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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-422
MIDDLESEX WATER COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-1114430
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(State of Incorporation) (IRS employer identification no.)
1500 Ronson Road, Iselin NJ 08830
(Address of principal executive offices, including zip code)
(732) 634-1500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: Name of each exchange on which registered:
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par Value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes |X| No |_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant at June 30, 2004 was $212,760,366 based on the closing market price
of $19.41 per share.
The number of shares outstanding for each of the registrant's classes of common
stock, as of March 1, 2005:
Common Stock, No par Value: 11,377,403 shares outstanding
Documents Incorporated by Reference
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Proxy Statement to be filed in connection with the Registrant's Annual Meeting
of Shareholders to be held on May 25, 2005, which will be filed with the
Securities and Exchange Commission within 120 days, is incorporated as to Part
III.
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Explanatory Note
This amendment on Form 10-K/A reflects the restatement of Middlesex Water
Company's (the Company) consolidated balance sheets as of December 31, 2004 and
2003 and consolidated statements of cash flows for the years ended December 31,
2004, 2003, and 2002 to correct the accounting and disclosure of non-cash
contributions of utility plant from developers, as discussed in Note 10 of the
Notes to the Consolidated Financial Statements, included in Item 8. In addition,
the Company has amended Item 9A and Management's Report on Internal Control Over
Financial Reporting to update the disclosure regarding disclosure controls and
procedures and internal control over financial reporting.
The restatement affects only Items 6, 7, 8 and 15 of this report. Except for the
foregoing amended items, the information in this Form 10-K/A is as of March 16,
2005, the filing date of the original Form 10-K for the year ended December 31,
2004, and has not been updated for the events subsequent to that date other than
for the matter discussed above.
MIDDLESEX WATER COMPANY
FORM 10-K/A
INDEX
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PAGE
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Forward-Looking Statements 1
PART I
Item 1. Business:
Overview 2
Financial Information 4
Water Supplies and Contracts 4
Employees 6
Competition 6
Regulation 6
Management 8
Risk Factors 10
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchase of
Equity Securities 15
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 7A. Qualitative and Quantitative Disclosure About Market Risk 26
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 49
Item 9A. Controls and Procedures 49
Item 9B. Other Information 53
PART III
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners
and Management 54
Item 13. Certain Relationships and Related Transactions 54
Item 14. Principal Accountant Fees and Services 54
PART IV
Item 15. Exhibits and Financial Statement Schedules 55
Signatures 56
Exhibit Index 57
Forward-Looking Statements
Certain statements contained in this annual report are "forward-looking
statements" within the meaning of federal securities laws. The Company intends
that these statements be covered by the safe harbors created under those laws.
These statements include, but are not limited to:
- statements as to expected financial condition, performance,
prospects and earnings of the Company;
- statements regarding strategic plans for growth;
- statements regarding the amount and timing of rate increases and
other regulatory matters;
- statements regarding expectations and events concerning capital
expenditures;
- statements as to the Company's expected liquidity needs during
fiscal 2005 and beyond and statements as to the sources and
availability of funds to meet its liquidity needs;
- statements as to expected rates, consumption volumes, service fees,
revenues, margins, expenses and operating results;
- statements as to the Company's compliance with environmental laws
and regulations and estimations of the materiality of any related
costs;
- statements as to the safety and reliability of the Company's
equipment, facilities and operations;
- statements as to financial projections;
- statements as to the ability of the Company to pay dividends;
- statements as to the Company's plans to renew municipal franchises
and consents in the territories it serves;
- expectations as to the cost of cash contributions to fund the
Company's pension plan, including statements as to anticipated
discount rates and rates of return on plan assets;
- statements as to trends; and
- statements regarding the availability and quality of our water
supply.
These forward-looking statements are subject to risks, uncertainties and other
factors that could cause actual results to differ materially from future results
expressed or implied by the forward-looking statements. Important factors that
could cause actual results to differ materially from anticipated results and
outcomes include, but are not limited to:
- the effects of general economic conditions;
- increases in competition in the markets served by the Company;
- the ability of the Company to control operating expenses and to
achieve efficiencies in its operations;
- the availability of adequate supplies of water;
- actions taken by government regulators, including decisions on base
rate increase requests;
- new or additional water quality standards;
- weather variations and other natural phenomena;
- acts of war or terrorism; and
- other factors discussed elsewhere in this annual report.
Many of these factors are beyond the Company's ability to control or predict.
Given these uncertainties, readers are cautioned not to place undue reliance on
any forward-looking statements, which only speak to the Company's understanding
as of the date of this annual report. The Company does not undertake any
obligation to release publicly any revisions to these forward-looking statements
to reflect events or circumstances after the date of this annual report or to
reflect the occurrence of unanticipated events, except as may be required under
applicable securities laws.
For an additional discussion of factors that may affect the Company's business
and results of operations, see Item 1. Business- Risk Factors.
1
PART I
Item 1. Business.
Overview
Middlesex Water Company was incorporated as a water utility company in 1897 and
owns and operates regulated water utility systems in central and southern New
Jersey and in Delaware as well as a regulated wastewater utility in southern New
Jersey. We also operate water and wastewater systems on behalf of others in New
Jersey and Delaware.
The terms "the Company," "we," "our," and "us" refer to Middlesex Water Company
and its subsidiaries, including Tidewater Utilities, Inc. (Tidewater) and
Tidewater's wholly-owned subsidiaries, Southern Shores Water Company, LLC
(Southern Shores) and White Marsh Environmental Systems, Inc. (White Marsh),
Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company
(Pinelands Wastewater) (collectively, Pinelands), Utility Service Affiliates,
Inc. (USA), Utility Service Affiliates (Perth Amboy) Inc., (USA-PA) and Bayview
Water Company (Bayview).
We recently created a new wholly-owned Delaware corporation named Tidewater
Environmental Services, Inc. (TESI), which will be used to own and operate
regulated wastewater systems in Delaware (see Regulation for further
discussion).
Middlesex principal executive offices are located at 1500 Ronson Road, Iselin,
New Jersey 08830. Our telephone number is (732) 634-1500. Our internet website
address is http://www.middlesexwater.com. We make available, free of charge
through our internet website, reports and amendments filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, after such
material is electronically filed with or furnished to the Securities and
Exchange Commission (SEC).
Middlesex System
The Middlesex System provides water services to approximately 58,000 retail
customers, primarily in eastern Middlesex County, New Jersey and provides water
under contract to the Township of Edison, the Boroughs of Highland Park and
Sayreville, and both the Old Bridge and the Marlboro Township Municipal
Utilities Authorities. The Middlesex System treats, stores and distributes water
for residential, commercial, industrial and fire prevention purposes. Under a
special contract, the Middlesex System also provides water treatment and pumping
services to the Township of East Brunswick. The Middlesex System, through its
retail and contract sales, produced approximately 67% of our 2004 revenue.
The Middlesex System's retail customers are located in an area of approximately
55 square miles in Woodbridge Township, the City of South Amboy, the Boroughs of
Metuchen and Carteret, portions of Edison Township and the Borough of South
Plainfield in Middlesex County and, to a minor extent, a portion of the Township
of Clark in Union County. The retail customers include a mix of residential
customers, large industrial concerns and commercial and light industrial
facilities. These retail customers are located in generally well-developed areas
of central New Jersey. The contract customers of the Middlesex System comprise
an area of approximately 141 square miles with a population of approximately
267,000. Contract sales to Edison, Sayreville, Old Bridge and Marlboro are
supplemental to the existing water systems of these customers. The State of New
Jersey in the mid-1980's approved plans to increase available surface water
supply to the South River Basin area of the state to permit a reduced use of
ground water in this area. The Middlesex System
2
provides treated surface water under long-term agreements to East Brunswick,
Marlboro, Old Bridge and Sayreville consistent with the state-approved plan.
Tidewater System
Tidewater, together with its wholly-owned subsidiary, Southern Shores Water
Company, LLC, provides water services to approximately 26,000 retail customers
for domestic, commercial and fire protection purposes in over 250 separate
community water systems in New Castle, Kent and Sussex Counties, Delaware.
Tidewater has another wholly-owned subsidiary, White Marsh Environmental
Systems, Inc., which operates water and wastewater systems under contract for
approximately 4,500 customers and also owns the office building that Tidewater
uses as its business office. White Marsh's rates for water and wastewater
operations are not regulated by the Delaware Public Service Commission (PSC).
The Tidewater System produced approximately 17% of our total revenue in 2004.
Utility Service Affiliates (Perth Amboy)
USA-PA operates the City of Perth Amboy's water and wastewater systems under a
20-year agreement, which expires in 2018. Perth Amboy has a population of 40,000
and has approximately 9,600 customers, most of whom are served by both systems.
The agreement was effected under New Jersey's Water Supply Public-Private
Contracting Act and the New Jersey Wastewater Public/Private Contracting Act and
requires USA-PA to lease from Perth Amboy all of its employees who currently
work on the Perth Amboy water and wastewater systems. Under the agreement,
USA-PA receives both fixed and variable fees based on increased system billing.
Fixed fee payments began at $6.4 million in the first year and are to increase
over the term of the 20-year contract to $10.2 million. USA-PA produced
approximately 11% of our total revenue in 2004.
In connection with the agreement, we guaranteed a series of bonds in the
principal amount of approximately $26.3 million, of which approximately $23.9
million remains outstanding. In addition to the agreement with Perth Amboy,
USA-PA entered into a 20-year subcontract with a wastewater operating company
for the operation and maintenance of the Perth Amboy wastewater system. The
subcontract provides for the sharing of certain fixed and variable fees and
operating expenses.
Pinelands System
Pinelands Water provides water services to approximately 2,400 residential
customers in Burlington County, New Jersey. Pinelands Water produced less than
1% of our total revenue in 2004.
Pinelands Wastewater provides wastewater services to approximately 2,400
primarily residential retail customers. Under contract, it also services one
municipal wastewater system in Burlington County, New Jersey with about 200
residential customers. Pinelands Wastewater produced approximately 1% of our
total revenue in 2004.
Utility Service Affiliates, Inc.
In 1999, we implemented a franchise agreement with the City of South Amboy
(South Amboy) to provide water service and install water system facilities in
South Amboy. The South Amboy franchise was approved by the Board of Public
Utilities (BPU) and its implementation significantly impacted two existing
agreements entered into by the parties. The first agreement was for the sale of
water to South Amboy on a wholesale basis. The second agreement was for the
provision of management services for a fixed fee.
USA provides customers within the Middlesex System a service line maintenance
program called LineCare(SM). LineCare(SM) is an affordable maintenance program
that covers all parts, material and labor required to repair or replace specific
elements of the customer's water service line and customer shut-off value.
3
Middlesex and USA have entered into a venture with an entity that provides meter
installation and related services. This venture seeks to obtain competitively
bid service contracts with municipalities in the Mid-Atlantic and New England
regions. The contract work may include any or all of the following: meter
purchases, replacement meter program, new meter program and meter testing. These
businesses contributed approximately 3% of our total revenue in 2004.
Bayview System
Bayview provides water service to approximately 300 customers in Cumberland
County, New Jersey. Bayview produced less than 1% of our total revenue in 2004.
Financial Information
Consolidated operating revenues and operating income are as follows:
(Thousands of Dollars)
Years Ended December 31,
------------------------
2004 2003 2002
------- ------- -------
Operating Revenues $70,991 $64,111 $61,933
Operating Income $13,119 $11,500 $12,467
Operating revenues were earned from the following sources:
Years Ended December 31,
------------------------
2004 2003 2002
----- ----- -----
Residential 39.9% 39.4% 40.0%
Commercial 9.5 9.8 9.7
Industrial 10.9 11.1 11.9
Fire Protection 10.2 10.7 10.5
Contract Sales 12.8 13.2 14.1
Contract Operations 11.2 12.6 12.1
Other 5.5 3.2 1.7
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TOTAL 100.0% 100.0% 100.0%
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Water Supplies and Contracts
Our New Jersey and Delaware water supply systems are physically separate and are
not interconnected. In New Jersey, the Pinelands System and Bayview System are
not interconnected with the Middlesex System or each other. We believe we have
adequate sources of water supply to meet the current and anticipated future
service requirements of our present customers in New Jersey and Delaware.
Middlesex System
Our Middlesex System, which produced 16,623 million gallons in 2004, obtains
water from surface sources and wells, which we call groundwater sources. In
2004, surface sources of water provided approximately 70% of the
4
Middlesex System's water supply, groundwater from wells provided approximately
23% and the balance of 7% was purchased from a nonaffiliated water utility.
Middlesex System's distribution storage facilities are used to supply water to
its customers at times of peak demand, outages and emergencies.
The principal source of surface water supply for the Middlesex System is the
Delaware & Raritan Canal, which is owned by the State of New Jersey and operated
as a water resource by the New Jersey Water Supply Authority. Middlesex renewed
and modified its agreement with the New Jersey Water Supply Authority, which was
effective January 1, 2004 and expires November 30, 2023, and provides for an
average purchase of 27 million gallons per day of untreated water from the
Delaware & Raritan Canal, augmented by the Round Valley/Spruce Run Reservoir
System. Surface water is pumped to and treated at the Carl J. Olsen (CJO) Plant.
Middlesex also has an agreement with a nonaffiliated water utility for the
purchase of treated water. This agreement, which expires December 31, 2005,
provides for the minimum purchase of 3 million gallons per day of treated water
with provisions for additional purchases. Purchased water costs are shown below:
(Millions of Dollars)
Years Ended December 31,
------------------------
Purchased Water 2004 2003 2002
--------------- ---- ---- ----
Untreated $2.2 $2.0 $1.9
Treated 2.0 1.8 1.8
---- ---- ----
Total Costs $4.2 $3.8 $3.7
==== ==== ====
Our Middlesex System also derives water from groundwater sources equipped with
electric motor-driven, deepwell turbine-type pumps. The Middlesex System has 31
wells, which provide an aggregate pump capacity of approximately 27 million
gallons per day.
The Middlesex System's groundwater sources are:
2004
Maximum Use
No.of Per Day Pumpage Pump
Source Wells (millions of gallons) Capacity (mgd) Location
------ ----- --------------------- -------------- --------
Park Avenue 15 8.3 15.2 South Plainfield
Tingley Lane North 4 2.8 2.8 Edison
Tingley Lane South 5 2.1 2.6 Edison
Spring Lake 4 0.0 2.8 South Plainfield
Sprague Avenue #1 1 1.1 1.1 South Plainfield
Sprague Avenue #2 1 1.3 1.3 South Plainfield
Maple Avenue 1 0.0 0.9 South Plainfield
-- ---- ----
Totals 31 15.6 26.7
Tidewater System
Our Tidewater System, which produced 1,517 million gallons in 2004, obtains 100%
of its water from 202 wells. In 2004, we placed 11 new wells in service and also
deactivated, sealed and abandoned 18 wells. Tidewater continues to submit
applications to Delaware regulatory authorities for the approval of additional
wells as growth, demand and water quality warrants. The Tidewater System does
not have a central treatment facility but has several regional filter plants.
Several of its water systems in New Castle, Kent and Sussex Counties, Delaware
have interconnected transmission systems.
5
Pinelands System
Water supply to our Pinelands System is derived from four wells drilled into the
Mt. Laurel aquifer which provided overall system delivery of 179 million gallons
in 2004. The pump capacity for the four wells is 2.2 million gallons per day.
Bayview System
Water supply to Bayview customers is derived from two wells, which provided an
overall system delivery of 11 million gallons in 2004. Each well has treatment
facilities.
Pinelands Wastewater System
The Pinelands Wastewater System discharges into the South Branch of the Rancocas
Creek through a tertiary treatment plant that provides clarification,
sedimentation, filtration and disinfection. The total capacity of the plant is
0.5 million gallons per day. Current average flow is 0.3 million gallons per
day. Pinelands has a current valid discharge permit issued by the New Jersey
Department of Environmental Protection (DEP).
Employees
As of December 31, 2004, we had a total of 149 employees in New Jersey, and a
total of 71 employees in Delaware. In addition, we lease 22 employees under the
USA-PA contract with the City of Perth Amboy, New Jersey. No employees are
represented by a union except the leased employees. We believe our employee
relations are good. Wages and benefits, other than for leased employees, are
reviewed annually and are considered competitive within the industry.
Competition
Our business in our franchised service area is substantially free from direct
competition with other public utilities, municipalities and other entities.
However, our ability to provide some contract water supply and wastewater
services and operations and maintenance services is subject to competition from
other public utilities, municipalities and other entities. Although Tidewater
has been granted an exclusive franchise for each of its existing community water
systems, its ability to expand service areas can be affected by the PSC awarding
franchises to other regulated water utilities.
Regulation
We are regulated as to rates charged to customers for water and wastewater
services in New Jersey and for water services in Delaware, as to the quality of
water service we provide and as to certain other matters. Only our USA, USA-PA
and White Marsh subsidiaries are not regulated utilities. We are subject to
environmental and water quality regulation by the United States Environmental
Protection Agency (EPA), and the DEP with respect to operations in New Jersey
and the Delaware Department of Natural Resources and Environmental Control
(DNREC), Delaware Department of Health and Social Services-Division of Public
Health (DPH), and the Delaware River Basin Commission (DRBC) with respect to
operations in Delaware. In addition, our issuances of securities are subject to
the prior approval of the Securities and Exchange Commission and the BPU or the
PSC.
During 2004, the PSC assumed regulatory authority over wastewater services in
Delaware and issued proposed rules and regulations similar to the water systems
it regulates.
6
Regulation of Rates and Services
New Jersey water and wastewater service operations (excluding the operations of
USA-PA) are subject to regulation by the BPU. Similarly, our Delaware water
service operations, and beginning in 2005, wastewater services to be offered by
TESI, are subject to regulation by the PSC. These regulatory authorities have
jurisdiction with respect to rates, service, accounting procedures, the issuance
of securities and other matters of utility companies operating within the States
of New Jersey and Delaware, respectively. For ratemaking purposes, we account
separately for operations in New Jersey and Delaware to facilitate independent
ratemaking by the BPU for New Jersey operations and the PSC for Delaware
operations.
In determining our rates, the BPU and the PSC consider the income, expenses,
rate base of property used and useful in providing service to the public and a
fair rate of return on that property each within its separate jurisdiction. Rate
determinations by the BPU do not guarantee particular rates of return to us for
our New Jersey operations nor do rate determinations by the PSC guarantee
particular rates of return for our Delaware operations. Thus, we may not achieve
the rates of return permitted by the BPU or the PSC.
Effective May 27, 2004, Middlesex Water Company received approval from the BPU
for a 9.5%, or $4.3 million increase in its water rates. This increase
represents a portion of the Company's November 2003 request for a total rate
increase of 17.8% to cover the costs of its increased capital investment, as
well as maintenance and operating expenses.
