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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to______________________
Commission File Number 0-422
MIDDLESEX WATER COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-1114430
(State of incorporation) (IRS employer identification no.)
1500 Ronson Road, Iselin, NJ 08830
(Address of principal executive offices, including zip code)
(732) 634-1500
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
Yes |X| No |_|
The number of shares outstanding of each of the registrant's classes of common
stock, as of May 2, 2005: Common Stock, No Par Value: 11,380,682 shares
outstanding.
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Explanatory Note
This amendment on Form 10-Q/A reflects the restatement of the unaudited
Condensed Consolidated Balance Sheets of Middlesex Water Company (the Company)
as of March 31, 2005 and the Condensed Consolidated Statement of Cash Flows for
the three months ended March 31, 2004, to correct the accounting and disclosure
of non-cash contributions of utility plant from developers, as discussed in Note
9 of the Notes to Condensed Consolidated Financial Statements (Unaudited)
included in Part I.- Item 1. In addition, the Company has amended Part I.- Item
4 to update the disclosures regarding disclosure controls and procedures.
The restatement affects only Part I.- Items 1 and 4, and Part II.- Item 6.
Except for the foregoing amended items, all of the information in this Form
10-Q/A is as of May 6, 2005, the filing date of the original Form 10-Q for the
quarter ended March 31, 2005, and has not been updated for the events subsequent
to that date other than for the matter discussed above.
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements:
Condensed Consolidated Statements of Income 1
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Cash Flows 3
Condensed Consolidated Statements of Capital Stock
and Long-term Debt 4
Notes to Condensed Consolidated
Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures of Market Risk 18
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
SIGNATURE 21
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
2005 2004
----------------------------
Operating Revenues $ 16,742,903 $ 15,875,733
----------------------------
Operating Expenses:
Operations 9,041,996 8,904,091
Maintenance 898,685 862,508
Depreciation 1,548,048 1,436,230
Other Taxes 2,083,134 1,945,194
Income Taxes 666,770 507,359
----------------------------
Total Operating Expenses 14,238,633 13,655,382
----------------------------
Operating Income 2,504,270 2,220,351
Other Income:
Allowance for Funds Used During Construction 210,450 49,561
Other Income 55,219 19,806
Other Expense (8,145) (3,236)
----------------------------
Total Other Income, net 257,524 66,131
Interest Charges 1,382,092 1,252,842
----------------------------
Net Income 1,379,702 1,033,640
Preferred Stock Dividend Requirements 63,697 63,697
----------------------------
Earnings Applicable to Common Stock $ 1,316,005 $ 969,943
----------------------------
Earnings per share of Common Stock:
Basic $ 0.12 $ 0.09
Diluted $ 0.12 $ 0.09
Average Number of
Common Shares Outstanding :
Basic 11,367,475 10,579,095
Diluted 11,710,615 10,922,235
Cash Dividends Paid per Common Share $ 0.1675 $ 0.1650
See Notes to Condensed Consolidated Financial Statements.
1
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 2005 2004
===========================================================================================================================
(Restated -
see Note 9)
UTILITY PLANT: Water Production $ 84,008,905 $ 82,340,798
Transmission and Distribution 197,429,415 194,531,035
General 20,503,687 20,451,215
Construction Work in Progress 12,939,425 13,013,391
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TOTAL 314,881,432 310,336,439
Less Accumulated Depreciation 53,253,309 52,017,761
----------------------------------------------------------------------------------------------
UTILITY PLANT - NET 261,628,123 258,318,678
----------------------------------------------------------------------------------------------
===========================================================================================================================
CURRENT ASSETS: Cash and Cash Equivalents 1,739,186 4,034,768
Accounts Receivable, net 6,081,133 6,316,853
Unbilled Revenues 3,594,987 3,572,713
Materials and Supplies (at average cost) 1,298,836 1,203,906
Prepayments 591,754 823,976
----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 13,305,896 15,952,216
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===========================================================================================================================
DEFERRED CHARGES Unamortized Debt Expense 3,137,481 3,172,254
AND OTHER ASSETS: Preliminary Survey and Investigation Charges 1,293,538 1,032,182
Regulatory Assets 8,418,941 8,198,565
Restricted Cash 10,715,906 13,257,106
Non-utility Assets, net 5,363,244 5,237,622
Other 462,932 465,419
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TOTAL DEFERRED CHARGES AND OTHER ASSETS 29,392,042 31,363,148
----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 304,326,061 $ 305,634,042
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CAPITALIZATION AND LIABILITIES
===========================================================================================================================
CAPITALIZATION: Common Stock, No Par Value $ 72,369,198 $ 71,979,902
Retained Earnings 22,516,420 23,103,908
Accumulated Other Comprehensive Income, net of tax 44,228 44,841
==============================================================================================
TOTAL COMMON EQUITY 94,929,846 95,128,651
