,573 $ 12,041
Non - Regulated 171 92 335 228 562 357
Inter-segment Elimination -- -- -- -- -- --
--------------------------------------------------------------------
Consolidated Operating Income $ 3,500 $ 3,753 $ 8,984 $ 9,316 $ 12,135 $ 12,398
--------------------------------------------------------------------
Depreciation/Amortization:
Regulated $ 1,326 $ 1,063 $ 3,922 $ 3,653 $ 5,194 $ 4,916
Non - Regulated 16 10 39 28 49 43
Inter-segment Elimination -- -- -- -- -- --
--------------------------------------------------------------------
Consolidated Depreciation/Amortization $ 1,342 $ 1,073 $ 3,961 $ 3,681 $ 5,243 $ 4,959
--------------------------------------------------------------------
Other Income:
Regulated $ 1,010 $ 858 $ 2,415 $ 1,962 $ 3,229 $ 2,339
Non - Regulated -- (13) (33) 23 (34) 26
Inter-segment Elimination (874) (733) (2,114) (1,688) (2,782) (2,088)
--------------------------------------------------------------------
Consolidated Other Income $ 136 $ 112 $ 268 $ 297 $ 413 $ 277
--------------------------------------------------------------------
Interest Expense:
Regulated $ 1,406 $ 1,575 $ 4,628 $ 4,681 $ 6,229 $ 6,190
Non - Regulated 37 13 80 40 94 54
Inter-segment Elimination (199) (295) (877) (846) (1,224) (1,085)
--------------------------------------------------------------------
Consolidated Interest Expense $ 1,244 $ 1,293 $ 3,831 $ 3,875 $ 5,099 $ 5,159
--------------------------------------------------------------------
Net Income:
Regulated $ 2,935 $ 2,945 $ 6,416 $ 6,369 $ 8,571 $ 8,190
Non - Regulated 133 66 242 211 435 329
Inter-segment Elimination (675) (439) (1,237) (842) (1,557) (1,003)
--------------------------------------------------------------------
Consolidated Net Income $ 2,393 $ 2,572 $ 5,421 $ 5,738 $ 7,449 $ 7,516
--------------------------------------------------------------------
Capital Expenditures:
Regulated $ 4,784 $ 3,645 $ 12,559 $ 12,620 $ 15,999 $ 16,500
Non - Regulated 6 132 218 201 446 214
Inter-segment Elimination -- -- -- -- -- --
--------------------------------------------------------------------
Total Capital Expenditures $ 4,790 $ 3,777 $ 12,777 $ 12,821 $ 16,445 $ 16,714
--------------------------------------------------------------------
As of As of
September 30, December
2003 31, 2002
------------------------
Assets:
Regulated 286,301 280,655
Non - Regulated 4,341 4,093
Inter-segment Elimination (35,637) (40,144)
------------------------
Consolidated Assets 255,005 244,604
------------------------
-8-
Note 5 - New Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 149, Amendments of Statement 133 on Derivative
Instruments and Hedging Activities ("SFAS 149"), which amends and clarifies
financial accounting and reporting for derivative instruments and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 149 is generally effective after June 30, 2003. The adoption of
SFAS 149 did not have any effect on the Company's financial statements.
FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities And Equity ("SFAS 150"), which establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have any effect
on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements ("FIN 46"). The adoption of FIN 46 is
not expected to have any effect on the Company's financial statements.
Note 6 - Contingent Liabilities
Litigation - A claim against the Company for damages involving the break of both
a Company water line and an underground electric power cable containing both
electric lines and petroleum based insulating fluid was recently settled. The
counterclaim was dismissed and submitted to binding arbitration which is still
pending. In the arbitration, the maximum damages for which the Company may be
responsible is $250,000. Management is unable to determine the outcome of the
arbitration.
Another claim is pending involving a construction subcontractor, the Company's
general contractor and the Company concerning a major construction project. The
dispute relates to work required to be performed under a construction contract
and related subcontracts and includes payment issues and timing/delay issues.
The matter was instituted in 2001 and is pending in Superior Court, Middlesex
County, New Jersey. The full amount at issue is not fully known at this stage of
the litigation. At this time, management is unable to determine the impact, if
any, on the financial statements. The Company's maximum exposure in this
litigation is estimated to be $5.2 million.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Three Months Ended September 30, 2003
Operating revenues for the three months ended September 30, 2003 were up $0.6
million or 3.55% from the same period in 2002. Customer growth of 9.1% in
Delaware provided additional facility charges and connection fees of $0.6
million. Higher base rates in Delaware provided $0.1 million of the increase.