Effective June 24, 2004, Pinelands Water and Pinelands Wastewater received
approval from the BPU for increases of 9.2% and 9.9%, respectively, or
approximately $131,000 in the aggregate. This increase represents a portion of
Pinelands' December 2003 request for a total base rate increase of approximately
$250,000 to help offset the increased costs associated with capital
improvements, and the operation and maintenance of their systems.
Effective June 25, 2004, Tidewater received approval from the PSC for an interim
increase of 15%, or $1.5 million in its water rates, which includes 4.89% of
previously Distribution System Improvement Charges (DSIC). On October 19, 2004,
the PSC approved a settlement between Tidewater and the interveners in the
matter. The settlement allowed the interim rates to become permanent. This
increase represents a portion of Tidewater's April 2004 request for at 24% rate
increase to accommodate the growth of Tidewater's customer base, improvements to
water treatment, fire protection and to interconnect systems for service
reliability and back-up. As part of the settlement, Tidewater will be eligible
to apply for a second phase rate increase of $0.5 million, provided it completes
a number of capital projects within a specified time schedule. Tidewater must
file an application for this increase no earlier than March 2005 or later than
May 2005. Upon verification of project completion, new rates will become
effective 30 days after the filing date. Tidewater also agreed to waive its
right to file DSIC applications over the next three six-month cycles (January
and July 2005, and January 2006) and to defer making an application for a
general rate increase until after April 1, 2006.
In accordance with the tariff established for Southern Shores, a rate increase
of 2.8% based on the Consumer Price Index was implemented on January 1, 2004.
Other than rates for the Southern Shores system, there can be no assurance that
any future rate increases will be granted or, if granted, that they will be in
the amounts we requested.
Water Quality and Environmental Regulations
Both the EPA and the DEP regulate our operations in New Jersey with respect to
water supply, treatment and distribution systems and the quality of the water,
as do the EPA, DNREC, DPH and DRBC with respect to operations in Delaware.
7
Federal, New Jersey and Delaware regulations adopted relating to water quality
require us to perform expanded types of testing to ensure that our water meets
state and federal water quality requirements. In addition, environmental
regulatory agencies are reviewing current regulations governing the limits of
certain organic compounds found in the water as byproducts of treatment. We
participate in industry-related research to identify the various types of
technology that might reduce the level of organic, inorganic and synthetic
compounds found in the water. The cost to water companies of complying with the
proposed water quality standards depends in part on the limits set in the
regulations and on the method selected to implement such reduction. We believe
the CJO Plant capabilities put us in a strong position to meet any such future
standards with regard to our Middlesex System. We use regular testing of our
water to determine compliance with existing federal, New Jersey and Delaware
primary water quality standards.
Well water treatment in our Tidewater System is by chlorination and, in some
cases, pH correction and filtration for nitrate and iron removal.
Well water treatment in the Pinelands and Bayview Systems (disinfection only) is
done at individual well sites.
The DEP and the DPH monitor our activities and review the results of water
quality tests that are performed for adherence to applicable regulations. Other
regulations applicable to us include the Lead and Copper Rule, the maximum
contaminant levels established for various volatile organic compounds, the
Federal Surface Water Treatment Rule and the Total Coliform Rule.
Management
This table lists information concerning our senior management team:
Name Age Principal Position(s)
- ------------------ --- -----------------------------------------------------
Dennis G. Sullivan 63 President and Chief Executive Officer
Dennis W. Doll 46 Executive Vice President
A. Bruce O'Connor 46 Vice President and Chief Financial Officer
Ronald F. Williams 55 Vice President-Operations and Chief Operating Officer
Kenneth J. Quinn 57 Vice President, General Counsel, Secretary and Treasurer
James P. Garrett 59 Vice President-Human Resources
Richard M. Risoldi 48 Vice President- Subsidiary Operations
Gerard L. Esposito 53 President, Tidewater Utilities, Inc.
Dennis G. Sullivan - Mr. Sullivan has been a Director of Middlesex since 1999.
Mr. Sullivan was hired in 1984 as Corporate Attorney, responsible for general
corporate internal legal matters. He was elected Assistant Secretary-Assistant
Treasurer in 1988 and Vice President and General Counsel in 1990. He was elected
President and General Counsel in 2001 and became President and Chief Executive
Officer in January 2003. He is Chairman of the Board and a Director of Tidewater
Utilities, Inc., Tidewater Environmental Services, Inc., White Marsh
Environmental Systems, Inc., Pinelands Water Company, Pinelands Wastewater
Company, Utility Service Affiliates, Inc., Utility Service Affiliates (Perth
Amboy) Inc. and Bayview Water Company. He is also a Director of the New Jersey
Utilities Association and the National Association of Water Companies.
Dennis W. Doll - Mr. Doll, a Certified Public Accountant, joined the Company in
November 2004 as Executive Vice President. Prior to joining the Company Mr. Doll
was employed by Elizabethtown Water Company since 1985, serving most recently as
a member of the senior leadership team of the Northeast Region of American
Water, which was comprised of Elizabethtown Water Company, New Jersey-American
Water Company and
8
Long Island Water Corporation and included other regulated and non-regulated
subsidiaries. In this capacity, Mr. Doll served as Vice President - Finance &
Controller and served previously, as Vice President - Merger Integration. Prior
to 2001, Mr. Doll served as Vice President & Controller of Elizabethtown,
Elizabethtown's parent company, E'town Corporation, and various other regulated
and non-regulated subsidiaries, primarily engaged in the water and wastewater
fields.
A. Bruce O'Connor - Mr. O'Connor, a Certified Public Accountant, joined the
Company in 1990 as Assistant Controller and was elected Controller in 1992 and
Vice President in 1995. He was elected Vice President and Controller and Chief
Financial Officer in 1996. In July 2004, his Controller responsibilities were
assigned to the newly created Corporate Controller position. He is responsible
for financial reporting, customer service, rate cases, cash management and
financings. He is Treasurer and a Director of Tidewater Utilities, Inc.,
Tidewater Environmental Services, Inc., Bayview Water Company, Utility Service
Affiliates, Inc., and White Marsh Environmental Systems, Inc. He is Vice
President, Treasurer and a Director of Utility Service Affiliates (Perth Amboy)
Inc., Pinelands Water Company and Pinelands Wastewater Company.
Ronald F. Williams - Mr. Williams was hired in 1995 as Assistant Vice
President-Operations, responsible for the Company's Engineering and Distribution
Departments. He was elected Vice President-Operations in October 1995. Mr.
Williams was elected to the additional posts of Assistant Secretary and
Assistant Treasurer for Middlesex in 2004. He was formerly employed with the
Garden State Water Company as President and Chief Executive Officer. He is a
Director and President of Utility Service Affiliates (Perth Amboy) Inc., and
Director of Utility Service Affiliates, Inc., Pinelands Water Company, Pinelands
Wastewater Company, and Bayview Water Company.
Kenneth J. Quinn - Mr. Quinn joined the Company in 2002 as General Counsel and
was elected Assistant Secretary in 2003. In 2004, Mr. Quinn was elected Vice
President, Secretary and Treasurer for Middlesex and Secretary and Assistant
Treasurer for all subsidiaries of Middlesex. He has been engaged in the practice
of law for 29 years and prior to joining the Company he had been employed by the
law firm of Schenck, Price, Smith and King in Morristown, New Jersey. Prior to
that, Mr. Quinn spent 10 years as in-house counsel to two major banking
institutions located in New Jersey. In May 2003, he was elected Assistant
Secretary of Tidewater Utilities, Inc., Pinelands Water Company, Pinelands
Wastewater Company, Utility Service Affiliates (Perth Amboy) Inc., Bayview Water
Company and White Marsh Environmental Systems, Inc. He is a Director of Utility
Service Affiliates (Perth Amboy) Inc., Utility Service Affiliates, Inc.,
Pinelands Water Company, Pinelands Wastewater Company, and Bayview Water
Company. He is a member of the New Jersey State Bar Association and is also a
member of the Public Utility Law Section of the Bar.
James P. Garrett - Mr. Garrett joined the Company in 2003 as Assistant Vice
President-Human Resources. In May 2004, he was elected Vice President- Human
Resources. Prior to his hire, Mr. Garrett was employed by Toys "R" Us, Inc. for
23 years, most recently as Director of Organizational Development. Mr. Garrett
is responsible for all human resource programs and activities at Middlesex Water
Company and its subsidiaries.
Richard M. Risoldi - Mr. Risoldi joined the Company in 1989 as Director of
Production, responsible for the operation and maintenance of the Company's
treatment and pumping facilities. He was appointed Assistant Vice President of
Operations in 2003. He was elected Vice President in May 2004, responsible for
regulated subsidiary operations and business development. He is a Director of
Tidewater Utilities, Inc., Tidewater Environmental Services, Inc., White Marsh
Environmental Systems Inc and USA-PA. He also serves as Director and President
of Pinelands Water Company, Pinelands Wastewater Company, Bayview Water Company
and Utility Service Affiliates, Inc.
Gerard L. Esposito - Mr. Esposito joined Tidewater Utilities, Inc. in 1998 as
Executive Vice President. He was elected President of Tidewater and White Marsh
Environmental Systems, Inc. in 2003 and elected President of Tidewater
Environmental Services, Inc. in January 2005 . Prior to joining the Company he
worked for 22 years
9
in various executive positions for Delaware environmental protection and water
quality governmental agencies. He is a Director of Tidewater Utilities, Inc.,
Tidewater Environmental Services, Inc., and White Marsh Environmental Systems,
Inc.
Risk Factors
Our revenue and earnings depend on the rates we charge our customers. We cannot
raise utility rates without filing a petition with the appropriate governmental
agency. If these agencies modify, delay, or deny our petition, our revenues will
not increase and our earnings will decline unless we are able to reduce costs.
The BPU regulates all of our public utility companies in New Jersey with respect
to rates and charges for service, classification of accounts, awards of new
service territory, acquisitions, financings and other matters. That means, for
example, that we cannot raise the utility rates we charge to our customers
without first filing a petition with the BPU and going through a lengthy
administrative process. In much the same way, the PSC regulates our public
utility companies in Delaware. We cannot give assurances of when we will request
approval for any such matter, nor can we predict whether the BPU or PSC will
approve, deny or reduce the amount of such requests.
Certain costs of doing business are not within our control. The failure to
obtain any rate increase would prevent us from increasing our revenues and,
unless we are able to reduce costs, would result in reduced earnings.
We are subject to penalties unless we comply with environmental laws and
regulations, including water quality regulations. Compliance with those laws and
regulations impose costs on us.
The EPA and DEP regulate our operations in New Jersey with respect to water
supply, treatment and distribution systems and the quality of the water, as do
the EPA, DNREC, DPH and DRBC with respect to operations in Delaware. Federal,
New Jersey and Delaware regulations relating to water quality require us to
perform expanded types of testing to ensure that our water meets state and
federal water quality requirements. We are subject to EPA regulations under the
Federal Safe Drinking Water Act, which include the Lead and Copper Rule, the
maximum contaminant levels established for various volatile organic compounds,
the Federal Surface Water Treatment Rule and the Total Coliform Rule. There are
also similar state regulations by the DEP in New Jersey. The DEP and DPH monitor
our activities and review the results of water quality tests that we perform for
adherence to applicable regulations. In addition, environmental regulatory
agencies are reviewing current regulations governing the limits of certain
organic compounds found in the water as byproducts of treatment.
The cost to water companies of complying with the proposed water quality
standards depends in part on the limits set in the regulations and on the method
selected to implement them. Those costs could be very high and make us less
profitable if we cannot recover those costs through our rates that we charge our
customers.
We depend upon our ability to raise money in the capital markets to finance some
of the costs of complying with laws and regulations, including environmental
laws and regulations or to pay for some of the costs of improvements or the
expansion of our utility system assets. We cannot issue debt or equity
securities without regulatory approval.
We require financing to fund the ongoing capital program for the improvement of
our utility system assets and for planned expansion of that system. We project
that we may expend approximately $74.4 million for existing capital projects. We
must have regulatory approval to sell debt or equity securities to raise money
for these projects. If sufficient capital is not available or the cost of
capital is too high, or if the regulatory authorities deny a petition of ours to
sell debt or equity securities, we would not be able to meet the cost of
complying with
10
environmental laws and regulations or the costs of improving and expanding our
utility system assets. This might result in the imposition of fines or
restrictions on our operations and may curtail our ability to improve upon and
expand our utility system assets.
Weather conditions and overuse of underground aquifers may interfere with our
sources of water, demand for water services, and our ability to supply water to
customers.
Our ability to meet the existing and future water demands of our customers
depends on an adequate supply of water. Unexpected conditions may interfere with
our water supply sources. Drought and overuse of underground aquifers may limit
the availability of ground and surface water. These factors might adversely
affect our ability to supply water in sufficient quantities to our customers.
Governmental drought restrictions might result in decreased use of water
services and can adversely affect our revenue and earnings. Additionally, cool
and wet weather may reduce consumption demands, also adversely affecting our
revenue and earnings. Freezing weather may also contribute to water transmission
interruptions caused by pipe and main breakage. Any interruption in our water
supply could cause a reduction in our revenue and profitability.
Our water sources may become contaminated by naturally-occurring or man-made
compounds and events. This may cause disruption in services and impose costs to
restore the water to required levels of quality.
Our sources of water may become contaminated by naturally-occurring or man-made
compounds and events. In the event that our water supply is contaminated, we may
have to interrupt the use of that water supply until we are able to install
treatment equipment or substitute the flow of water from an uncontaminated water
source through our transmission and distribution systems. We may also incur
significant costs in treating the contaminated water through the use of our
current treatment facilities, or development of new treatment methods. Our
inability to substitute water supply from an uncontaminated water source, or to
adequately treat the contaminated water source in a cost-effective manner may
reduce our revenues and make us less profitable.
The necessity for increased security has and may continue to result in increased
operating costs.
In the wake of the September 11, 2001 terrorist attacks and the ensuing threats
to the health and security of the United States of America, we have taken steps
to increase security measures at our facilities and heighten employee awareness
of threats to our water supply. We have tightened our security measures
regarding the delivery and handling of certain chemicals used in our business.
We are at risk for terrorist attacks and have and will continue to incur
increased costs for security precautions to protect our facilities, operations
and supplies from such risks.
We face competition from other utilities and service providers which might
hinder our growth and reduce our profitability.
We face risks of competition from other utilities authorized by federal, state
or local agencies. Once a utility regulator grants a service territory to a
utility, that utility is usually the only one to service that territory.
Although a new territory offers some protection against competitors, the pursuit
of service territories is competitive, especially in Delaware where new
territories may be awarded to utilities based upon competitive negotiation.
Competing utilities have challenged, and may in the future challenge, our
applications for new service territories. Also, third parties entering into
long-term agreements to operate municipal systems might adversely affect us and
our long-term agreements to supply water on a contract basis to municipalities.
We have a long-term contractual obligation for water and wastewater system
operation and maintenance under which we may incur costs in excess of payments
received.
11
Middlesex Water Company and USA-PA operate and maintain the water and wastewater
systems of the City of Perth Amboy, New Jersey under a multi-year contract. This
contract does not protect us against incurring costs in excess of payments we
will receive pursuant to the contract. There can be no assurance that we will
not experience losses resulting from this contract. Losses under this contract
or our failure or inability to perform may have a material adverse effect on our
financial condition and results of operations. Also, as of December 31, 2004,
approximately $23.9 million of Perth Amboy's bonds we have guaranteed remain
outstanding. If Perth Amboy defaults on its obligations to pay the bonds we have
guaranteed, we would have to raise funds to meet our obligations under that
guarantee,
An important element of our growth strategy is the acquisition of water and
wastewater systems. Any pending or future acquisitions we decide to undertake
may involve risks.
The acquisition of water and wastewater systems is an important element in our
growth strategy. This strategy depends on identifying suitable acquisition
opportunities and reaching mutually agreeable terms with acquisition candidates.
The negotiation of potential acquisitions as well as the integration of acquired
businesses could require us to incur significant costs and cause diversion of
our management's time and resources. Further, acquisitions may result in
dilution of our equity securities, incurrence of debt and contingent
liabilities, fluctuations in quarterly results and other acquisition related
expenses. In addition, the business and other assets we acquire may not achieve
the sales and profitability expected.
We have restrictions on our dividends. There can also be no assurance that we
will continue to pay dividends in the future or, if dividends are paid, that
they will be in amounts similar to past dividends.
Our Restated Certificate of Incorporation and our Indenture of Mortgage dated as
of April 1, 1927, as supplemented impose conditions on our ability to pay
dividends. We have paid dividends on our common stock each year since 1912 and
have increased the amount of dividends paid each year since 1973. Our earnings,
financial condition, capital requirements, applicable regulations and other
factors, including the timeliness and adequacy of rate increases, will determine
both our ability to pay dividends on common stock and the amount of those
dividends. There can be no assurance that we will continue to pay dividends in
the future or, if dividends are paid, that they will be in amounts similar to
past dividends.
We are subject to anti-takeover measures that may be used by existing management
to discourage, delay or prevent changes of control that might benefit
non-management shareholders.
Subsection 10A of the New Jersey Business Corporation Act, known as the
Shareholder Protection Act, applies to us. The Shareholder Protection Act deters
merger proposals, tender offers or other attempts to effect changes in our
control that are not negotiated and approved by our Board of Directors. In
addition, we have a classified Board of Directors, which means only one-third of
the Directors are elected each year. A classified Board can make it harder for
an acquirer to gain control by voting its candidates onto the Board of Directors
and may also deter merger proposals and tender offers. Our Board of Directors
also has the ability, subject to obtaining BPU approval, to issue one or more
series of preferred stock having such number of shares, designation,
preferences, voting rights, limitations and other rights as the Board of
Directors may fix. This could be used by the Board of Directors to discourage,
delay or prevent an acquisition that might benefit non-management shareholders.
12
Item 2. Properties.
Utility Plant
The water utility plant in our systems consist of source of supply, pumping,
water treatment, transmission and distribution, general facilities and all
appurtenances, including all connecting pipes.
Middlesex System
The Middlesex System's principal source of surface supply is the Delaware &
Raritan Canal owned by the State of New Jersey and operated as a water resource
by the New Jersey Water Supply Authority.
Water is withdrawn from the Delaware & Raritan Canal at New Brunswick, New
Jersey through our intake and pumping station, which has a design capacity of 80
million gallons per day and is located on state-owned land bordering the canal.
The four electric motor-driven, vertical turbine pumps presently installed have
an aggregate design capacity of 82 million gallons per day. Water is transported
through our 4,900 foot 54-inch reinforced concrete supply main for treatment and
distribution at our CJO Plant in Edison, New Jersey. The design capacity of our
raw water supply main is 55 million gallons per day.