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Preferred Stock 4,063,062 4,063,062
Long-term Debt 115,343,509 115,280,649
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TOTAL CAPITALIZATION 214,336,417 214,472,362
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===========================================================================================================================
CURRENT Current Portion of Long-term Debt 1,153,562 1,091,351
LIABILITIES: Notes Payable 9,500,000 11,000,000
Accounts Payable 4,314,812 6,001,806
Accrued Taxes 8,699,514 6,784,380
Accrued Interest 931,729 1,703,131
Unearned Revenues and Advanced Service Fees 395,834 387,156
Other 741,153 795,456
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TOTAL CURRENT LIABILITIES 25,736,604 27,763,280
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===========================================================================================================================
COMMITMENTS AND CONTINGENT LIABILITIES (Note 6)
===========================================================================================================================
DEFERRED CREDITS Customer Advances for Construction 13,871,817 14,018,006
AND OTHER LIABILITIES: Accumulated Deferred Investment Tax Credits 1,676,912 1,696,566
Accumulated Deferred Income Taxes 14,873,351 14,556,153
Employee Benefit Plans 5,875,032 5,464,056
Regulatory Liability - Cost of Utility Plant Removal 5,522,494 5,363,152
Other 807,918 849,551
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TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 42,627,524 41,947,484
----------------------------------------------------------------------------------------------
===========================================================================================================================
CONTRIBUTIONS IN AID OF CONSTRUCTION 21,625,516 21,450,916
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 304,326,061 $ 305,634,042
----------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
2
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2005 2004
----------------------------
(Restated -
see Note 9)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,379,702 $ 1,033,640
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 1,720,355 1,499,191
Provision for Deferred Income Taxes and ITC (25,049) (58,444)
Allowance for Funds Used During Construction (210,450) (49,561)
Changes in Assets and Liabilities:
Accounts Receivable 235,720 (201,372)
Unbilled Revenues (22,274) (18,363)
Materials & Supplies (94,930) (228,443)
Prepayments 232,222 161,209
Other Assets (28,823) 30,126
Accounts Payable (1,686,994) (606,899)
Accrued Taxes 1,915,449 1,897,195
Accrued Interest (771,402) (1,091,009)
Employee Benefit Plans 410,976 211,445
Unearned Revenue & Advanced Service Fees 8,678 260,004
Other Liabilities (95,936) 99,805
- ----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,967,244 2,938,524
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (4,192,222) (2,918,050)
Cash Surrender Value & Other Investments (85,936) (57,864)
Restricted Cash 2,541,200 299,378
Preliminary Survey & Investigation Charges (261,356) (94,170)
- ----------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,998,314) (2,770,706)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (210,575) (212,204)
Proceeds from Issuance of Long-term Debt 335,646 1,084,746
Net Short-term Bank (Repayments) Borrowings (1,500,000) 975,000
Deferred Debt Issuance Expenses (7,500) (17,512)
Common Stock Issuance Expense -- (204,286)
Proceeds from Issuance of Common Stock 389,296 507,153
Payment of Common Dividends (1,903,493) (1,744,975)
Payment of Preferred Dividends (63,697) (63,697)
Construction Advances and Contributions-Net (304,189) (201,429)
- ----------------------------------------------------------------------------------------------------
NET CASH (USED BY) PROVIDED BY FINANCING ACTIVITIES (3,264,512) 122,796
- ----------------------------------------------------------------------------------------------------
NET CHANGES IN CASH AND CASH EQUIVALENTS (2,295,582) 290,614
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,034,768 3,005,610
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,739,186 $ 3,296,224
- ----------------------------------------------------------------------------------------------------
*Excludes Allowance for Funds Used During Construction
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Utility Plant received as Construction Advances and Contributions $ 332,600 $ 252,743
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Period for:
Interest $ 2,111,221 $ 2,453,181
Interest Capitalized $ (210,450) $ (49,561)
Income Taxes $ 300,000 $ 112,000
- ----------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
3
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
(Unaudited)
March 31, December 31,
2005 2004
- -----------------------------------------------------------------------------------------------------
Common Stock, No Par Value
Shares Authorized - 20,000,000
Shares Outstanding - 2005 - 11,377,403 $ 72,369,198 $ 71,979,902
2004 - 11,358,772
Retained Earnings 22,516,420 23,103,908
Accumulated Other Comprehensive Income, net of tax 44,228 44,841
- -----------------------------------------------------------------------------------------------------
TOTAL COMMON EQUITY 94,929,846 95,128,651
- -----------------------------------------------------------------------------------------------------
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 3,044,055 3,063,389
6.25%, Amortizing Secured Note, due May 22, 2028 9,730,000 9,835,000
4.22%, State Revolving Trust Note, due December 31, 2022 784,000 784,000
3.60%, State Revolving Trust Note, due May 1, 2025 2,683,962 2,348,316