Offsetting some of the growth increases were the decline in consumption revenues
of $0.3 million in Delaware, due to cool wet weather during the quarter. Even
though our New Jersey systems experienced similar weather as Delaware, revenue
was flat compared to the prior year because of the drought restrictions in place
in 2002, which were not in place in 2003. Revenues from our operations and
maintenance contracts rose $0.2 million due to scheduled increases in fixed fees
under the City of Perth Amboy contract.
Operating expenses increased $0.9 million or 6.46%. Main repair expenses
increased by $0.1 million. Water treatment expenses increased by $0.1 million.
Pumping expenses increased by $0.1 million due to higher electricity costs.
Payroll costs and employee benefits costs increased by $0.4 million. Tidewater
expenses increased by $0.1 million as customer growth increased production
related costs and the need for additional employees. There were higher sewer
disposal costs of $0.1 million for USA-PA.
Depreciation expense increased $0.3 million, or 25.1% due mostly to the effect
of a one-time reconciliation adjustment in 2002.
AFUDC increased by $0.1 million for the year as Tidewater's capital program now
includes larger projects with longer construction schedules.
Other taxes increased by $0.1 million due to payroll related taxes and real
estate taxes in New Jersey and Delaware. Lower Federal income taxes of $0.3
million over last year are attributable to unfavorable operating results during
the last three months.
Net income decreased by 6.98% to $2.4 million and basic and diluted earnings per
share decreased to $0.22 from $0.24 per share.
Results of Operations - Nine Months Ended September 30, 2003
Operating revenues for the nine months rose $1.8 million or 3.91% over the same
period in 2002. Customer growth of 9.1% in Delaware provided additional facility
charges and connection fees of $1.2 million. Higher base rates in our Delaware
service territories provided $0.5 million of the increase. Cool wet weather in
the Mid Atlantic region pushed Tidewater's consumption revenue down by $0.4
million and Middlesex consumption revenue down by $0.1 million. Revenues from
our operations and maintenance contracts rose $0.5 million due to scheduled
increases in fixed fees under the City of Perth Amboy contract. Wastewater
operations in Delaware provided $0.1 million in additional revenues.
Operating expenses increased by $2.2 million or 5.8%. Costs related to main
breaks resulting from severe winter weather conditions in the first quarter of
2003 contributed to additional expenses of $0.3 million. There were higher sewer
disposal costs of $0.3 million for USA-PA. An increase in our Delaware employee
base, general wage increases and higher costs associated with employee medical
and retirement benefits pushed up costs by $0.4 million. In New Jersey, payroll
costs, employee benefits and legal fees pushed up costs by $0.8 million. Water
Treatment, Source of Supply and Pumping costs increased by $0.4 million
combined.
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Other taxes increased by $0.2 million generally due to payroll related taxes and
real estate taxes in both New Jersey and Delaware. Lower Federal income taxes of
$0.5 million over last year are attributable to the unfavorable operating
results during the first nine months of 2003.
Depreciation expense increased by $0.3 million, or 7.60% due to a higher level
of utility plant in service.
Other income decreased by $0.1 million as interest rates fell on short-term cash
balance investments.
AFUDC rose $0.1 million for the year as Tidewater's capital program now includes
larger projects with longer construction schedules.
Net income decreased to $5.4 million from $5.7 million and basic and diluted
earnings per share decreased by $0.04 to $0.50.
Results of Operations - Twelve Months Ended September 30, 2003
Operating revenues for the twelve months ended September 30, 2003 were up $1.3
million to $63.8 million. Annual customer growth of 9.1% in Delaware provided
additional facility charges and connection fees of $1.4 million. Consumption
revenue fell $0.5 million in New Jersey and $0.03 million in Delaware due to
cool and wet weather in 2003. Rate increases in Delaware accounted for $0.5
million. Service fees from our operations and maintenance contracts rose $0.2
million, due to increased fixed fees for sewer disposal costs under the City of
Perth Amboy contract.
AFUDC increased by $0.1 million for the year as Tidewater's capital program now
includes larger projects with longer construction schedules.
Operating expenses increased $1.6 million or 3.2%. Operations and maintenance
expenses increased $1.9 million or 5.8%. Main breaks resulting from severe
winter weather conditions in the first quarter of 2003 pushed expenses up by
$0.4 million. In addition, water treatment expenses were up $0.4 million and
payroll, employee-related costs and auditing fees rose by $0.8 million. An
increase in our Delaware employee base, general wage increases and higher costs
associated with insurance expense pushed up costs by $0.3 million.