In the Spring of 2004, the Company began construction on a second raw water
pipeline from the intake and pumping station to the CJO Plant. The pipeline,
which is approximately 6,100 feet of 60-inch ductile iron pipe, will provide for
redundancy, additional security, and additional capacity. The project, which
includes renovations to the intake and pumping station, is scheduled to be
completed in the Spring of 2005 (see Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation- Liquidity and Capital
Resources- Capital Expenditures and Commitments for additional discussion).
The CJO Plant includes chemical storage and chemical feed equipment, two dual
rapid mixing basins, four upflow clarifiers which are also called
superpulsators, four underground reinforced chlorine contact tanks, twelve rapid
filters containing gravel, sand and anthracite for water treatment and a steel
washwater tank. The CJO Plant also includes a computerized Supervisory Control
and Data Acquisitions system to monitor and control the CJO Plant and the water
supply and distribution system in the Middlesex System. There is an on site
State certified laboratory capable of performing bacteriological, chemical,
process control and advanced instrumental chemical sampling and analysis. The
firm design capacity of the CJO Plant is 45 million gallons per day (60 million
gallons per day maximum capacity). The main pumping station at the CJO Plant has
a design capacity of 90 million gallons per day. The four electric motor-driven,
vertical turbine pumps presently installed have an aggregate capacity of 72
million gallons per day.
In addition, there is a 15 million gallon per day auxiliary pumping station
located in a separate building at the CJO Plant location. It has a dedicated
substation and emergency power supply provided by a diesel-driven generator. It
pumps from the 10 million gallon distribution storage reservoir directly into
the distribution system.
The transmission and distribution system is comprised of 722 miles of mains and
includes 23,200 feet of 48-inch reinforced concrete transmission main connecting
the CJO Plant to our distribution pipe network and related storage facilities.
Also included is a 58,600 foot transmission main and a 38,800 foot transmission
main, augmented with a long-term, non-exclusive agreement with the East
Brunswick system to transport water to several of our contract customers.
Middlesex System's storage facilities consist of a 10 million gallon reservoir
at the CJO Plant, 5 million gallon and 2 million gallon reservoirs in Edison
(Grandview), a 5 million gallon reservoir in Carteret (Eborn) and a 2 million
gallon reservoir at the Park Avenue Well Field.
13
In New Jersey, we own the properties on which Middlesex System's 31 wells are
located, the properties on which our storage tanks are located as well as the
property where the CJO Plant is located. We also own our headquarters complex
located at 1500 Ronson Road, Iselin, New Jersey, consisting of a 27,000 square
foot, two story office building and an adjacent 16,500 square foot maintenance
facility.
Tidewater System
The Tidewater System's is comprised of 91 production plants that vary in pumping
capacity from 40,000 gallons per day to 1.5 million gallons per day. Water is
transported to our customers through 446 miles of transmission and distribution
mains. Storage facilities include 38 tanks, with an aggregate capacity of 4.7
million gallons. Our Delaware operations are managed from Tidewater's leased
offices in Dover, Delaware and Millsboro, Delaware. Tidewater's Dover, Delaware
office property, located on property owned by White Marsh, consists of a 6,800
square foot office building situated on an eleven-acre lot. White Marsh also
owns another business site for which it is exploring several options for future
use.
Pinelands System
Pinelands Water owns well site and storage properties that are located in
Southampton Township, New Jersey. The Pinelands Water storage facility is a 1.2
million gallon standpipe. Water is transported to our customers through 18 miles
of transmission and distribution mains.
Pinelands Wastewater System
Pinelands Wastewater owns a 12 acre site on which its 0.5 million gallons per
day capacity tertiary treatment plant and connecting pipes are located. Its
wastewater collection system is comprised of approximately 24.5 miles of main.
Bayview System
Bayview owns two wells, which are located in Downe Township, Cumberland County,
New Jersey. Water is transported to its customers through our 3.5 mile
distribution system.
USA-PA, USA and White Marsh
Our non-regulated subsidiaries, namely USA-PA, USA and White Marsh, do not own
utility plant property.
Item 3. Legal Proceedings
A lawsuit was filed in 1998 against the Company for damages involving the break
of both a Company water line and an underground electric power cable containing
both electric lines and petroleum based insulating fluid. The electric utility
also asserted claims against the Company. The lawsuit was settled in 2003, and
by agreement, the electric utility's counterclaim for approximately $1.1 million
in damages was submitted to binding arbitration, in which the agreed maximum
exposure of the Company is $0.3 million, which the Company has accrued for.
While we are unable to predict the outcome of the arbitration, we believe that
we have substantial defenses.
A claim involving a construction subcontractor, the Company's general contractor
and the Company concerning a major construction project was settled during
October 2004. The matter was instituted in 2001, and related to work required to
be performed under a construction contract and related subcontracts and included
payment
14
issues and timing/delay issues. The amount that was determined to be due from us
for the work performed was $1.4 million and was recorded as an addition to
utility plant in service during fiscal 2004.
The Company is defendant in various lawsuits. We believe the resolution of
pending claims and legal proceedings will not have a material adverse effect on
the Company's consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
(a) Market Information
The Company's common stock is traded on the NASDAQ Stock Market, under the
symbol MSEX. The following table shows the range of high and low share prices
per share for the common stock and the dividend paid to shareholders in such
quarter.
2004 High Low Dividend
---- ---- --- --------
Fourth Quarter $ 20.72 $ 17.06 $0.1675
Third Quarter 19.50 16.65 0.1650
Second Quarter 21.81 18.83 0.1650
First Quarter 21.32 19.38 0.1650
2003 High Low Dividend
---- ---- --- --------
Fourth Quarter $ 21.12 $ 18.19 $0.1650
Third Quarter 21.23 17.72 0.1613
Second Quarter 18.49 16.32 0.1613
First Quarter 18.00 15.77 0.1613
(b) Approximate Number of Equity Security Holders as of December 31,
2004
Number of
Title of Class Record Holders
-------------- --------------
Common Stock, No Par Value 2,077
Cumulative Preferred Stock, No Par Value:
$7.00 Series 14
$4.75 Series 1
Cumulative Convertible Preferred Stock, No Par Value:
$7.00 Series 4
$8.00 Series 3
15
(c) Dividends
The Company has paid dividends on its common stock each year since 1912.
Although it is the present intention of the Board of Directors of the Company to
continue to pay regular quarterly cash dividends on its common stock, the
payment of future dividends is contingent upon the future earnings of the
Company, its financial condition and other factors deemed relevant by the Board
of Directors at its discretion.
If four or more quarterly dividends are in arrears, the preferred shareholders,
as a class, are entitled to elect two members to the Board of Directors in
addition to Directors elected by holders of the common stock. In the event
dividends on the preferred stock are in arrears, no dividends may be declared or
paid on the common stock of the Company. Substantially all of the Utility Plant
of the Company is subject to the lien of its mortgage, which also includes
certain restrictions as to cash dividend payments and other distributions on
common stock.
(d) Restricted Stock Plan
The Company maintains a shareholder approved restricted Stock Plan, under which
65,233 shares of the Company's common stock are held in escrow by the Company
for key employees. Such stock is subject to an agreement requiring forfeiture by
the employee in the event of termination of employment within five years of the
grant other than as a result of retirement, death or disability. The maximum
number of shares authorized for grant under this plan is 240,000 shares.
(e) Sale of Unregistered Securities
The Company did not issue any shares of unregistered securities during fiscal
years 2004, 2003, or 2002.
(f) Issuer Purchases of Equity Securities
The Company did not purchase any shares of its equity securities during fiscal
year 2004.
16
Item 6. Selected Financial Data
CONSOLIDATED SELECTED FINANCIAL DATA
(Thousands of Dollars Except per Share Data)
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Operating Revenues $ 70,991 $ 64,111 $ 61,933 $ 59,638 $ 54,477
- ----------------------------------------------------------------------------------------------------
Operating Expenses:
Operations and Maintenance 39,984 36,195 32,767 31,740 30,269
Depreciation 5,846 5,363 4,963 5,051 4,701
Other Taxes 8,228 7,816 7,737 7,594 6,916
Income Taxes 3,814 3,237 3,999 3,760 2,653
- ----------------------------------------------------------------------------------------------------
Total Operating Expenses 57,872 52,611 49,466 48,145 44,539
- ----------------------------------------------------------------------------------------------------
Operating Income 13,119 11,500 12,467 11,493 9,938
Other Income, Net 795 358 442 502 364
Interest Charges 5,468 5,227 5,144 5,042 4,997
- ----------------------------------------------------------------------------------------------------
Net Income 8,446 6,631 7,765 6,953 5,305
Preferred Stock Dividend 255 255 255 255 255
- ----------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 8,191 $ 6,376 $ 7,510 $ 6,698 $ 5,050
- ----------------------------------------------------------------------------------------------------
Earnings per Share:
Basic $ 0.74 $ 0.61 $ 0.73 $ 0.66 $ 0.50
Diluted $ 0.73 $ 0.61 $ 0.73 $ 0.66 $ 0.50
Average Shares Outstanding:
Basic 11,080 10,475 10,280 10,131 10,044
Diluted 11,423 10,818 10,623 10,474 10,387
Dividends Declared and Paid $ 0.663 $ 0.649 $ 0.634 $ 0.623 $ 0.613
Total Assets $305,634* $267,956* $251,971* $242,512* $224,534*
Convertible Preferred Stock $ 2,961 $ 2,961 $ 2,961 $ 2,961 $ 2,961
Long-term Debt $115,281 $ 97,377 $ 87,483 $ 88,140 $ 82,109
- ----------------------------------------------------------------------------------------------------
* As Restated (see Note 10 of the Notes to the Consolidated Financial Statements included in Item 8)
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussions of the Company's historical results of operations and
financial condition should be read in conjunction with the Company's
consolidated financial statements and related notes.
This Management's Discussion and Analysis of Financial Condition and Results of
Operation reflects the restatement of the Company's Consolidated Financial
Statements, as discussed in Note 10 of the Notes to the Consolidated Financial
Statements.
Overview
Middlesex Water Company has operated as a water utility in New Jersey since
1897, and in Delaware, through our wholly-owned subsidiary, Tidewater, since
1992. We are in the business of collecting, treating, distributing and selling
water for domestic, commercial, municipal, industrial and fire protection
purposes. We also operate a New Jersey municipal water and wastewater system
under contract and provide wastewater services in New Jersey and Delaware
through our subsidiaries. We are regulated as to rates charged to customers for
water and wastewater services in New Jersey and for water services in Delaware,
as to the quality of water service we provide and as to certain other matters.
Our TESI subsidiary is expected to commence operations during 2005 as a
regulated wastewater utility in Delaware. Only our USA, USA-PA and White Marsh
subsidiaries are not regulated utilities.
Our New Jersey water utility system (the Middlesex System) provides water
services to approximately 58,000 retail customers, primarily in central New
Jersey. The Middlesex System also provides water service under contract to
municipalities in central New Jersey with a total population of approximately
267,000. In partnership with our subsidiary, USA-PA, we operate the water supply
system and wastewater system for the City of Perth Amboy, New Jersey. Our other
New Jersey subsidiaries, Pinelands Water and Pinelands Wastewater, provide water
and wastewater services to residents in Southampton Township, New Jersey.
Our Delaware subsidiaries, Tidewater and Southern Shores, provide water services
to approximately 26,000 retail customers in New Castle, Kent and Sussex
Counties, Delaware. Our other Delaware subsidiary, White Marsh, services an
additional 4,500 customers in Kent and Sussex Counties.
The majority of our revenue is generated from retail and contract water services
to customers in our service areas. We record water service revenue as such
service is rendered and include estimates for amounts unbilled at the end of the
period for services provided after the last billing cycle. Fixed service charges
are billed in advance by our subsidiary, Tidewater, and are recognized in
revenue as the service is provided.
Our ability to increase operating income and net income is based significantly
on three factors: weather, adequate and timely rate increases, and customer
growth. These factors are evident in the discussions below which compare our
results of operations from prior years.
Results of Operations in 2004 Compared to 2003
Operating revenues for the year rose $6.9 million, or 10.7% over the same period
in 2003. Water sales improved by $2.9 million in our Middlesex system, which was
primarily a result of base rate increases. Customer growth of 10.4% in Delaware
provided additional consumption revenues of $1.2 million and higher base rates
provided $0.8 million. Our meter services venture provided $2.0 million of
additional revenues for completed meter installations. New unregulated
wastewater contracts in Delaware provided $0.3 million in additional revenues.
Base rate increases for our Pinelands system contributed $0.1 million of
additional revenues. Revenues from our operations and maintenance contracts
decreased $0.4 million due to scheduled reductions in fixed fees under the City
of Perth Amboy contract.
While we anticipate continued growth in the number of customers and increased
water consumption among our Delaware systems, such growth and increased
consumption cannot be guaranteed. Weather conditions may
18
adversely impact future consumption even with an anticipated growth in the
number of customers. Our New Jersey systems are also highly dependent on the
effects of weather. Our ability to generate operating revenues by our meter
services venture is dependent upon our ability to obtain additional contracts,
however USA did not submit bids for any meter service contracts during fiscal
2004 and currently does not expect to submit any bids during fiscal 2005. The
existing meter services contracts were substantially completed during the fourth
quarter of 2004.
Operating expenses increased by $5.3 million, or 10.0% as compared to the same
period in 2003. Operation and maintenance expenses increased $3.8 million or
10.5%. In New Jersey, payroll costs, employee benefits and corporate governance
related fees increased costs by $1.1 million. Source of supply and pumping costs
for the Middlesex system increased by $0.7 million combined due to increased
costs for electricity and purchased water. Costs to operate the Tidewater
system, as well as an increase in our Delaware employee base, general wage
increases and higher costs associated with employee medical and retirement
benefits increased costs by $0.6 million. The costs of our meter services
venture increased $1.6 million due to completed installations. The costs of our
non-regulated wastewater operations and maintenance contracts increased $0.3
million due to additional contracts obtained during the year. These increases
were partially offset by $0.4 million of reduced costs related to our City of
Perth Amboy contract due to reduced water treatment costs and a decrease of $0.1
million for water main repair costs in our Middlesex system.
Going forward we anticipate an increase in New Jersey's electric generation
costs due to deregulation of electricity. These increasing costs, in addition to
higher business insurance and corporate governance costs, as well as completion
of the new raw water pipeline during the second quarter of 2005 will require us
to file for a base rate increase with the BPU for Middlesex during 2005. We
cannot predict whether the BPU will approve, deny or reduce the amount of any
request.
Depreciation expense for 2004 increased by $0.5 million, or 9.0%, due to a
higher level of utility plant in service. Allowance for funds used during
construction rose by $0.3 million for the year, due to large construction
projects in New Jersey for the RENEW program and a new raw water pipeline (see
Liquidity and Capital Resources for additional discussion of capital spending).
As our investments in utility plant and operating expenses increase, we continue
to seek timely rate relief through base rate filings as discussed above.
Other taxes increased by $0.4 million generally reflecting additional taxes on
higher taxable gross revenues, payroll and real estate. Improved operating
results in 2004 compared to 2003 led to higher income taxes of $0.8 million,
which was partially offset by $0.2 million of tax benefits.
Other income increased $0.1 million, primarily due the recognition of a gain on
the sale of real estate that had previously been deferred pending the outcome of
the Middlesex rate case.
Interest expense increased by $0.2 million, primarily due to higher average
long-term borrowings as compared to the prior year period.
Net income increased by 27.4% to $8.4 million from $6.6 million in the prior
year, and basic earnings per share increased from $0.61 to $0.74. Diluted
earnings per share increased from $0.61 to $0.73. The increase in earnings per
share was impacted by the higher number of shares outstanding during the current
year as a result of the sale of 700,000 shares of common stock in May 2004.
19
Results of Operations in 2003 Compared to 2002
Operating revenues for the year rose $2.2 million, or 3.5% over the same period
in 2002. Customer growth of 10.9% in Delaware provided additional facility
charges and connection fees of $1.4 million. Higher base rates in our Delaware
service territories provided $0.6 million of the increase. For the year ended
December 31, 2003, cool wet weather in the Mid-Atlantic region pushed
Tidewater's consumption revenue down by $0.3 million and Middlesex consumption
revenue down by $0.5 million. Despite such adverse weather conditions, revenues
from our operations and maintenance contracts rose $0.5 million due to scheduled
increases in fixed fees under the City of Perth Amboy contract.
New unregulated wastewater operations in Delaware provided $0.1 million in
additional revenues. Our new meter services venture provided $0.3 million in
additional revenues. All other operations accounted for $0.1 million of the
higher revenues.
Operating expenses increased by $3.1 million, or 6.4%. Costs related to main
breaks resulting from severe winter weather conditions in the first quarter of
2003 contributed to additional expenses of $0.4 million. There were also higher
sewer disposal fees and security costs for USA-PA that helped increase costs by
$0.6 million. An increase in our Delaware employee base, general wage increases
and higher costs associated with employee medical and retirement benefits pushed
up costs by $0.7 million. In New Jersey, payroll costs, employee benefits and
legal fees pushed up costs by $0.9 million. Non-regulated operations of meter
installations and wastewater, which began in 2003, contributed $0.3 million of
the overall expense increase. Water treatment, source of supply and pumping
costs increased by $0.5 million combined.
Depreciation expense for 2003 increased by $0.4 million, or 8.1%, due to a
higher level of utility plant in service. Allowance for funds used during
construction rose 17% for the year as Tidewater's capital program included
larger projects with longer construction schedules.
Other taxes increased by $0.1 million generally due to higher payroll related
taxes and real estate taxes in both New Jersey and Delaware. Lower federal
income taxes of $0.8 million over last year are attributable to the reduced
operating results for 2003 as compared to 2002.
Other income decreased by $0.1 million as interest rates fell on short-term cash
balance investments. Interest expense increased by $0.1 million due to a higher
level of overall debt outstanding as compared to last year.
Net income decreased to $6.6 million from $7.8 million and basic and diluted
earnings per share decreased by $0.12 to $0.61 due to lower earnings.
Outlook
In addition to some of the factors previously discussed under "Results of
Operations in 2004 Compared to 2003," our revenues are expected to increase in
2005 from anticipated customer growth in Delaware for our regulated operations
and, to a lesser degree, from growth of non-regulated operations in Delaware and
elsewhere. We settled four rate cases during 2004, from which we expect to
receive the full annualized benefit in 2005. Revenues and earnings will also be
influenced by weather. Changes in these factors, as well as increases in capital
expenditures and operating costs are the primary factors that determine the need
for rate increase filings. The level of revenues and earnings will be impacted
by the ultimate timing and outcome of the anticipated base rate filing in New
Jersey during 2005.
We continue to explore viable plans to streamline operations and reduce costs,
particularly in Delaware, where customer growth continues to exceed industry
averages. Part of the challenge is that our Delaware operations are a
combination of over 91 stand-alone production and distribution systems serving
250 communities.
20
As a result of anticipated regulation of wastewater services in Delaware, we
have established a new regulated wastewater operation that will commence
operations during fiscal 2005. Due to the start-up nature of this operation, we
expect our expenses with respect to this subsidiary to exceed its revenues in
the near term.
We expect our interest expense to increase during 2005 as a result of incurring
a full year of interest expense on the approximately $19.0 million of long-term
debt we financed during fiscal 2004 and higher expected average borrowings and
interest rates on short-term credit facilities in order to finance a portion of
our capital expenditures during the coming year (see Liquidity and Capital
Resources).
Our strategy includes continued revenue growth through acquisitions, internal
expansion, contract operations and when necessary, rate relief. We will continue
to pursue opportunities in both the regulated and non-regulated sectors that are
financially sound, complement existing operations and increase shareholder
value.
Liquidity and Capital Resources
Cash flows from operations are largely based on three factors: weather, adequate
and timely rate increases, and customer growth. The effect of those factors on
net income is discussed in results of operations. For 2004, cash flows from
operating activities increased $1.4 million to $15.6 million, as compared to the
prior year. This increase was primarily attributable to improved profitability
during the current year period and the timing of payments made toward prepaid
expenses, materials and supplies, and employee benefit plans. These increases in
cash flows were partially offset by the timing of collection of customer
accounts and payments to vendors. The $15.6 million of net cash flow from
operations allowed us to fund approximately 54% of our utility plant
expenditures for the period internally, with the remainder funded with both
short-term and long-term borrowings. Net proceeds from issuing long-term debt
were used to fund the balance of those expenditures.
For 2003, net cash flow from operations of $14.2 million, which increased over
2002 due to lower working capital requirements, and proceeds from prior year
financings allowed us to fund approximately 81% of our 2003 utility plant
expenditures. Net proceeds from issuing long-term debt were used to fund the
balance of those expenditures.
Increases in certain operating costs will impact our liquidity and capital
resources. As described in our results of operations discussion, during 2004 we
received rate relief for Middlesex, Tidewater and the Pinelands Companies. We
also plan to file for a base rate increase for Middlesex in 2005 in conjunction
with the completion of the raw water pipeline project (see Capital Expenditures
and Commitments). There is no certainty, however, that the BPU will approve any
or all of this or other future requested increases.
Sources of Liquidity
Short-Term Debt. The Board of Directors has authorized lines of credit for up to
an aggregate of $40.0 million. As of December 31, 2004, the Company has
established revolving lines of credit aggregating $33.0 million. At December 31,
2004, the outstanding borrowings under these credit lines were $11.0 million at
a weighted average interest rate of 3.42%. As of that date, the Company had
borrowing capacity of $22.0 million under its credit lines.
The weighted average daily amounts of borrowings outstanding under the Company's
credit lines and the weighted average interest rates on those amounts were $8.9
million and $14.0 million at 2.37% and 1.89% for the years ended December 31,
2004 and 2003, respectively.
Long-Term Debt. Subject to regulatory approval, the Company periodically
finances capital projects under State Revolving Fund (SRF) loan programs in New
Jersey and Delaware. These government programs provide
21
financing at interest rates that are typically below rates available in the
financial markets. A portion of the borrowings under the New Jersey SRF is
interest free. We participated in the SRF loan programs during 2004 and will
continue to pursue opportunities to participate as circumstances allow us in the
future.
During 2004, Middlesex closed on $16.6 million of first mortgage bonds through
the New Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey
SRF loan program in order to finance the costs of a new raw water pipeline and
our 2005 and 2006 RENEW programs (see Capital Expenditures and Commitments for
discussion of these projects). The proceeds of these bonds and any interest
earned are held by a trustee, and are classified as Restricted Cash on the
Consolidated Balance Sheet.
During 2004, Tidewater closed on a Delaware SRF loan of $0.8 million to fund a
portion of its multi-year capital program. The Delaware SRF program will allow,
but does not obligate, Tidewater to draw down against a General Obligation Note
for three specific projects.
Substantially all of the Utility Plant of the Company is subject to the lien of
its mortgage, which also includes debt service and capital ratio covenants,
certain restrictions as to cash dividend payments and other distributions on
common stock. The Company is in compliance with all of its mortgage covenants
and restrictions.
Common Stock. The Company periodically issues shares of common stock in
connection with its dividend reinvestment and stock purchase plan. Periodically,
the Company may issue additional equity to reduce short-term indebtedness and
for other general corporate purposes. During 2004, the Company issued $15.1
million of common stock, which included a common stock offering of 700,000
shares that was priced at $19.80 in May. The majority of the net proceeds of
approximately $12.9 million from the common stock offering were used to repay
most of the Company's short-term borrowings outstanding at that time.
Capital Expenditures and Commitments
As shown in the following table, we expect our capital expenditures in 2005 and
2006 to increase over 2004. These increases are attributable to a major pipeline
installation in the Middlesex system and continued customer growth and service
improvement requirements in our Tidewater systems in Delaware, where we spent
$12.8 million on utility plant in 2004. At this time we have not determined any
amounts anticipated to be spent by TESI in the table below.
(Millions of Dollars)
2005 2006 2007
----- ----- -----
Delaware Systems $16.5 $18.1 $ 9.3
Raw Water Line 3.4 -- --
RENEW Program 3.3 3.3 3.3
Scheduled Upgrades to Existing Systems 5.3 8.1 3.8
----- ----- -----
Total $28.5 $29.5 $16.4
===== ===== =====
Under our capital program for 2005, we plan to expend $16.5 million for water
system additions and improvements for our Delaware systems, which include the
construction of several storage tanks and the creation of new wells and
interconnections. We expect to spend approximately $3.4 million to complete the
new raw water line to the Middlesex primary water treatment plant that began in
2004. We expect to spend $3.3 million for the RENEW program, which is our
program to clean and cement line unlined mains in the Middlesex System. There
remains a total of approximately 129 miles of unlined mains in the 730-mile
Middlesex System. In 2004, nine miles of unlined mains were cleaned and cement
lined. The capital program also includes $5.3 million for scheduled upgrades to
our existing systems in New Jersey. The scheduled upgrades consist of $1.1
million for improvements to existing plant, $1.2 million for mains, $0.8 million
for
22
service lines, $0.3 million for meters, $0.3 million for hydrants, and $1.6
million for computer systems and various other items.
To pay for our capital program in 2005, we will utilize internally generated
funds and funds available under existing NJEIT loans (currently, $8.3 million)
and Delaware SRF loans (currently, $1.8 million). The SRF programs provide low
cost financing for projects that meet certain water quality and system
improvement benchmarks. If necessary, we will also utilize short-term borrowings
through $33.0 million of available lines of credit with four financial
institutions. As of December 31, 2004, we had $11.0 million outstanding against
the lines of credit.
Going forward into 2006 through 2007, we currently project that we will be
required to expend approximately $45.9 million for capital projects. To the
extent possible and because of the favorable interest rates available to
regulated water utilities, we will finance our capital expenditures under the
SRF loan programs. We also expect to use internally generated funds and proceeds
from the sale of common stock through the Dividend Reinvestment and Common Stock
Purchase Plan.
Contractual Obligations
In the course of normal business activities, the Company enters into a variety
of contractual obligations and commercial commitments. Some of these items
result in direct obligations on the Company's balance sheet while others are
commitments, some firm and some based on uncertainties, which are disclosed in
the Company's underlying consolidated financial statements.
The table below presents our known contractual obligations for the periods
specified as of December 31, 2004.
Payment Due by Period
(Millions of Dollars)
Less
than 1-3 4-5 More than
Total 1 Year Years Years 5 Years
------ ------ ------ ------ -------
Long-term Debt $116.4 $ 1.1 $ 3.4 $ 3.9 $108.0
Notes Payable 11.0 11.0 -- -- --
Interest on Long-term Debt 104.0 5.6 11.2 10.2 77.0
Purchased Water Contracts 21.7 3.9 4.5 4.5 8.8
Wastewater Operations 63.0 3.8 7.8 8.3 43.1
------ ------ ------ ------ ------
Total $316.1 $ 25.4 $ 26.9 $ 26.9 $236.9
====== ====== ====== ====== ======
Guarantees
USA-PA operates the City of Perth Amboy's (Perth Amboy) water and wastewater
systems under a service contract agreement through June 30, 2018. The agreement
was effected under New Jersey's Water Supply Public/Private Contracting Act and
the New Jersey Wastewater Public/Private Contracting Act. Under the agreement,
USA-PA receives a fixed fee and a variable fee based on increased system
billing. Scheduled fixed fee payments began at $6.4 million in the first year
and will increase over the term of the contract to $10.2 million at the end of
the contract.
In connection with the agreement, Perth Amboy, through the Middlesex County
Improvement Authority, issued approximately $68.0 million in three series of
bonds. Middlesex guaranteed one of those series of bonds, designated the Series
C Serial Bonds, in the principal amount of approximately $26.3 million. Perth
Amboy guaranteed the two other series of bonds. The Series C Serial Bonds have
various maturity dates with the final
23
maturity date on September 1, 2015. As of December 31, 2004, approximately $23.9
million of the Series C Serial Bonds remained outstanding.
We are obligated to perform under the guarantee in the event notice is received
from the Series C Serial Bonds trustee of an impending debt service deficiency.
If Middlesex funds any debt service obligations as guarantor, there is a
provision in the agreement that requires Perth Amboy to reimburse us. There are
other provisions in the agreement that we believe make it unlikely that we will
be required to perform under the guarantee, such as scheduled annual rate
increases for the water and wastewater services as well as rate increases due to
unforeseen circumstances. In the event revenues from customers could not satisfy
the reimbursement requirements, Perth Amboy has Ad Valorem taxing powers, which
could be used to raise the needed amount.
Critical Accounting Policies and Estimates
The application of accounting policies and standards often requires the use of
estimates, assumptions and judgments. Changes in these variables may lead to
significantly different financial statement results. Our critical accounting
policies are set forth below.
Regulatory Accounting
We maintain our books and records in accordance with accounting principles
generally accepted in the United States of America. Middlesex and certain of its
subsidiaries, which account for 86% of Operating Revenues and 99% of Total
Assets, are subject to regulation in the states in which they operate. Those
companies are required to maintain their accounts in accordance with regulatory
authorities' rules and guidelines, which may differ from other authoritative
accounting pronouncements. In those instances, the Company follows the guidance
provided in the Financial Accounting Standards Board (FASB), Statement of
Financial Accounting Standards No. 71, "Accounting For the Effects of Certain
Types of Regulation" (SFAS 71).
In accordance with SFAS No. 71, costs and obligations are deferred if it is
probable that these items will be recognized for rate-making purposes in future
rates. Accordingly, we have recorded costs and obligations, which will be
amortized over various future periods. Any change in the assessment of the
probability of rate-making treatment will require us to change the accounting
treatment of the deferred item. We have no reason to believe any of the deferred
items that are recorded would be treated differently by the regulators in the
future.
Revenues
Revenues from metered customers include amounts billed on a cycle basis and
unbilled amounts estimated from the last meter reading date to the end of the
accounting period. The estimated unbilled amounts are determined by utilizing
factors which include historical consumption usage and current climate
conditions. Differences between estimated revenues and actual billings are
recorded in a subsequent period.
Revenues from unmetered customers are billed at a fixed tariff rate in advance
at the beginning of each service period and are recognized in revenue ratably
over the service period.
Revenues from the Perth Amboy management contract are comprised of fixed and
variable fees. Fixed fees, which have been set for the life of the contract, are
billed monthly and recorded as earned. Variable fees, which are based on
billings and other factors and are not significant, are recorded upon approval
of the amount by Perth Amboy.
24
Pension Plan
We maintain a noncontributory defined benefit pension plan which covers
substantially all employees with more than 1,000 hours of service.
The discount rate utilized for determining future pension obligations has
decreased from 6.75% at December 31, 2002 to 6.00% at December 31, 2003 to
5.875% at December 31, 2004. Lowering the discount rate by 0.5% would have
increased the net periodic pension cost by $0.1 million in 2004. Lowering the
expected long-term rate of return on the pension plans by 0.5% (from 8.0% to
7.5%) would have increased the net periodic pension cost in 2004 by
approximately $0.1 million.
The discount rate for determining future pension obligations are determined
based on market rates for long-term, high-quality corporate bonds at our
December 31 measurement date. The expected long-term rate of return for pension
assets is determined based on historical returns and our asset allocation.
Future actual pension income will depend on future investment performance,
changes in future discount rates and various other factors related to the
population participating in the pension plans.
Recent Accounting Standards
In December 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No.123(R) "Share-Based Payment", which replaces SFAS No.123, "Accounting
for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees". The Statement requires that the cost resulting
from all share-based payment transactions be recognized in the financial
statements. The Statement also establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires all
entities to apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees, except for equity instruments
held by employee share ownership plans. This statement is effective for quarters
beginning after June 15, 2005. The Company currently recognizes compensation
expense at fair value for stock-based payment awards in accordance with SFAS No.
123 "Accounting for Stock-Based Compensation," and does not anticipate adoption
of this standard will have a material impact on its financial position, results
of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 addresses the
measurement of exchanges of nonmonetary assets and redefines the scope of
transactions that should be measured based on the fair value of the assets
exchanged. SFAS 153 is effective for nonmonetary asset exchanges occurring in
quarters beginning after June 15, 2005. The Company does not anticipate adoption
of this standard will have a material impact on its financial position, results
of operations, or cash flows.
In May 2004, the FASB issued FASB Staff Position (FSP) 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (FSP 106-2). FSP 106-2 provides guidance on the
accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (Medicare Drug Act) for employers who sponsor
postretirement health care plans that provide prescription drug benefits. FSP
106-2 also requires those employers to provide certain disclosures regarding the
effect of the federal subsidy provided by the Medicare Drug Act. The Medicare
Drug Act generally permits plan sponsors that provide retiree prescription drug
benefits that are "actuarially equivalent" to the benefits of Medicare Part D to
be eligible for a non-taxable federal subsidy. FSP 106-2 is effective for the
first interim or annual period beginning after June 15, 2004. FSP 106-2 provides
that if the effect of the Medicare Drug Act is not considered a significant
event, the measurement date for the adoption of FSP 106-2 is delayed until the
next regular measurement date. Based on Management's discussions with its
Actuary, Management determined the effect of the Medicare Drug Act was not
considered a significant event and thus
25
the Company will account for the effects of FSP 106-2 at its next measurement
date (January 1, 2005). The adoption of FSP 106-2 will not have a material
effect on the Company's financial statements.
In March 2004, the Emerging Issues Task Force (EITF) reached consensus on EITF
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" (EITF 03-1). EITF 03-1 further defines the meaning of an
"other-than-temporary impairment" and its application to debt and equity
securities. Impairment occurs when the fair value of a security is less than its
cost basis. When such a condition exists, the investor is required to evaluate
whether the impairment is other-than-temporary as defined in EITF 03-1. When an
impairment is other-than-temporary, the security must be written down to its
fair value. EITF 03-1 also requires additional annual quantitative and
qualitative disclosures for available for sale and held to maturity impaired
investments that are not other-than temporarily impaired. On September 30, 2004,
the FASB issued FSP EITF 03-1-1, "Effective date of Paragraph's 10-20 of EITF
Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" (FSP EITF 03-1-1). FSP EITF 03-1-1 delayed
the effective date for the measurement and recognition guidance contained in
EITF 03-1 until further implementation guidance is issued. The Company does not
expect any material effects from the adoption of EITF 03-1 on its financial
statements.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk.
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rates through the use of
fixed rate long-term debt and, to a lesser extent, short-term debt. The
Company's interest rate risk related to existing fixed rate, long-term debt is
not material due to the term of the majority of our First Mortgage Bonds, which
have final maturity dates ranging from 2009 to 2038. Over the next twelve
months, approximately $1.1 million of the current portion of ten existing
long-term debt instruments will mature. Combining this amount with the $11.0
million in short-term debt outstanding at December 31, 2004, and applying a
hypothetical change in the rate of interest charged by 10% on those borrowings,
would not have a material effect on our earnings.
26
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Middlesex Water Company:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capital stock and long-term debt of Middlesex Water Company and
subsidiaries (the Company) as of December 31, 2004 and 2003, and the related
consolidated statements of income, common stockholders' equity and comprehensive
income, and cash flows for each of the three years in the period ended December
31, 2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2004
and 2003, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 15, 2005 (November 17, 2005 as to the effect of the material
weakness described in Management's Report on Internal Controls Over Financial
Reporting (as revised)) expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an adverse opinion on the effectiveness of the Company's internal
control over financial reporting.