Depreciation increased by $0.3 million, or 5.7% due to a higher level of utility
plant in service.
Other taxes increased by $0.1 million due to higher payroll related taxes in
both New Jersey and Delaware and real estate taxes in Delaware. Federal income
taxes decreased $0.7 million, or 16.9% as a result of the lower amount of
taxable income.
Net income decreased by less than $0.1 million. Due to an increase in average
shares outstanding basic earnings per share fell by $0.02 to $0.69 and diluted
earnings per share fell by $0.03 to $0.68.
Capital Resources
The Company's capital program for 2003 is estimated to be $18.0 million and
includes $11.0 million for water system additions and improvements for our
Delaware systems, $2.7 million for the RENEW Program, which is our program to
clean and cement line approximately five miles of unlined mains in the Middlesex
system. There is a total of approximately 143 miles of unlined mains in the
730-mile Middlesex system. The capital program also includes $4.3 million for
scheduled upgrades to our existing systems in New Jersey. The scheduled upgrades
consist of $0.7 million for mains, $0.8 million for service lines, $0.3 million
for meters, $0.3 million for hydrants, $0.1 million for computer systems and
$2.1 million for various other items.
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Liquidity
To pay for its remaining capital program in 2003, Middlesex will utilize
internally generated funds and funds available under existing New Jersey
Environmental Infrastructure Trust (NJEIT) loans and Delaware State Revolving
Funds (SRF) loans, which provides low cost financing for projects that meet
certain water quality and system improvement benchmarks. The Company will also
utilize short-term borrowings through $30.0 million of available lines of credit
with three commercial banks. At September 30, 2003, there was $12.5 million
outstanding against the lines of credit.
Going forward into 2004 through 2006, Middlesex currently projects that it will
be required to expend approximately $65.0 million for capital projects. Plans to
finance those projects are underway as the Company expects to receive approval
to borrow up to $17.0 million under the NJEIT program in November of 2004.
Middlesex is also seeking permission from the New Jersey Board of Public
Utilities (BPU) to issue up to 800,000 shares of Middlesex common stock, which
based on the common stock's closing price on September 30, 2003, could provide
up to $14.0 million if approved and actually issued. We expect to receive BPU
approval in November 2003 and ultimately issue the stock in January 2004. There
can be no assurance, however, that we will receive BPU approval or that we will
consummate any sale of our common stock. We anticipate that some additional
capital projects in Delaware will be eligible for the SRF program in that State
and are pursuing those opportunities. We also expect to use internally generated
funds and proceeds from the sale of common stock through the Dividend
Reinvestment and Common Stock Purchase Plan.
Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 149, Amendments of Statement 133 on Derivative
Instruments and Hedging Activities ("SFAS 149"), which amends and clarifies
financial accounting and reporting for derivative instruments and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 149 is generally effective after June 30, 2003. The adoption of
SFAS 149 did not have any effect on the Company's financial statements.
FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities And Equity ("SFAS 150"), which establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have any effect
on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements ("FIN 46"). The adoption of FIN 46 is
not expected to have any effect on the Company's financial statements.
Outlook
While revenues continue to grow in Delaware because of customer growth and rate
increases, cool wet weather has reduced consumption demands in our New Jersey
and Delaware systems. This trend has continued into the fourth quarter in both
New Jersey and Delaware. Also, certain operating costs will continue to increase
as we
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go forward. With the deregulation of the electricity generation market in New
Jersey on August 1, 2003, Middlesex electric commodity costs have increased over
40%. On that same date the remaining regulated portion of the electricity rates
rose 15%. The New Jersey Water Supply Authority has changed the way it contracts
for supplemental water purchases with all contract customers, including
Middlesex. These changes, which are effective January 1, 2004, are expected to
increase our cost of raw water by at least 8.5%. Costs for the employee pension
plan continue to rise as the return on plan assets have dropped due to the
overall performance of the stock market prior to 2003. These increasing costs,
when added to already higher costs for business insurances and security costs,
prompted Middlesex to file for a 17.82% base rate increase with the BPU on
November 5, 2003. The Company currently anticipates that this matter could be
decided by the summer of 2004. There is no certainty that the BPU will approve
any or all of the requested increase.