As discussed in Note 10, the accompanying consolidated balance sheets and
statements of cash flows have been restated.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 15, 2005 (November 14, 2005 as to the effects of the restatement described
in Note 10)
27
MIDDLESEX WATER COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 2004 2003
========================================================================================================================
(Restated - (Restated -
see Note 10) see Note 10)
UTILITY PLANT: Water Production $ 82,340,798 $ 77,265,782
Transmission and Distribution 194,531,035 179,219,783
General 20,451,215 19,776,293
Construction Work in Progress 13,013,391 2,798,070
--------------------------------------------------------------------------------------------
TOTAL 310,336,439 279,059,928
Less Accumulated Depreciation 52,017,761 47,510,797
--------------------------------------------------------------------------------------------
UTILITY PLANT - NET 258,318,678 231,549,131
--------------------------------------------------------------------------------------------
========================================================================================================================
CURRENT ASSETS: Cash and Cash Equivalents 4,034,768 3,005,610
Accounts Receivable, net 6,316,853 5,682,608
Unbilled Revenues 3,572,713 3,234,788
Materials and Supplies (at average cost) 1,203,906 1,419,142
Prepayments 823,976 1,009,304
--------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 15,952,216 14,351,452
========================================================================================================================
DEFERRED CHARGES Unamortized Debt Expense 3,172,254 3,272,783
AND OTHER ASSETS: Preliminary Survey and Investigation Charges 1,032,182 1,380,771
Regulatory Assets 8,198,565 8,216,117
Operations Contracts Fees Receivable 685,599 699,806
Restricted Cash 13,257,106 3,825,420
Non-utility Assets - Net 4,552,023 4,147,685
Other 465,419 513,116
--------------------------------------------------------------------------------------------
TOTAL DEFERRED CHARGES AND OTHER ASSETS 31,363,148 22,055,698
--------------------------------------------------------------------------------------------
TOTAL ASSETS $ 305,634,042 $ 267,956,281
--------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
========================================================================================================================
CAPITALIZATION: Common Stock, No Par Value $ 71,979,902 $ 56,924,028
Retained Earnings 23,103,908 22,668,348
Accumulated Other Comprehensive Income, net of tax 44,841 50,808
============================================================================================
TOTAL COMMON EQUITY 95,128,651 79,643,184
============================================================================================
Preferred Stock 4,063,062 4,063,062
Long-term Debt 115,280,649 97,376,847
--------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION 214,472,362 181,083,093
========================================================================================================================
CURRENT Current Portion of Long-term Debt 1,091,351 1,067,258
LIABILITIES: Notes Payable 11,000,000 12,500,000
Accounts Payable 6,001,806 4,777,400
Accrued Taxes 6,784,380 6,258,739
Accrued Interest 1,703,131 1,810,639
Unearned Revenues and Advanced Service Fees 387,156 602,854
Other 795,456 678,596
--------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 27,763,280 27,695,486
========================================================================================================================
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4)
========================================================================================================================
DEFERRED CREDITS Customer Advances for Construction 14,018,006 12,838,342
AND OTHER LIABILITIES: Accumulated Deferred Investment Tax Credits 1,696,566 1,775,183
Accumulated Deferred Income Taxes 14,556,153 14,125,970
Employee Benefit Plans 5,464,056 5,086,988
Regulatory Liability - Cost of Utility Plant Removal 5,363,152 4,830,308
Other 849,551 909,498
--------------------------------------------------------------------------------------------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 41,947,484 39,566,289
========================================================================================================================
CONTRIBUTIONS IN AID OF CONSTRUCTION 21,450,916 19,611,413
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 305,634,042 $ 267,956,281
--------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
28
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2004 2003 2002
==================================================================================================
Operating Revenues $ 70,991,146 $ 64,111,214 $ 61,932,786
- --------------------------------------------------------------------------------------------------
Operating Expenses:
Operations 36,519,355 32,666,099 29,918,921
Maintenance 3,464,036 3,529,113 2,847,209
Depreciation 5,846,191 5,362,727 4,963,268
Other Taxes 8,228,354 7,815,918 7,737,155
Income Taxes 3,814,418 3,237,218 3,999,295
- --------------------------------------------------------------------------------------------------
Total Operating Expenses 57,872,354 52,611,075 49,465,848
==================================================================================================
Operating Income 13,118,792 11,500,139 12,466,938
- --------------------------------------------------------------------------------------------------
Other Income (Expense):
Allowance for Funds Used During Construction 606,019 315,919 269,668
Other Income 221,950 131,499 249,324
Other Expense (32,676) (89,931) (77,114)
- --------------------------------------------------------------------------------------------------
Total Other Income, net 795,293 357,487 441,878
Interest Charges 5,468,576 5,227,030 5,143,463
- --------------------------------------------------------------------------------------------------
Net Income 8,445,509 6,630,596 7,765,353
Preferred Stock Dividend Requirements 254,786 254,786 254,786
- --------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 8,190,723 $ 6,375,810 $ 7,510,567
==================================================================================================
Earnings per share of Common Stock:
Basic $ 0.74 $ 0.61 $ 0.73
Diluted $ 0.73 $ 0.61 $ 0.73
Average Number of
Common Shares Outstanding :
Basic 11,079,835 10,475,295 10,280,302
Diluted 11,422,975 10,818,435 10,623,442
Cash Dividends Paid per Common Share $ 0.663 $ 0.649 $ 0.634
See Notes to Consolidated Financial Statements.
29
MIDDLESEX WATER COMPANY
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2004 2003 2002
---------------------------------------------
(Restated - (Restated - (Restated -
see Note 10) see Note 10) see Note 10)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 8,445,509 $ 6,630,596 $ 7,765,353
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 6,387,808 5,633,863 5,436,525
Provision for Deferred Income Taxes and ITC 603,275 306,919 197,714
Allowance for Funds Used During Construction (606,019) (315,919) (269,668)
Changes in Assets and Liabilities:
Accounts Receivable (634,245) 345,694 637,418
Unbilled Revenues (337,925) (53,697) (380,076)
Materials & Supplies 215,236 (228,805) (162,417)
Prepayments 185,328 (193,912) 54,301
Other Assets (578,048) 275,802 (256,683)
Operations Contracts Receivable 14,207 (699,806) --
Accounts Payable 1,224,406 2,260,431 (476,148)
Accrued Taxes 528,715 333,815 (432,126)
Accrued Interest (107,508) 196,361 (199,618)
Employee Benefit Plans 377,068 (192,749) 17,061
Unearned Revenue & Advanced Service Fees (215,698) 186,265 71,316
Other Liabilities 56,913 (236,431) (803,949)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,559,022 14,248,427 11,199,003
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (28,878,576) (17,576,634) (16,255,866)
Cash Surrender Value & Other Investments (273,837) (466,290) (4,438)
Restricted Cash (9,431,686) 2,321,158 2,843,996
Proceeds from Real Estate Dispositions -- 532,922 --
Preliminary Survey & Investigation Charges 348,589 (282,303) (154,846)
Other Assets -- (47,264) (68,179)
- --------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (38,235,510) (15,518,411) (13,639,333)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (1,067,258) (884,427) (6,443,836)
Proceeds from Issuance of Long-term Debt 18,995,153 11,205,723 6,067,350
Net Short-term Bank Borrowings (Repayments) (1,500,000) (5,150,000) 4,425,000
Deferred Debt Issuance Expenses (65,219) (194,484) (510,818)
Common Stock Issuance Expense (379,534) (103,284) (3,688)
Restricted Cash -- 121 219,588
Proceeds from Issuance of Common Stock 15,055,874 3,609,859 3,214,548
Payment of Common Dividends (7,375,629) (6,791,254) (6,510,494)
Payment of Preferred Dividends (254,786) (254,786) (254,786)
Construction Advances and Contributions-Net 297,045 (99,768) 640,976
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,705,646 1,337,700 843,840
- --------------------------------------------------------------------------------------------------------------------
NET CHANGES IN CASH AND CASH EQUIVALENTS 1,029,158 67,716 (1,596,490)
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,005,610 2,937,894 4,534,384
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,034,768 $ 3,005,610 $ 2,937,894
- --------------------------------------------------------------------------------------------------------------------
*Excludes Allowance for Funds Used During Construction.
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Utility Plant received as Construction Advances and Contributions $ 2,722,121 $ 3,753,037 $ 1,042,529
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Interest $ 5,409,803 $ 5,061,878 $ 5,103,787
Interest Capitalized $ (606,019) $ (315,919) $ (269,668)
Income Taxes $ 3,074,513 $ 2,472,000 $ 4,237,000
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
30
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
December 31,
2004 2003
======================================================================================================
Common Stock, No Par Value
Shares Authorized - 20,000,000
Shares Outstanding - 2004 - 11,358,772 $ 71,979,902 $ 56,924,028
2003 - 10,566,937
Retained Earnings 23,103,908 22,668,348
Accumulated Other Comprehensive Income, net of tax 44,841 50,808
- ------------------------------------------------------------------------------------------------------
TOTAL COMMON EQUITY 95,128,651 79,643,184
- ------------------------------------------------------------------------------------------------------
Cumulative Preference Stock, No Par Value:
Shares Authorized - 100,000
Shares Outstanding - None
Cumulative Preferred Stock, No Par Value
Shares Authorized - 140,497
Convertible:
Shares Outstanding, $7.00 Series - 14,881 1,562,505 1,562,505
Shares Outstanding, $8.00 Series - 12,000 1,398,857 1,398,857
Nonredeemable:
Shares Outstanding, $7.00 Series - 1,017 101,700 101,700
Shares Outstanding, $4.75 Series - 10,000 1,000,000 1,000,000
- ------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK 4,063,062 4,063,062
- ------------------------------------------------------------------------------------------------------
Long-term Debt
8.05%, Amortizing Secured Note, due December 20, 2021 3,063,389 3,136,531
6.25%, Amortizing Secured Note, due May 22, 2028 9,835,000 10,255,000
4.22%, State Revolving Trust Note, due December 31, 2022 784,000 192,281
3.60%, State Revolving Trust Note, due May 1, 2025 2,348,316 580,792
4.00% to 5.00%, State Revolving Trust Bond, due September 1, 2021 790,000 820,000
0.00%, State Revolving Fund Bond, due September 1, 2021 652,306 690,833
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 755,006 807,956
4.25% to 4.63%, Series Y, due September 1, 2018 920,000 965,000
0.00%, Series Z, due September 1, 2019 1,679,979 1,792,435
5.25% to 5.75%, Series AA, due September 1, 2019 2,085,000 2,175,000
0.00%, Series BB, due September 1, 2021 2,048,095 2,168,277
4.00% to 5.00%, Series CC, due September 1, 2021 2,275,000 2,360,000
5.10%, Series DD, due January 1, 2032 6,000,000 6,000,000
0.00%, Series EE, due September 1, 2024 7,715,909 --
3.00% to 5.50%, Series FF, due September 1, 2024 8,920,000 --
- ------------------------------------------------------------------------------------------------------
SUBTOTAL LONG-TERM DEBT 116,372,000 98,444,105
- ------------------------------------------------------------------------------------------------------
Less: Current Portion of Long-term Debt (1,091,351) (1,067,258)
- ------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 115,280,649 $ 97,376,847
- ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
31
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
Accumulated
Common Common Other
Stock Stock Retained Comprehensive
Shares Amount Earnings Income Total
=========== =========== =========== ============= ===========
Balance at January 1, 2002 10,168,002 $50,099,621 $22,190,691 $ -- $72,290,312
Net Income 7,765,353 7,765,353
Dividend Reinvestment & Common
Stock Purchase Plan 176,320 2,990,712 2,990,712
Restricted Stock Awards - Net 12,167 223,836 223,836
Cash Dividends on Common Stock (6,510,494) (6,510,494)
Cash Dividends on Preferred Stock (254,786) (254,786)
Common Stock Expenses (3,688) (3,688)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2002 10,356,489 $53,314,169 $23,187,076 $ -- $76,501,245
Net Income 6,630,596 6,630,596
Change in Value of Equity Investments,
net of $26,000 Income Tax 50,808 50,808
-----------
Comprehensive Income 6,681,404
-----------
Dividend Reinvestment & Common
Stock Purchase Plan 192,515 3,263,569 3,263,569
Restricted Stock Awards - Net 17,933 346,290 346,290
Cash Dividends on Common Stock (6,791,254) (6,791,254)
Cash Dividends on Preferred Stock (254,786) (254,786)
Common Stock Expenses (103,284) (103,284)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003 10,566,937 $56,924,028 $22,668,348 $ 50,808 $79,643,184
Net Income 8,445,509 8,445,509
Change in Value of Equity Investments,
net of $3,000 Income Tax (5,967) (5,967)
-----------
Comprehensive Income 8,439,542
Dividend Reinvestment & Common
Stock Purchase Plan 76,935 1,533,507 1,533,507
Issuance of Common Stock 700,000 13,257,000 13,257,000
Restricted Stock Awards - Net 14,900 265,367 265,367
Cash Dividends on Common Stock (7,375,629) (7,375,629)
Cash Dividends on Preferred Stock (254,786) (254,786)
Common Stock Expenses (379,534) (379,534)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2004 11,358,772 $71,979,902 $23,103,908 $ 44,841 $95,128,651
=========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
32
Middlesex Water Company
Notes to Consolidated Financial Statements (as Restated)
Note 1 - Summary of Significant Accounting Policies
(a) Organization - Middlesex Water Company (Middlesex) is the parent company and
sole shareholder of Tidewater Utilities, Inc. (Tidewater), Pinelands Water
Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands
Wastewater) (collectively, Pinelands), Utility Service Affiliates, Inc. (USA),
Utility Service Affiliates (Perth Amboy) Inc. (USA-PA) and Bayview Water Company
(Bayview). 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.
Middlesex Water Company has operated as a water utility in New Jersey since
1897, and in Delaware, through our wholly-owned subsidiary, Tidewater, since
1992. We are in the business of collecting, treating, distributing and selling
water for domestic, commercial, municipal, industrial and fire protection
purposes. We also operate a New Jersey municipal water and wastewater system
under contract and provide wastewater services in New Jersey and Delaware
through our subsidiaries. We are regulated as to rates charged to customers for
water and wastewater services in New Jersey and for water services in Delaware,
as to the quality of water service we provide and as to certain other matters.
Our Tidewater Environmental Services, Inc. subsidiary will commence operations
during 2005 as a regulated wastewater utility in Delaware. Only our USA, USA-PA
and White Marsh subsidiaries are not regulated utilities.
(b) System of Accounts - Middlesex, Pinelands Water, Pinelands Wastewater and
Bayview maintain their accounts in accordance with the Uniform System of
Accounts prescribed by the Board of Public Utilities of the State of New Jersey
(BPU). Tidewater and Southern Shores maintain their accounts in accordance with
the Public Service Commission of Delaware (PSC) requirements.
(c) Utility Plant is stated at original cost as defined for regulatory purposes.
Property accounts are charged with the cost of betterments and major
replacements of property. Cost includes direct material, labor and indirect
charges for pension benefits and payroll taxes. The cost of labor, materials,
supervision and other expenses incurred in making repairs and minor replacements
and in maintaining the properties is charged to the appropriate expense
accounts. At December 31, 2004, there was no event or change in circumstance
that would indicate that the carrying amount of any long-lived asset was not
recoverable.
(d) Depreciation is computed by each regulated member of the Company utilizing a
rate approved by the applicable regulatory authority. The Accumulated Provision
for Depreciation is charged with the cost of property retired, less salvage. The
following table sets forth the range of depreciation rates for the major utility
plant categories used to calculate depreciation for the years ended December 31,
2004, 2003 and 2002. These rates have been approved by either the BPU or PSC:
Source of Supply 1.15% - 3.44% Transmission and Distribution (T&D):
Pumping 2.87% - 5.04% T&D - Mains 1.10% - 3.13%
Water Treatment 2.71% - 7.64% T&D - Services 2.12% - 2.81%
General Plant 2.08% - 17.84% T&D - Other 1.61% - 4.63%
Non-regulated fixed assets consist primarily of an office building, furniture
and fixtures, and transportation equipment. These assets are recorded at
original cost and depreciation is calculated based on the estimated useful
lives, ranging from 3 to 40 years.
33
(e) Customers' Advances for Construction - Water utility plant and/or cash
advances are contributed to the Company by customers, real estate developers and
builders in order to extend water service to their properties. These
contributions are recorded as Customers' Advances for Construction. Refunds on
these advances are made by the Company in accordance with agreements with the
contributing party and are based on either additional operating revenues related
to the utility plant or as new customers are connected to and take service from
the utility plant. After all refunds are made, any remaining balance is
transferred to Contributions in Aid of Construction.
Contributions in Aid of Construction - Contributions in Aid of Construction
include direct non-refundable contributions of water utility plant and/or cash
and the portion of Customers' Advances for Construction that become
non-refundable.
(f) Allowance for Funds Used During Construction (AFUDC) - Middlesex, Tidewater,
Pinelands Water, Pinelands Wastewater and Bayview capitalize AFUDC, which
represents the cost of financing projects during construction. AFUDC is added to
the construction costs of individual projects exceeding specific cost and
construction period thresholds established for each company and then depreciated
along with the rest of the utility plant's costs over its estimated useful life.
For the years ended December 31, 2004, 2003 and 2002 approximately $0.6 million,
$0.3 million and $0.3 million of AFUDC was added to the cost of construction
projects. AFUDC is calculated using each company's weighted cost of debt and
equity as approved in their most recent respective regulatory rate order. The
average AFUDC rate for the years ended December 31, 2004, 2003 and 2002 for
Middlesex, Tidewater and Bayview were 7.42%, 8.77% and 3.11%, respectively.
Pinelands Water and Pinelands Wastewater did not incur AFUDC during the periods
covered by this report.
(g) Accounts Receivable - We record bad debt expense based on historical
accounts receivable write-offs. The allowance for doubtful accounts at December
31, 2004, 2003 and 2002 was $0.2 million, $0.2 million and $0.1 million,
respectively. The corresponding expense for the year ended December 31, 2004,
2003 and 2002 was $0.1 million, $0.2 million and $0.1 million, respectively.
(h) Revenues - General metered customer's bills typically are broken down into
two components; a fixed service charge and a volumetric or consumption charge.
Revenues from general metered service customers, except Tidewater, include
amounts billed in arrears on a cycle basis and unbilled amounts estimated from
the last meter reading date to the end of the accounting period. The estimated
unbilled amounts are determined by utilizing factors which include historical
consumption usage and current climate conditions. Actual billings may differ
from our estimates. Revenues are adjusted in the period that the difference is
identified. Tidewater customers are billed in advance for their fixed service
charge and these revenues are recognized as the service is provided to the
customer.
Bayview and Southern Shores are unmetered systems. Customers are billed a fixed
service charge in accordance with the approved tariff. Southern Shore service
charges are billed in advance at the beginning of each month and are recognized
as earned. Bayview service charges are billed in advance at the beginning of
each calendar quarter and are recognized in revenue ratably over the quarter.
Revenues from the City of Perth Amboy management contract are comprised of fixed
and variable fees. Fixed fees, which have been set for the life of the contract,
are billed monthly and recorded as earned. Variable fees, which are not
significant, are recorded upon approval of the amount by the City of Perth
Amboy.
(i) Deferred Charges and Other Assets - Unamortized Debt Expense is amortized
over the lives of the related issues. Restricted Cash represents proceeds from
loans entered into through state financing programs and is held in trusts. The
proceeds are restricted for specific capital expenditures and debt service
requirements.
34
(j) Income Taxes - Middlesex files a consolidated federal income tax return for
the Company and income taxes are allocated based on the separate return method.
Investment tax credits have been deferred and are amortized over the estimated
useful life of the related property.
(k) Statements of Cash Flows - For purposes of reporting cash flows, the Company
considers all highly liquid investments with original maturity dates of three
months or less to be cash equivalents. Cash and cash equivalents represent bank
balances and money market funds with investments maturing in less than 90 days.
(l) Use of Estimates - Conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts in the financial statements. Actual
results could differ from those estimates.
(m) Recent Accounting Pronouncements - In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No.123(R) "Share-Based Payment", which replaces SFAS No.123,
"Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees". The Statement requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements. The Statement also establishes fair value as the
measurement objective in accounting for share-based payment arrangements and
requires all entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees, except for
equity instruments held by employee share ownership plans. This statement is
effective for quarters beginning after June 15, 2005. The Company currently
recognizes compensation expense at fair value for stock-based payment awards in
accordance with SFAS No. 123 "Accounting for Stock-Based Compensation," and does
not anticipate adoption of this standard will have a material impact on its
financial position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 addresses the
measurement of exchanges of nonmonetary assets and redefines the scope of
transactions that should be measured based on the fair value of the assets
exchanged. SFAS 153 is effective for nonmonetary asset exchanges occurring in
quarters beginning after June 15, 2005. The Company does not anticipate adoption
of this standard will have a material impact on its financial position, results
of operations, or cash flows.
In May 2004, the FASB issued FASB Staff Position (FSP) 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (FSP 106-2). FSP 106-2 provides guidance on the
accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (Medicare Drug Act) for employers who sponsor
postretirement health care plans that provide prescription drug benefits. FSP
106-2 also requires those employers to provide certain disclosures regarding the
effect of the federal subsidy provided by the Medicare Drug Act. The Medicare
Drug Act generally permits plan sponsors that provide retiree prescription drug
benefits that are "actuarially equivalent" to the benefits of Medicare Part D to
be eligible for a non-taxable federal subsidy. FSP 106-2 is effective for the
first interim or annual period beginning after June 15, 2004. FSP 106-2 provides
that if the effect of the Medicare Drug Act is not considered a significant
event, the measurement date for the adoption of FSP 106-2 is delayed until the
next regular measurement date. Based on Management's discussions with its
Actuary, Management determined the effect of the Medicare Drug Act is not
considered a significant event and thus the Company will account for the effects
of FSP 106-2 at its next measurement date (January 1, 2005). The adoption of FSP
106-2 will not have a material effect on the Company's financial statements.
In March 2004, the Emerging Issues Task Force (EITF) reached consensus on EITF
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" (EITF 03-1). EITF 03-1 further defines the meaning of an
"other-than-temporary impairment" and its application to debt and equity
securities. Impairment occurs when the fair value of a security is less than its
cost basis. When such a
35
condition exists, the investor is required to evaluate whether the impairment is
other-than-temporary as defined in EITF 03-1. When an impairment is
other-than-temporary, the security must be written down to its fair value. EITF
03-1 also requires additional annual quantitative and qualitative disclosures
for available for sale and held to maturity impaired investments that are not
other-than temporarily impaired. On September 30, 2004, the FASB issued FSP EITF
03-1-1, "Effective date of Paragraph's 10-20 of EITF Issue No. 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments"
(FSP EITF 03-1-1). FSP EITF 03-1-1 delayed the effective date for the
measurement and recognition guidance contained in EITF 03-1 until further
implementation guidance is issued. The Company does not expect any material
effects from the adoption of EITF 03-1 on its financial statements.
(n) Other Comprehensive Income - Total comprehensive income includes changes in
equity that are excluded from the consolidated statements of income and are
recorded into a separate section of capitalization on the consolidated balance
sheets. The Company's accumulated other comprehensive income shown on the
consolidated balance sheets consists of unrealized gains on investment holdings.
(o) Regulatory Accounting - We maintain our books and records in accordance with
accounting principles generally accepted in the United States of America.
Middlesex and certain of its subsidiaries, which account for 86% of Operating
Revenues and 99% of Total Assets, are subject to regulation in the state in
which they operate. Those companies are required to maintain their accounts in
accordance with regulatory authorities' rules and guidelines, which may differ
from other authoritative accounting pronouncements. In those instances, the
Company follows the guidance provided SFAS No. 71, "Accounting for the Effects
of Certain Types of Regulation."
(p) Pension Plan - We maintain a noncontributory defined benefit pension plan
which covers substantially all employees with more than 1,000 hours of service.
The discount rate utilized for determining pension costs decreased from 7.25%
for the year ended December 31, 2002 to 6.75% for the year ended December 31,
2003 to 6.00% for the year ended December 31, 2004. Future actual pension income
will depend on future investment performance, changes in future discount rates
and various other factors related to the population participating in the pension
plans.
Note 2 - Rate and Regulatory Matters
Effective May 27, 2004, Middlesex received approval from the BPU for a 9.5%, or
$4.3 million increase in its water rates. This increase represents a portion of
Middlesex's November 2003 request for a total rate increase of 17.8% to cover
the costs of its increased capital investment, as well as maintenance and
operating expenses.
Effective June 24, 2004, Pinelands Water and Pinelands Wastewater received
approval from the BPU for rate increases of 9.2% and 9.9%, respectively, or
approximately $0.13 million in the aggregate. This increase represents a portion
of Pinelands' December 2003 request for a total rate increase of approximately
$0.25 million to help offset the increasing costs associated with capital
improvements, and the operation and maintenance of their systems.
Effective June 25, 2004, Tidewater received approval from the PSC for an interim
rate increase of 15%, or $1.5 million increase in its water rates, which
includes 4.89% of previously implemented Distribution System Improvement Charges
(DSIC). On October 19, 2004, the PSC approved a settlement between Tidewater and
interveners in the matter. The settlement allows the interim rates to become
permanent. This increase represents a portion of Tidewater's April 2004 request
for a 24% rate increase to accommodate the growth of Tidewater's customer base,
improvements to water treatment, fire protection and to interconnect systems for
service reliability and back-up. As part of the settlement, Tidewater will be
eligible to apply for a second phase rate increase of $0.5 million, provided it
completes a number of capital projects within a specified time schedule.
Tidewater must file an application for this increase no earlier than March 2005
or later than May 2005. Upon
36
verification of project completion, new rates will become effective 30 days
after the filing date. Tidewater also agreed to waive its right to file DSIC
applications over the next three six-month cycles (January and July 2005, and
January 2006) and to defer making an application for a general rate increase
until after April 1, 2006.
In accordance with the tariff established for Southern Shores, an annual rate
increase of 2.8% was implemented on January 1, 2004. The increase cannot exceed
the lesser of the regional Consumer Price Index or 3%.
Other than rates for the Southern Shores system, there can be no assurance that
any rate increases will be granted or, if granted, that they will be in the
amounts we requested.
In the fall of 2002, the BPU approved a 76.7% base rate increase for the
Bayview. This translates into additional revenues of less than $0.1 million.
Two-thirds of the increase was implemented on January 1, 2003 and the balance
became effective July 1, 2003. The new rates are designed to allow for the
recovery of operating costs and capital costs incurred to replace the entire
water distribution system on Fortescue Island in Southern New Jersey.
We have recorded certain costs as regulatory assets because we believe we will
be allowed full recovery of or are currently recovering these costs in the rates
that we charge customers. These deferred costs have been excluded from rate base
and, therefore, we are not earning a return on the unamortized balances.
Years Ended December 31,
(Thousands of Dollars)
Remaining
Recovery
Regulatory Assets 2004 2003 Periods
----------------- ------ ------ -------
Income Taxes $6,535 $6,786 Various
Post-retirement Benefits 697 783 8 years
Tank Painting 426 198 3-10 years
Rate Cases and Other 541 449 Up to 3 years
------ ------
Total $8,199 $8,216
====== ======
The recovery period for income taxes is dependent upon when the temporary
differences between tax and book will reverse.
The Company uses the composite deprecation method for its regulated utility
operations, which is currently an acceptable method of accounting under
generally accepted accounting principles and is widely used in the utility
industry. Historically, under the composite deprecation method, the anticipated
costs of removing assets upon retirement are provided for over the life of those
assets as a component of depreciation expense. However, FASB Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143), precludes the recognition of expected future costs of
removal as a component of depreciation expense unless they are legal obligations
under SFAS 143. The Company recovers certain asset retirement costs through
rates charged to customers as an approved component of deprecation expense. As
of December 31, 2004 and 2003, the Company has approximately $5.4 million and
$4.8 million, respectively, of cost of removal recovered in rates in excess of
actual costs incurred. These amounts are included in regulatory liabilities.
Bayview, Pinelands Water and Pinelands Wastewater are recovering the acquisition
premium of $0.9 million over the remaining life of their Utility Plant. These
deferred costs have been included in their rate bases as utility plant and are
earning a return on the unamortized costs during the recovery periods.
37
Note 3 - Income Taxes
Income tax expense differs from the amount computed by applying the statutory
rate on book income subject to tax for the following reasons:
Years Ended December 31,
(Thousands of Dollars)
2004 2003 2002
- -------------------------------------------------------------------------------
Income Tax at Statutory Rate of 34% $ 4,168 $ 3,355 $ 4,000
Tax Effect of:
Utility Plant Related (500) (171) (123)
State Income Taxes - Net 167 106 80
Employee Benefits (25) (67) 25
Other 4 14 17
- -------------------------------------------------------------------------------
Total Income Tax Expense $ 3,814 $ 3,237 $ 3,999
- -------------------------------------------------------------------------------
Income tax expense is comprised of the following:
Current:
Federal $ 3,128 $ 2,835 $ 3,730
State 83 95 82
Deferred:
Federal 512 321 227
State 170 65 39
Investment Tax Credits (79) (79) (79)
- -------------------------------------------------------------------------------
Total Income Tax Expense $ 3,814 $ 3,237 $ 3,999
- -------------------------------------------------------------------------------
The statutory review period for income tax returns for the years prior to 2001
has been closed.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial purposes
and the amounts used for income tax purposes. The components of the net deferred
tax liability are as follows:
Years Ended December 31,
(Thousands of Dollars)
2004 2003
- -------------------------------------------------------------------------------
Utility Plant Related $ 21,293 $ 20,522
Customer Advances (4,263) (4,218)
Employee Benefits (2,568) (2,209)
Other 94 31
- --------------------------------------------------------------------------------
Total Deferred Tax Liability $ 14,556 $ 14,126
- -------------------------------------------------------------------------------
The Company is required to set up deferred income taxes for all temporary
differences regardless of the regulatory ratemaking treatment. Because
management believes that it is probable that these additional taxes will be
passed on to ratepayers, an offsetting regulatory asset of $6.5 million and $6.8
million has been recorded at December 31, 2004 and 2003 respectively.
38
Note 4 - Commitments and Contingent Liabilities
Guarantees - USA-PA operates the City of Perth Amboy's (Perth Amboy) water and
wastewater systems under a service contract agreement through June 30, 2018. The
agreement was effected under New Jersey's Water Supply Public/Private
Contracting Act and the New Jersey Wastewater Public/Private Contracting Act.
Under the agreement, USA-PA receives a fixed fee and a variable fee based on
increased system billing. Scheduled fixed fee payments for 2004, 2003 and 2002
were $7.4 million, $7.2 million and $6.9 million, respectively. The fixed fees
will increase over the term of the contract to $10.2 million.
In connection with the agreement, Perth Amboy, through the Middlesex County
Improvement Authority, issued approximately $68.0 million in three series of
bonds. Middlesex guaranteed one of those series of bonds, designated the Series
C Serial Bonds, in the principal amount of approximately $26.3 million. Perth
Amboy guaranteed the two other series of bonds. The Series C Serial Bonds have
various maturity dates with the final maturity date on September 1, 2015. As of
December 31, 2004, approximately $23.9 million of the Series C Serial Bonds
remained outstanding.
We are obligated to perform under the guarantee in the event notice is received
from the Series C Serial Bonds trustee of an impending debt service deficiency.
If Middlesex funds any debt service obligations as guarantor, there is a
provision in the agreement that requires Perth Amboy to reimburse us. There are
other provisions in the agreement that we believe make it unlikely that we will
be required to perform under the guarantee, such as scheduled annual rate
increases for water and wastewater services as well as rate increases due to
unforeseen circumstances. In the event revenues from customers could not satisfy
the reimbursement requirements, Perth Amboy has Ad Valorem taxing powers, which
could be used to raise the needed amount.
Franchise Agreement/Service Agreement - In 1999, Middlesex implemented a
franchise agreement with the City of South Amboy (South Amboy) to provide water
service and install water system facilities in South Amboy. The agreement
between Middlesex and South Amboy was approved by the BPU. The implementation of
the franchise agreement had significantly impacted two existing agreements
entered into by the parties.
The first agreement was for the sale of water to South Amboy on a wholesale
basis. The second agreement, which included Middlesex's wholly-owned subsidiary
USA, was a contract to provide management services for a fixed fee. In
conjunction with the franchise agreement, the water sales contract was
eliminated. In addition, the management services contract was extended through
May 2045 and significantly modified to correspond with the terms and conditions
of the franchise agreement. Fixed fee revenues recognized under the original
contract have been eliminated effective December 1999, in lieu of revenues
earned from providing water to South Amboy's 2,900 customers.
Water Supply - Middlesex revised and extended its agreement with the New Jersey
Water Supply Authority (NJWSA) for the purchase of untreated water, effective
January 1, 2004. The agreement now expires November 30, 2023 and provides an
average purchase of 27 million gallons a day (mgd) up from 20 mgd. Pricing has
been modified to include a two tier pricing schedule for the original 20 mgd and
the additional 7 mgd. In addition, 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 nonaffiliated water utility for the
purchase of treated water. This agreement, which expires December 31, 2005,
provides for the minimum purchase of 3 mgd of treated water with provisions for
additional purchases.
39
Purchased water costs are shown below:
(Millions of Dollars)
Years Ended December 31,
Purchased Water 2004 2003 2002
--------------- ----- ----- -----
Untreated $ 2.2 $ 2.0 $ 1.9
Treated 2.0 1.8 1.8
----- ----- -----
Total Costs $ 4.2 $ 3.8 $ 3.7
===== ===== =====
Construction - Based on its capital budget, the Company plans to spend
approximately $28.5 million in 2005, $29.5 million in 2006 and $16.4 million in
2007 on its construction program.
Litigation - A lawsuit was filed in 1998 against the Company for damages
involving the break of both a Company water line and an underground electric
power cable containing both electric lines and petroleum based insulating fluid.
The electric utility also asserted claims against the Company. The lawsuit was
settled in 2003, and by agreement, the electric utility's counterclaim for
approximately $1.1 million in damages was submitted to binding arbitration, in
which the agreed maximum exposure of the Company is $0.3 million, which the
Company has accrued for. While we are unable to predict the outcome of the
arbitration, we believe that we have substantial defenses.
A claim involving a construction subcontractor, the Company's general contractor
and the Company concerning a major construction project was settled during
October 2004. The matter was instituted in 2001, and related to work required to
be performed under a construction contract and related subcontracts and included
payment issues and timing/delay issues. The amount that was determined to be due
from us for the work performed was $1.4 million and was recorded as an addition
to utility plant in service during fiscal 2004.
The Company is defendant in various lawsuits. We believe the resolution of
pending claims and legal proceedings will not have a material adverse effect on
the Company's consolidated financial statements.
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 5 - Short-term Borrowings
Information regarding the Company's short-term borrowings for the years ended
December 31, 2004 and 2003 is summarized below:
(Millions of Dollars)
2004 2003
----------------------------------------------------------------
Established Lines at Year-End $33.0 $25.0
Maximum Amount Outstanding 13.5 18.5
Average Outstanding 8.9 14.0
Notes Payable at Year-End 11.0 12.5
Weighted Average Interest Rate 2.37% 1.89%
Weighted Average Interest Rate at Year-End 3.42% 1.64%
Year-end interest rates on short-term borrowings outstanding ranged from 2.82%
to 3.75% and 1.56% to 1.67% as of December 31, 2004 and 2003, respectively. The
maturity dates for borrowings outstanding as of December 31, 2004 are: January
3, 2005- $7.0 million; January 21, 2005- $3.0 million; and March 14, 2005- $1.0
million.
40
The Board of Directors has authorized lines of credit for up to $40.0 million.
Short-term borrowings are below the prime rate with some requirements for
compensating balances not exceeding 1% of the line.
Note 6 - Capitalization
All the transactions discussed below related to the issuance of securities were
approved by the BPU, except where noted.
Common Stock
In May 2004, the Company sold and issued 700,000 shares of its common stock in a
public offering that was priced at $19.80. The majority of the net proceeds of
approximately $12.9 million were used to repay most of the Company's short-term
borrowings outstanding at that time.
In August 2003, the Board of Directors approved a four-for-three stock split of
its common stock, effective November 14, 2003 for shareholders of record on
November 1, 2003. In October 2001, the Board of Directors approved a
three-for-two common stock split effective January 2, 2002, for shareholders of
record on December 14, 2001. All share, average number of shares and per share
amounts of no par common stock on the financial statements have been restated to
reflect the effect of both stock splits.
The number of shares authorized under the Dividend Reinvestment and Common Stock
Purchase Plan (DRP) is 1,700,000 shares. The cumulative number of shares issued
under the DRP at December 31, 2004, is 1,316,725. In each of 2003 and 2002 for
specific six month periods, DRP participants had the opportunity to purchase the
Company's common stock at a 5% discount with reinvested dividends and optional
cash payments. The Company also has a restricted stock plan, which is described
in Note 7 - Employee Benefit Plans.
In the event dividends on the preferred stock are in arrears, no dividends may
be declared or paid on the common stock of the Company. At December 31, 2004, no
preferred stock dividends were in arrears.
Preferred Stock
If four or more quarterly dividends are in arrears, the preferred shareholders,
as a class, are entitled to elect two members to the Board of Directors in
addition to Directors elected by holders of the common stock. At December 31,
2004 and 2003, 37,898 shares of preferred stock presently authorized were
outstanding and there were no dividends in arrears.
The conversion feature of the no par $7.00 Series Cumulative and Convertible
Preferred Stock allows the security holders to exchange one convertible
preferred share for twelve shares of the Company's common stock. In addition,
the Company may redeem up to 10% of the outstanding convertible stock in any
calendar year at a price equal to the fair market value of twelve shares of the
Company's common stock for each share of convertible stock redeemed.
The conversion feature of the no par $8.00 Series Cumulative and Convertible
Preferred Stock allows the security holders to exchange one convertible
preferred share for 13.714 shares of the Company's common stock. The preferred
shares are convertible at the election of the security holder until 2004. After
that date Middlesex also has the right to elect the conversion feature.
Long-term Debt
On March 24, 2004, Tidewater received approval from the PSC to borrow $0.8
million to fund a portion of its multi-year capital program. Subsequent to the
PSC approval, Tidewater closed on a Delaware State Revolving Fund (SRF) loan of
$0.8 million. The Delaware SRF program will allow, but does not obligate,
Tidewater to
41
draw down against a General Obligation Note for three specific projects.
Tidewater will be charged an annual fee, which is a combination of interest
charges and administrative fees, of 3.30% on the outstanding principal amount.
All unpaid principal and fees must be paid on or before March 1, 2026.
Middlesex received approval from the BPU to issue up to $18.0 million of first
mortgage bonds through the New Jersey Environmental Infrastructure Trust under
the New Jersey SRF program. The Company closed on $16.6 million of First
Mortgage Bonds designated as Series EE and FF on November 4, 2004.