Tidewater received approval for a 2.49% Distribution System Improvement Charge
(DSIC) from the Delaware Public Service Commission (PSC), effective for services
rendered on or after July 1, 2003. The DSIC is a separate rate mechanism that
allows for cost recovery of certain capital improvement costs incurred in
between base rate filings. Delaware regulated water utilities are allowed to
apply for a DSIC every six months with the maximum increase limited to 5.0% in
any six month period and a 7.5% overall limitation. Tidewater expects to file
for another DSIC to be effective January 1, 2004, which can not exceed 2.51%
based on the aforementioned annual limit. In addition, because Tidewater
continues to make significant capital additions and improvements to its new and
existing systems, it believes it will be necessary to file for a base rate
increase by early Spring 2004. That increase request, which is expected to be in
excess of 20%, is due to the $20.0 million of additional utility plant placed in
service or to be placed in service since the last rate case.
The Company continues to pursue regulated and non-regulated opportunities in New
Jersey and Delaware. White Marsh Environmental Systems, a wholly-owned
subsidiary of Tidewater, has begun a campaign to acquire contracts to operate
non-regulated wastewater systems throughout Delaware. Systems currently under
contract or expected to be signed shortly will generate annual revenues of
approximately $130,000. Although the expected results of operations are not
material compared to the consolidated group, we believe it puts us in a better
position to obtain additional wastewater and water projects in Delaware.
Forward Looking Information
Certain matters discussed in this report on Form 10-Q are "forward-looking
statements" intended to qualify for safe harbors from liability established by
the Private Securities Litigation Reform Act of 1995. Such statements may
address future plans, objectives, expectations and events concerning various
matters such as capital expenditures, earnings, litigation, growth potential,
rate and other regulatory matters, liquidity, capital resources and accounting
matters. Actual results in each case could differ materially from those
currently anticipated in such statements. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures of Market Risk
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rates through the use of
fixed rate, long-term debt and, to a lesser extent, short-term debt. The
Company's interest rate risk related to existing fixed rate, long-term debt is
not material due to the term of the majority of our First Mortgage Bonds, which
have maturity dates ranging from 2009 to 2038. Over the next twelve months,
approximately $1.1 million of the current portion of nine existing long-term
debt instruments will mature. Applying a hypothetical change in the rate of
interest charged by 10% on those borrowings would not have a material effect on
earnings.
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Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was conducted by the Company's Chief Executive Officer along with
the Company's Chief Financial Officer. Based upon that evaluation, the Company's
Chief Executive Officer and the Company's Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective as of the end of
the period covered by this Report. There have been no significant changes in the
Company's internal controls or in other factors, which could significantly
affect internal controls during the quarter ended September 30, 2003.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A claim against the Company for damages involving the break of both a
Company water line and an underground electric power cable containing
both electric lines and petroleum based insulating fluid was recently
settled. The counterclaim was dismissed and submitted to binding
arbitration which is still pending. In the arbitration, the maximum
damages for which the Company may be responsible is $250,000.
Management is unable to determine the outcome of the arbitration.
Another claim is pending involving a construction subcontractor, the
Company's general contractor and the Company concerning a major
construction project. The dispute relates to work required to be
performed under a construction contract and related subcontracts and
includes payment issues and timing/delay issues. The matter was
instituted in 2001 and is pending in Superior Court, Middlesex County,
New Jersey. The full amount at issue is not fully known at this stage
of the litigation. At this time, management is unable to determine the
impact, if any, on the financial statements. The Company's maximum
exposure in this litigation is estimated to be $5.2 million.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
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Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit 31: Section 302 Certification by
Dennis G. Sullivan Pursuant to Rules
13a-14 and 15d-14 of the Securities
Exchange Act of 1934
Exhibit 31.1: Section 302 Certification by
A. Bruce O'Connor Pursuant to Rules
13a-14 and 15d-14 of the Securities
Exchange Act of 1934
.
Exhibit 32: Section 906 Certification by
Dennis G. Sullivan Pursuant to
18 U.S.C. ss.1350
Exhibit 32.1: Section 906 Certification by
A. Bruce O'Connor Pursuant to 18
U.S.C. ss.1350
(b) Reports
on Form 8-K: Filed September 16, 2003 for Stock Split and Stock
Offering Disclosure.
Filed October 31, 2003 for Third Quarter
Earnings Release.
Filed November 6, 2003 for Middlesex Water Company
Rate Case Filing.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDDLESEX WATER COMPANY
By: /s/A. Bruce O'Connor
-----------------------------------
A. Bruce O'Connor
Vice President and Controller and
Chief Financial Officer
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