First Mortgage Bonds Series S through W and Series DD are term bonds with single
maturity dates. The aggregate annual principal repayment obligations for all
other long-term debt are shown below:
(Millions of Dollars)
Annual Annual
Year Maturities Year Maturities
---- ---------- ---- ----------
2005 $1.1 2008 $1.9
2006 $1.5 2009 $2.0
2007 $1.9
The weighted average interest rate on all long-term debt at December 31, 2004
and 2003 was 5.26% and 6.03%, respectively. Except for the Amortizing Secured
Note and Series U First Mortgage Bonds, all of the Company's outstanding debt
has been issued through the New Jersey Economic Development Authority ($57.5
million), the New Jersey Environmental Infrastructure Trust program ($27.9
million) and the SRF program ($3.1 million).
Restricted cash includes proceeds from the Series Y, AA, BB, CC, EE and FF First
Mortgage Bonds and State Revolving Trust Bonds issuances. These funds are held
in trusts and restricted for specific capital expenditures and debt service
requirements. Series BB and CC proceeds can only be used for the 2004 main
cleaning and cement lining programs. Series EE and FF proceeds can only be used
for the construction of a raw water pipeline and the 2005 and 2006 main cleaning
and cement lining programs.
Substantially all of the Utility Plant of the Company is subject to the lien of
its mortgage, which also includes debt service and capital ratio covenants,
certain restrictions as to cash dividend payments and other distributions on
common stock. The Company is in compliance with all of its mortgage covenants
and restrictions.
Earnings Per Share
The following table presents the calculation of basic and diluted earnings per
share (EPS) for the three years ended December 31, 2004. Basic 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
$8.00 Series. All share and per share amounts reflect the three-for-two common
stock split, effective January 2, 2002 and the four-for-three common stock
split, effective November 14, 2003.
42
(In Thousands of Dollars, Except per Share Amounts)
2004 2003 2002
Basic: Income Shares Income Shares Income Shares
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 8,446 11,080 $ 6,631 10,475 $ 7,765 10,280
Preferred Dividend (255) (255) (255)
-------------------------------------------------------------------
Earnings Applicable to Common Stock $ 8,191 11,080 $ 6,376 10,475 $ 7,510 10,280
Basic EPS $ 0.74 $ 0.61 $ 0.73
Diluted:
- --------------------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 8,191 11,080 $ 6,376 10,475 $ 7,510 10,280
$7.00 Series Dividend 104 178 104 178 104 178
$8.00 Series Dividend 96 165 96 165 96 165
-------------------------------------------------------------------
Adjusted Earnings Applicable to Common Stock $ 8,391 11,423 $ 6,576 10,818 $ 7,710 10,623
Diluted EPS $ 0.73 $ 0.61 $ 0.73
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 consolidated balance
sheets for cash and cash equivalents, marketable securities, and trade
receivables and payables 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 bonds is based on quoted market prices
for similar issues. The carrying amount and fair market value of the Company's
bonds were as follows:
(Thousands of Dollars)
At December 31,
2004 2003
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
First Mortgage Bonds $98,899 $101,968 $82,769 $85,734
State Revolving Bonds $ 1,442 $ 1,476 $ 1,511 $ 1,539
For other long-term debt for which there was no quoted market price, it was not
practicable to estimate their fair value. The carrying amount of these
instruments at December 31, 2004 and 2003 was $16.0 million and $14.2 million,
respectively. Customer advances for construction have a carrying amount of $12.4
million and $11.7 million at December 31, 2004 and 2003, 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 7 - Employee Benefit Plans
Pension
The Company has a noncontributory defined benefit pension plan, which covers
substantially all employees with more than 1,000 hours of service. In addition,
the Company maintains an unfunded supplemental pension
43
plan for its executives. The Accumulated Benefit Obligation for all pension
plans at December 31, 2004 was $20.9 million.
Postretirement Benefits Other Than Pensions
The Company has a postretirement benefit plan other than pensions for
substantially all of its retired employees. Coverage includes healthcare and
life insurance. Retiree contributions are dependent on credited years of
service. Accrued retirement benefit costs are recorded each year.
The Company has recognized a deferred regulatory asset relating to the
difference between the accrued retirement benefit costs and actual cash paid for
plan premiums in years prior to 1998. Included in the regulatory asset is a
transition obligation from adopting SFAS No.106 on January 1, 1993. In addition
to the recognition of annual accrued retirement benefit costs in rates,
Middlesex is also recovering the transition obligation over 15 years. The
regulatory assets at December 31, 2004 and 2003, respectively were $0.7 million
and $0.8 million.
The Company uses a December 31 measurement date for all of its employee benefit
plans. The following table sets forth information relating to the Company's
pension plans and other postretirement benefits:
(Thousands of Dollars)
Years Ended December 31,
Pension Benefits Other Benefits
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------
Reconciliation of Projected Benefit Obligation
Beginning Balance $ 23,671 $ 19,677 $ 9,498 $ 7,437
Service Cost 746 684 426 263
Interest Cost 1,387 1,356 580 485
Actuarial (Gain)/Loss 1,516 3,039 1,028 1,645
Benefits Paid (1,221) (1,085) (399) (332)
- ------------------------------------------------------------------------------------------------------------
Ending Balance $ 26,099 $ 23,671 $ 11,133 $ 9,498
- ------------------------------------------------------------------------------------------------------------
Reconciliation of Plan Assets at Fair Value
Beginning Balance $ 18,587 $ 15,846 $ 2,582 $ 2,065
Actual Return on Plan Assets 1,497 2,768 190 15
Employer Contributions 647 1,058 1,057 834
Benefits Paid (1,221) (1,085) (399) (332)
- ------------------------------------------------------------------------------------------------------------
Ending Balance $ 19,510 $ 18,587 $ 3,430 $ 2,582
- ------------------------------------------------------------------------------------------------------------
Funded Status $ (6,589) $ (5,084) $ (7,703) $(6,916)
Unrecognized Net Transition Obligation -- -- 1,082 1,217
Unrecognized Net Actuarial (Gain)/Loss 2,655 1,144 4,835 4,076
Unrecognized Prior Service Cost 173 264 (3) (3)
- ------------------------------------------------------------------------------------------------------------
Accrued Benefit Cost $ (3,761) $ (3,676) $ (1,789) $(1,626)
- ------------------------------------------------------------------------------------------------------------
44
(Thousands of Dollars)
Years Ended December 31,
Pension Benefits Other Benefits
2004 2003 2002 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost
Service Cost $ 746 $ 684 $ 724 $ 426 $ 263 $ 222
Interest Cost 1,387 1,356 1,300 580 485 463
Expected Return on Plan Assets (1,492) (1,272) (1,281) (213) (175) (125)
Amortization of Net Transition Obligation -- -- 2 135 135 135
Amortization of Net Actuarial (Gain)/Loss -- -- -- 292 143 111
Amortization of Prior Service Cost 92 92 92 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net Periodic Benefit Cost $ 733 $ 860 $ 837 $ 1,220 $ 851 $ 806
- ---------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2004 2003 2002
------- ------- ------- ------- ------- -------
Actual Return on Plan Assets 8.18% 17.48% (9.47%) 6.53% 0.77% 1.38%
Weighted Average Assumptions:
Expected Return on Plan Assets 8.00% 8.00% 8.00% 7.50% 7.50% 7.50%
Discount Rate for:
Benefit Obligation 5.875% 6.00% 6.75% 5.875% 6.00% 6.75%
Benefit Cost 6.00% 6.75% 7.25% 6.00% 6.75% 7.25%
Compensation Increase for:
Benefit Obligation 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%
Benefit Cost 3.50% 3.50% 4.25% 3.50% 3.50% 4.25%
For measurement purposes, a 9.0% annual rate of increase in the per capita cost
of covered healthcare benefits was assumed for 2004 and declining by 1.0% per
year through 2007 and 0.5% per year to 5% by year 2009. Assumed healthcare cost
trend rates have a significant effect on the amounts reported for the healthcare
plan. A one-percentage point change in assumed healthcare cost trend rates would
have the following effects:
(Thousands of Dollars)
1 Percentage Point
Increase Decrease
- ---------------------------------------------------------------------------------------
Effect on Current Year's Service and Benefit Cost $ 230 $ (173)
Effect on Benefit Obligation 1,714 (1,338)
The following benefit payments, which reflect expected future service, are
expected to be paid:
Year Pension Benefits Other Benefits
- ---- ---------------- --------------
2005 $ 1,282 $ 354
2006 1,269 367
2007 1,457 388
2008 1,509 414
2009 1,528 452
2010-2014 8,075 2,565
------- ------
Totals $15,120 $4,540
======= ======
Benefit Plans Assets
The benefit plans asset allocations at December 31, 2004 and 2003, by asset
category are as follows:
Pension Plan Other Benefits
--------------- ---------------
Asset Category 2004 2003 2004 2003 Target Range
----- ----- ----- ----- ------ -----
Equity Securities 62.8% 63.1% 54.0% -0- % 60% 30-65%
Debt Securities 34.5 33.4 36.9 -0- % 38% 25-70%
Cash 2.7 3.5 9.1 100.0% 2% 0-10%
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
45
Middlesex utilizes two investment firms to manage its pension plan asset
portfolio. One of those investment firms manages the other post-retirement
benefits assets. Quarterly meetings are held between the Company's Pension
Committee and the investment managers to review their performance and asset
allocation. If the current asset allocation is outside the targeted range, the
Pension Committee reviews current market conditions and advice provided by the
investment managers to determine the appropriateness of rebalancing the
portfolio.
The investment objective of the Company is to maximize its long-term return on
benefit plan assets, relative to a reasonable level of risk, maintain a
diversified investment portfolio and invest in compliance with the Employee
Retirement Income Security Act of 1974. The expected long-term rate of return is
based on the various asset categories in which it invests and the current
expectations and historical performance for these categories.
Equity securities include Middlesex common stock in the amounts of $0.7 million
(3.8 percent of total plan assets) and $0.8 million (4.2 percent of total plan
assets) at December 31, 2004 and 2003, respectively.
For the pension plan, Middlesex made total cash contributions of $0.6 million in
2004 and expects to make cash contributions of approximately $0.8 million in
2005.
For the other benefit plan, Middlesex made total cash contributions of $1.1
million in 2004 and expects to make cash contributions of approximately $1.2
million in 2005.
401(k) Plan
The Company has a 401(k) defined contribution plan, which covers substantially
all employees with more than 1,000 hours of service. Under the terms of the
Plan, the Company matches 100% of a participant's contributions, which do not
exceed 1% of a participant's compensation, plus 50% of a participant's
contributions exceeding 1% but not more than 6%. The Company's matching
contributions were $0.3 million in 2004, $0.3 million in 2003 and $0.2 million
in 2002.
Stock Based Compensation
The Company maintains a Restricted Stock Plan, under which 65,233 shares of the
Company's common stock are held in escrow by the Company for key employees. Such
stock is subject to an agreement requiring forfeiture by the employee in the
event of termination of employment within five years of the award other than as
a result of retirement, death or disability.
The maximum number of shares authorized for grant under this plan is 240,000
shares. Compensation expense is determined by the market value of the stock on
the date of the award and is being amortized over a five-year period.
Compensation expense for each of the years ended December 31, 2004, 2003 and
2002 was $0.3 million, $0.3 million and $0.2 million, respectively.
The Company recognizes compensation expense at fair value for the restricted
stock awards in accordance with SFAS No. 123 "Accounting for Stock-Based
Compensation."
46
Note 8 - 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
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.
(Thousands of Dollars)
Twelve Months Ended December 31,
Operations by Segments: 2004 2003 2002
- -------------------------------------------------------------------------------
Revenues:
Regulated $ 60,745 $ 55,707 $ 54,398
Non - Regulated 10,366 8,500 7,576
Inter-segment Elimination (120) (96) (41)
- -------------------------------------------------------------------------------
Consolidated Revenues $ 70,991 $ 64,111 $ 61,933
- -------------------------------------------------------------------------------
Operating Income:
Regulated $ 12,569 $ 11,013 $ 12,032
Non - Regulated 550 487 435
- -------------------------------------------------------------------------------
Consolidated Operating Income $ 13,119 $ 11,500 $ 12,467
- -------------------------------------------------------------------------------
Depreciation:
Regulated $ 5,762 $ 5,308 $ 4,925
Non - Regulated 84 55 38
- -------------------------------------------------------------------------------
Consolidated Depreciation $ 5,846 $ 5,363 $ 4,963
- -------------------------------------------------------------------------------
Other Income, Net:
Regulated $ 892 $ 506 $ 474
Non - Regulated (1) (33) 22
Inter-segment Elimination (96) (116) (54)
- -------------------------------------------------------------------------------
Consolidated Other Income, Net $ 795 $ 357 $ 442
- -------------------------------------------------------------------------------
Interest Expense:
Regulated $ 5,469 $ 5,227 $ 5,143
Non - Regulated 96 116 54
Inter-segment Elimination (96) (116) (54)
- -------------------------------------------------------------------------------
Consolidated Interest Charges $ 5,469 $ 5,227 $ 5,143
- -------------------------------------------------------------------------------
Net Income:
Regulated $ 7,993 $ 6,292 $ 7,361
Non - Regulated 453 339 404
- -------------------------------------------------------------------------------
Consolidated Net Income $ 8,446 $ 6,631 $ 7,765
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Capital Expenditures:
Regulated $ 28,669 $ 17,005 $ 15,827
Non - Regulated 210 572 429
- -------------------------------------------------------------------------------
Total Capital Expenditures $ 28,879 $ 17,577 $ 16,256
- -------------------------------------------------------------------------------
As of As of
December 31, December 31,
2004 2003
- --------------------------------------------------------------------------------
Assets:
Regulated $302,765 $264,453
Non - Regulated 4,943 5,223
Inter-segment Elimination (2,074) (1,720)
- --------------------------------------------------------------------------------
Consolidated Assets $305,634 $267,956
- --------------------------------------------------------------------------------
47
Note 9 - Quarterly Operating Results - Unaudited
Quarterly operating results for 2004 and 2003 are as follows:
(Thousands of Dollars, Except per Share Data)
1st 2nd 3rd 4th Total
2004
- --------------------------------------------------------------------------------
Operating Revenues $15,876 $17,770 $19,856 $17,489 $70,991
Operating Income 2,220 3,110 4,497 3,292 13,119
Net Income 1,034 1,890 3,362 2,160 8,446
Basic Earnings per Share $ 0.09 $ 0.17 $ 0.29 $ 0.19 $ 0.74
Diluted Earnings per Share $ 0.09 $ 0.16 $ 0.29 $ 0.19 $ 0.73
2003
- --------------------------------------------------------------------------------
Operating Revenues $14,981 $15,998 $17,586 $15,546 $64,111
Operating Income 2,376 3,108 3,500 2,516 11,500
Net Income 1,225 1,804 2,393 1,209 6,631
Basic Earnings per Share $ 0.11 $ 0.17 $ 0.22 $ 0.11 $ 0.61
Diluted Earnings per Share $ 0.11 $ 0.17 $ 0.22 $ 0.11 $ 0.61
The information above, in the opinion of the Company, includes all adjustments
consisting only of normal recurring accruals necessary for a fair presentation
of such amounts. The business of the Company is subject to seasonal fluctuation
with the peak period usually occurring during the summer months.
Note 10 - Restatement of Consolidated Financial Statements
On November 5, 2005 and subsequent to the issuance of the Company's Form 10-K
for the year ended December 31, 2004, management determined that the previously
filed Consolidated Balance Sheets and Statements of Cash Flows needed to be
restated.
The Consolidated Balance Sheets as of December 31, 2004 and 2003, reflect the
non-cash contributions of utility plant from developers and the related
construction advance or contributions as of the date the Company took ownership
of the property. Previously, the Company recorded the contributions as of the
date the cost information regarding the contributed property was received from
the developer.
The Consolidated Statements of Cash Flows for the three years ended December 31,
2004 reflect only the related cash activity for construction advances and
contributions of utility plant. Additionally, the Company has included
supplemental non-cash disclosure related to utility plant contributions by
developers. Previously, the Company incorrectly included non-cash activity for
construction advances and contributions of utility plant as cash outflows from
investing activities and cash inflows from financing activities.
The restatement does not have any effect on net income, earnings applicable to
common stock, cash flow from operations, or liquidity.
A summary of the significant effects of the restatement is as follows:
Consolidated Balance Sheet Effects:
December 31, 2004 December 31, 2003
----------------- -----------------
As Previously As As Previously As
Reported Restated Reported Restated
-------- -------- -------- --------
Utility Plant - Transmission and Distribution $188,026,091 $194,531,035 $174,455,437 $179,219,783
Total Assets 299,129,098 305,634,042 263,191,935 267,956,281
Customer Advances for Construction 12,366,060 14,018,006 11,711,846 12,838,342
Contributions in Aid of Construction 16,597,918 21,450,916 15,973,563 19,611,413
Total Capitalization and Liabilities 299,129,098 305,634,042 263,191,935 267,956,281
48
Consolidated Statement of Cash Flows Effects:
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
As Previously As As Previously As As Previously As
Reported Restated Reported Restated Reported Restated
-------- -------- -------- -------- -------- --------
Utility Plant Expenditures $(29,860,100) $(28,878,576) $(19,574,205) $(17,576,634) $(16,489,095) $(16,255,866)
Net Cash Used in Investing Activities (39,217,034) (38,235,510) (17,515,982) (15,518,411) (13,872,562) (13,639,333)
Construction Advances and Contributions - Net 1,278,569 297,045 1,897,803 (99,768) 874,205 640,976
Net Cash Provided by Financing Activities 24,687,170 23,705,646 3,335,271 1,337,700 1,077,069 843,840
Supplemental Disclosure of Non-Cash Activity:
Utility Plant received as Construction
Advances and Contributions $ -- $ 2,722,121 $ -- $ 3,753,037 $ -- $ 1,042,529
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures
(1) The Company's management, including the Company's Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of its disclosure
controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act)
as of the end of the period covered by this annual report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, solely due to the material weakness described below under (2)
Management's Report on Internal Control Over Financial Reporting, the Company's
disclosure controls and procedures were not effective as of the end of the
period covered by this annual report.
This matter and its resolution has been discussed with the Audit Committee of
the Company's Board of Directors.
Based on the foregoing, in connection with this Annual Report on Form 10-K/A,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's internal controls over financial reporting were not effective
as of the period covered by this annual report. Subsequent to the period covered
by this report, in connection with the discovery of errors related to recording
and reporting construction advances and contributions for utility plant, and
conclusion that the Company had a material weakness in its internal control over
financial reporting, the Company implemented procedures related to recording
non-cash contributions of utility assets from developers, expanded its periodic
review process of non-cash activities and expanded its review of the
presentation of non-cash transactions. Management believes these changes will
remediate the material weakness that led to the restatement and enhance the
reliability and effectiveness of the financial reporting process. Accordingly,
management believes that the consolidated financial statements included in this
report fairly present, in all material respects, our financial condition,
results of operations and cash flows for the periods presented.
49
There were no other changes in the Company's internal control over financial
reporting identified in connection with the foregoing evaluation that occurred
during the quarter ended December 31, 2004, that have materially affected or
that are reasonably likely to materially affect the Company's internal control
over financial reporting.
(2) Management's Report on Internal Control Over Financial Reporting (as
revised)
The management of Middlesex Water Company (Middlesex or the Company) is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Exchange Act Rule 13A-15(f) and 15d-15(f).
Middlesex's internal control system was designed to provide reasonable assurance
to the Company's management and Board of Directors regarding the adequate
preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to the adequacy of financial
statement preparation and presentation.
In the Company's 2004 annual report on Form 10-K, filed on March 16, 2005,
management of the Company included Management's Report on Internal Control Over
Financial Reporting, which expressed a conclusion by management that as of
December 31, 2004, the Company's internal control over financial reporting was
effective. As of result of the restatement of its financial statements, as
described further in Note 10 of the Notes to Consolidated Financial Statements,
management has concluded that a material weakness in internal control over
financial reporting existed as of December 31, 2004 and, accordingly, has
revised its assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004.
A material weakness is a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Due to the circumstances described in Note 10 of the Notes to
Consolidated Financial Statements, the management of Middlesex Water Company has
concluded that a material weakness existed in the Company's internal control
over financial reporting as of December 31, 2004 as defined under standards
established by the Public Company Accounting Oversight Board. Specifically,
there were ineffective controls to record non-cash contributions of utility
plant from developers and disclosure of these non-cash transactions in the
statement of cash flows. These errors resulted in the restatement of the
Company's Consolidated Balance Sheets as of December 31, 2004 and 2003 and
Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002.
In making this revised assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control- Integrated Framework. Based on those criteria and management's
revised assessment, management concludes that the Company did not maintain
effective internal control over financial reporting as of December 31, 2004,
solely as a result of the material weakness described above.
Subsequent to December 31, 2004, the Company completed a comprehensive review of
the recording of non-cash contributions of utility plant from developers and
disclosure of these non-cash transactions in the statement of cash flows. As a
result of this remediation effort, in the Company's best judgment, it has
remediated the aforementioned material weakness.
50
Middlesex's independent registered public accounting firm has issued their
report on our revised assessment of the Company's internal control over
financial reporting. This report appears on pages 51 through 53.
/s/ Dennis G. Sullivan /s/ A. Bruce O'Connor
--------------------------- --------------------------
Dennis G. Sullivan A. Bruce O'Connor
President Vice President and Chief
Financial Officer
Iselin, New Jersey
November 18, 2005
(3) Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Middlesex Water Company:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting (as revised),
that Middlesex Water Company and subsidiaries (the Company) did not maintain
effective internal control over financial reporting as of December 31, 2004,
because of the effect of the material weakness identified in management's
assessment based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
51
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our report dated March 15, 2005, we expressed an unqualified opinion on
management's assessment that the Company maintained effective internal control
over financial reporting and an unqualified opinion on the effectiveness of
internal control over financial reporting. As described in the following
paragraph, the Company subsequently identified material misstatements in its
2002, 2003, and 2004 annual financial statements and 2004 interim financial
statements, which caused such annual financial statements to be restated.
Management subsequently revised its assessment due to the identification of a
material weakness, described in the following paragraph, in connection with the
financial statement restatement. Accordingly, our opinion on the effectiveness
of the Company's internal control over financial reporting as of December 31,
2004 expressed herein is different from that expressed in our previous report.
A material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's revised assessment: there were ineffective controls to record
non-cash contributions of utility plant from developers and disclosure of these
non-cash transactions in the statement of cash flows. This material weakness
resulted in the restatement of the Company's previously issued annual financial
statements as described more fully in Note 10 of the Notes to Consolidated
Financial Statements. This material weakness was considered in determining the
nature, timing, and extent of audit tests applied in our audit of the
consolidated financial statements as of and for the year ended December 31, 2004
(as restated), of the Company and this report does not affect our report on such
restated financial statements.
In our opinion, management's revised assessment that the Company did not
maintain effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion,
because of the effect of the material weakness described above on the
achievement of objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of December
31, 2004, based on the criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. We do not express an opinion or any other form of assurance on
management's statements regarding the remediation of the material weakness
included in paragraph six of Management's Report on Internal Control Over
Financial Reporting (as revised).
52
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets and
consolidated statements of capital stock and long-term debt of the Company as of
December 31, 2004, and the related consolidated statements of income, common
stockholders' equity and comprehensive income, and cash flows for the year ended
December 31, 2004 and our report dated March 15, 2005 (November 14, 2005 as to
the effects of the restatement described in Note 10 of the Notes to Consolidated
Financial Statements) expressed an unqualified opinion on those consolidated
financial statements and includes an explanatory paragraph relating to the
restatement described in Note 10.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 15, 2005 (November 14, 2005 as to the effect of the
material weakness described in Management's Report on
Internal Control Over Financial Reporting (as revised))
Item 9B. Other Information.
None.
53
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to Directors of Middlesex Water Company is included in
Middlesex Water Company's Proxy Statement for the 2005 Annual Meeting of
Stockholders and is incorporated herein by reference.
Information regarding the Executive Officers of Middlesex Water Company is
included under Item 1. in Part I of this annual report.
Item 11. Executive Compensation.
This Information for Middlesex Water Company is included in Middlesex Water
Company's Proxy Statement for the 2005 Annual Meeting of Stockholders and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information for Middlesex Water Company is included in Middlesex Water
Company's Proxy Statement for the 2005 Annual Meeting of Stockholders and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
This information for Middlesex Water Company is included in Middlesex Water
Company's Proxy Statement for the 2005 Annual Meeting of Stockholders and is
incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
This information for Middlesex Water Company is included in Middlesex Water
Company's Proxy Statement for the 2005 Annual Meeting of Stockholders and is
incorporated herein by reference.
54
PART IV
Item 15. Exhibits and Financial Statement Schedules.
1. The following Financial Statements and Supplementary Data are included in
Part II- Item 8. of this annual report:
Consolidated Balance Sheets at December 31, 2004 and 2003 (as restated).
Consolidated Statements of Income for each of the three years in the
period ended December 31, 2004, 2003 and 2002.
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2004, 2003 and 2002 (as restated).
Consolidated Statements of Capital Stock and Long-term Debt at December
31, 2004 and 2003.
Consolidated Statements of Common Stockholders Equity and Comprehensive
Income for each of the three years in the period ended December 31, 2004,
2003 and 2002.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
-----------------------------
All Schedules are omitted because of the absence of the conditions under
which they are required or because the required information is shown in
the financial statements or notes thereto.
3. Exhibits
--------
See Exhibit listing immediately following the signature page.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MIDDLESEX WATER COMPANY
By: /s/ Dennis G. Sullivan
-----------------------------------------------
Dennis G. Sullivan
President, Chief Executive Officer and Director
Date: November 18, 2005
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
registrant and in the capacities on November 18, 2005.
By: /s/ A. Bruce O'Connor
-----------------------------------------------
A. Bruce O'Connor
Vice President and Chief Financial Officer
By: /s/ J. Richard Tompkins
-----------------------------------------------
J. Richard Tompkins
Chairman of the Board and Director
By: /s/ Dennis G. Sullivan
-----------------------------------------------
Dennis G. Sullivan
President, Chief Executive Officer and Director
By: /s/ Annette Catino
-----------------------------------------------
Annette Catino
Director
By: /s/ John C. Cutting
-----------------------------------------------
John C. Cutting
Director
By: /s/ John R. Middleton
-----------------------------------------------
John R. Middleton
Director
By: /s/ John P. Mulkerin
-----------------------------------------------
John P. Mulkerin
Director
By: /s/ Walter G. Reinhard
-----------------------------------------------
Walter G. Reinhard
Director
By: /s/ Jeffries Shein
-----------------------------------------------
Jeffries Shein
Director
56
EXHIBIT INDEX
Exhibits designated with an asterisk (*) are filed herewith. The exhibits not so
designated have heretofore been filed with the Commission and are incorporated
herein by reference to the documents indicated in the previous filing columns
following the description of such exhibits. Exhibits designated with a dagger
(t) are management contracts or compensatory plans.
Previous Filing's
Registration Exhibit
Exhibit No. Document Description No. No.
=================================================================================================================
3.1 Certificate of Incorporation of the Company, as amended, filed
as Exhibit 3.1 of 1998 Form 10-K.
3.2 Bylaws of the Company, as amended 33-54922 3.2
3.3 Certificate of Correction of Middlesex Water Company filed
with the State of New Jersey on April 30, 1999, filed as
Exhibit 3.3 of 2003 Form 10-K.
3.4 Certificate of Amendment to the Restated Certificate of
Incorporation Middlesex Water Company, filed with the State of
New Jersey on February 17, 2000, filed as Exhibit 3.4 of 2003
Form 10-K.
3.5 Certificate of Amendment to the Restated Certificate of
Incorporation Middlesex Water Company, filed with the State of
New Jersey on June 5, 2002, filed as Exhibit 3.5 of 2003 Form
10-K.
4.1 Form of Common Stock Certificate. 2-55058 2(a)
4.2 Registration Statement, Form S-3, under Securities Act of 1933
filed February 3, 1987, relating to the Dividend Reinvestment
and Common Stock Purchase Plan. 33-11717
4.3 Revised Prospectus relating to the Dividend Reinvestment and
Common Stock Purchase Plan, Submitted to the Securities and
Exchange Commission, January 20, 2000. 33-11717
4.4 Post Effective Amendments No. 7, Form S-3, under Securities
Act of 1933 filed February 1, 2002, relating to the Dividend
Reinvestment and Common Stock Purchase Plan. 33-11717
10.1 Copy of Purchased Water Agreement between the Company and
Elizabethtown Water Company, filed as Exhibit 10.1 of 1996
Form 10-K.
10.2 Copy of Mortgage, dated April 1, 1927, between the Company and
Union County Trust Company, as Trustee, as supplemented by
Supplemental Indentures, dated as of October 1, 1939 and April
1, 1949. 2-15795 4(a)-4(f)
10.3 Copy of Supplemental Indenture, dated as of July 1, 1964 and
June 15, 1991, between the Company and Union County Trust
Company, as Trustee. 33-54922 10.4-10.9
10.4 Copy of Supply Agreement, dated as of November 17, 1986,
between the Company and the Old Bridge Municipal Utilities
Authority. 33-31476 10.12
10.5 Copy of Supply Agreement, dated as of July 14, 1987, between
the Company and the Marlboro Township Municipal Utilities
Authority, as amended. 33-31476 10.13
57
EXHIBIT INDEX
Previous Filing's
Registration Exhibit
Exhibit No. Document Description No. No.
=================================================================================================================
10.6 Copy of Supply Agreement, dated as of February 11, 1988, with
modifications dated February 25, 1992, and April 20, 1994,
between the Company and the Borough of Sayreville filed as
Exhibit No. 10.11 of 1994 First Quarter Form 10-Q.
10.7 Copy of Water Purchase Contract, dated as of September 25,
2003, between the Company and the New Jersey Water Supply
Authority, filed as Exhibit No. 10.7 of 2003 Form 10-K.
10.8 Copy of Treating and Pumping Agreement, dated April 9, 1984,
between the Company and the Township of East Brunswick. 33-31476 10.17
10.9 Copy of Supply Agreement, dated June 4, 1990, between the
Company and Edison Township. 33-54922 10.24
10.10 Copy of Supply Agreement, between the Company and the Borough
of Highland Park, filed as Exhibit No. 10.15 of 1996 Form
10-K.
(t)10.11 Copy of Supplemental Executive Retirement Plan, filed as
Exhibit 10.13 of 1999 Third Quarter Form 10-Q.
(t)10.12 Copy of 1989 Restricted Stock Plan, filed as Appendix B to the
Company's Definitive Proxy Statement, dated and filed April
25, 1997. 33-31476 10.22
(t)10.13(a) Employment Agreement between Middlesex Water Company and
Dennis G. Sullivan, filed as Exhibit 10.15(f) of 1999 Third
Quarter Form 10-Q.
(t)10.13(b) Employment Agreement between Middlesex Water Company and A.
Bruce O'Connor, filed as Exhibit 10.15(c) of 1999 Third
Quarter Form 10-Q.
(t)10.13(d) Employment Agreement between Middlesex Water Company and
Richard M. Risoldi, filed as Exhibit 10.13(d) of 2003 Form
10-K.
(t)10.13(e) Employment Agreement between Middlesex Water Company and
Kenneth J. Quinn, filed as Exhibit 10.13(e) of 2003 Form 10-K.
(t)10.13(f) Employment Agreement between Middlesex Water Company and James
P. Garrett, filed as Exhibit 10.13(f) of 2003 Form 10-K.
(t)10.13(g) Employment Agreement between Tidewater Utilities, Inc. and
Gerard L. Esposito, filed as Exhibit 10.13(g) of 2003 Form
10-K.
(t)10.13(h) Consulting Agreement between Middlesex Water Company and J.
Richard Tompkins, filed as Exhibit 10.13(h) of 2003 Form 10-K.
(t)*10.13(i) Employment Agreement between Middlesex Water Company and
Dennis W. Doll.
58
EXHIBIT INDEX
Previous Filing's
Registration Exhibit
Exhibit No. Document Description No. No.
=================================================================================================================
10.14 Copy of Transmission Agreement, dated October 16, 1992,
between the Company and the Township of East Brunswick. 33-54922 10.23
10.15 Copy of Supplemental Indentures, dated September 1, 1993,
(Series S & T) and January 1, 1994, (Series U & V), between
the Company and United Counties Trust Company, as Trustee,
filed as Exhibit No. 10.22 of 1993 Form 10-K.
10.16 Copy of Trust Indentures, dated September 1, 1993, (Series S &
T) and January 1, 1994, (Series V), between the New Jersey
Economic Development Authority and First Fidelity Bank (Series
S & T), as Trustee, and Midlantic National Bank (Series V), as
Trustee, filed as Exhibit No. 10.23 of 1993 Form 10-K.
10.17 Copy of Supplemental Indenture dated October 15, 1998 between
Middlesex Water Company and First Union National Bank, as
Trustee. Copy of Loan Agreement dated November 1, 1998 between
the New Jersey and Middlesex Water Company (Series X), filed
as Exhibit No. 10.22 of the 1998 Third Quarter Form 10-Q.
10.18 Copy of Supplemental Indenture dated October 15, 1998 between
Middlesex Water Company and First Union National Bank, as
Trustee. Copy of Loan Agreement dated November 1, 1998 between
the State of New Jersey Environmental Infrastructure Trust and
Middlesex Water Company (Series Y), filed as Exhibit No. 10.23
of the 1998 Third Quarter Form 10-Q.
10.19 Copy of Operation, Maintenance and Management Services
Agreement dated January 1, 1999 between the Company City of
Perth Amboy, Middlesex County Improvement Authority and
Utility Service Affiliates, Inc. 333-66727 10.24
10.20 Copy of Supplemental Indenture dated October 15, 1999 between
Middlesex Water Company and First Union National Bank, as
Trustee and copy of Loan Agreement dated November 1, 1999
between the State of New Jersey and Middlesex Water Company
(Series Z), filed as Exhibit No. 10.25 of the 1999 Form 10-K.
10.21 Copy of Supplemental Indenture dated October 15, 1999 between
Middlesex Water Company and First Union National Bank, as
Trustee and copy of Loan Agreement dated November 1, 1999
between the New Jersey Environmental Infrastructure Trust and
Middlesex Water Company (Series AA), filed as Exhibit No.
10.26 of the 1999 Form 10-K.
59
EXHIBIT INDEX
Previous Filing's
Registration Exhibit
Exhibit No. Document Description No. No.
=================================================================================================================
10.22 Copy of Supplemental Indenture dated October 15, 2001 between
Middlesex Water Company and First Union National Bank, as
Trustee and copy of Loan Agreement dated November 1, 2001
between the State of New Jersey and Middlesex Water Company
(Series BB). Filed as Exhibit No. 10.22 of the 2001 Form 10-K.
10.23 Copy of Supplemental Indenture dated October 15, 2001 between
Middlesex Water Company and First Union National Bank, as
Trustee and copy of Loan Agreement dated November 1, 2001
between the New Jersey Environmental Infrastructure Trust and
Middlesex Water Company (Series CC). Filed as Exhibit No.
10.22 of the 2001 Form 10-K.
10.24 Copy of Supplemental Indenture dated January 15, 2002 between
Middlesex Water Company and First Union National Bank, as
Trustee and copy of Loan Agreement dated January 1, 2002
between the New Jersey Economic Development Authority and
Middlesex Water Company (Series DD), filed as Exhibit No.
10.24 of the 2001 Form 10-K.
10.25 Copy of Supplemental Indenture dated March 1, 1998 between
Middlesex Water Company and First Union National Bank, as
Trustee. Copy of Trust Indenture dated March 1, 1998 between
the New Jersey Economic Development Authority and PNC Bank,
National Association, as Trustee (Series W), filed as Exhibit
No. 10.21 of the 1998 Third Quarter Form 10-Q.
*10.26 Copy of Supplemental Indenture dated October 15, 2004 between
Middlesex Water Company and Wachovia Bank, as Trustee and copy
of Loan Agreement dated November 1, 2004 between the State of
New Jersey and Middlesex Water Company (Series EE).
*10.27 Copy of Supplemental Indenture dated October 15, 2004 between
Middlesex Water Company and Wachovia Bank, as Trustee and copy
of Loan Agreement dated November 1, 2004 between the New
Jersey Environmental Infrastructure Trust and Middlesex Water
Company (Series FF).
*21 Middlesex Water Company Subsidiaries.
*23 Consent of Independent Registered Public Accounting Firm.
*31 Section 302 Certification by Dennis G. Sullivan pursuant to
Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934.
*31.1 Section 302 Certification by A. Bruce O'Connor pursuant to
Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934.
60
EXHIBIT INDEX
Previous Filing's
Registration Exhibit
Exhibit No. Document Description No. No.
=================================================================================================================
*32 Section 906 Certification by Dennis G. Sullivan pursuant to 18
U.S.C. ss.1350.
*32.1 Section 906 Certification by A. Bruce O'Connor pursuant to 18
U.S.C. ss.1350.
61