4.00% to 5.00%, State Revolving Trust Bond, due September 1, 2021 790,000 790,000
0.00%, State Revolving Fund Bond, due September 1, 2021 641,580 652,306
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 742,578 755,006
4.25% to 4.63%, Series Y, due September 1, 2018 920,000 920,000
0.00%, Series Z, due September 1, 2019 1,650,588 1,679,979
5.25% to 5.75%, Series AA, due September 1, 2019 2,085,000 2,085,000
0.00%, Series BB, due September 1, 2021 2,014,399 2,048,095
4.00% to 5.00%, Series CC, due September 1, 2021 2,275,000 2,275,000
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 7,715,909
3.00% to 5.50%, Series FF, due September 1, 2024 8,920,000 8,920,000
- -----------------------------------------------------------------------------------------------------
SUBTOTAL LONG-TERM DEBT 116,497,071 116,372,000
- -----------------------------------------------------------------------------------------------------
Less: Current Portion of Long-term Debt (1,153,562) (1,091,351)
- -----------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 115,343,509 $ 115,280,649
- -----------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
4
MIDDLESEX WATER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Summary of Significant Accounting Policies
Organization - Middlesex Water Company (Middlesex) is the parent company and
sole shareholder of Tidewater Utilities, Inc. (Tidewater), Tidewater
Environmental Services, Inc. (TESI), Pinelands Water Company (Pinelands Water)
and Pinelands Wastewater Company (Pinelands Wastewater) (collectively,
Pinelands), Utility Service Affiliates, Inc. (USA), Utility Service Affiliates
(Perth Amboy) Inc. (USA-PA) and Bayview Water Company. Southern Shores Water
Company, LLC (Southern Shores) and White Marsh Environmental Systems, Inc.
(White Marsh) are wholly-owned subsidiaries of Tidewater. The financial
statements for Middlesex and its wholly owned subsidiaries (the Company) are
reported on a consolidated basis. All significant intercompany accounts and
transactions have been eliminated.
The consolidated notes within the 2004 Form 10-K/A are applicable to these
financial statements and, in the opinion of the Company, the accompanying
unaudited condensed consolidated financial statements contain all adjustments
necessary to present fairly the financial position as of March 31, 2005 and the
results of operations for the three month periods ended March 31, 2005 and 2004,
and cash flows for the three month periods ended March 31, 2005 and 2004.
Information included in the Unaudited Condensed Consolidated Balance Sheet as of
December 31, 2004, has been derived from the Company's audited financial
statements for the year ended December 31, 2004.
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" (SFAS 123(R)), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), 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 was
originally effective for quarters beginning after June 15, 2005, however on
April 14, 2005, the Securities and Exchange Commission adopted a rule which
makes the provisions of SFAS 123(R) effective for fiscal periods beginning after
June 15, 2005 (effective January 1, 2006 for the Company). 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
5
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 accounted for the effects of
FSP 106-2 at its next measurement date (January 1, 2005). The adoption of FSP
106-2 did 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.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" (FIN 47), to clarify the term
"conditional asset retirement obligation" as used in Statement of Financial
Accounting Standards SFAS No. 143, "Accounting for Asset Retirement
Obligations." Conditional asset retirement obligation refers to a legal
obligation to perform an asset retirement activity in which the timing and/or
method of settlement are conditional on a future event that may or may not be
within the control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and/or
method of settlement. Accordingly, an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. The fair value of a
liability for the conditional asset retirement obligation should be recognized
when incurred, generally, upon acquisition, construction, development and/or
through the normal operation of the asset. Uncertainty about the timing and/or
method of settlement should be factored into the measurement of the liability
when sufficient information exists. FIN 47 also clarifies when an entity would
have sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005 (December 31, 2005 for calendar-year
enterprises). The Company does not anticipate adoption of this standard will
have a material impact on its financial position, results of operations, or cash
flows.
Rate Matters - As part of an approved settlement with the Delaware Public
Service Commission (PSC) on October 19, 2004, Tidewater was eligible to apply
for a second phase rate increase of $0.5 million, provided it completed a number
of capital projects within a specified time schedule. Tidewater filed an
application for this increase on March 28, 2005. Upon verification of project
completion, the new rates became effective on April 27, 2005. Tidewater also
agreed to waive its right to file Distribution System Improvement Charges (DSIC)
6
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 27, 2006.
In accordance with the tariff established for Southern Shores, an annual rate
increase of 3% was implemented on January 1, 2005. The increase cannot exceed
the lesser of the regional Consumer Price Index or 3%.
Stock Based Compensation - The Company recognizes compensation expense at fair
value for its restricted stock awards in accordance with SFAS 123. As discussed
in Note 1, SFAS 123(R) is effective for fiscal periods beginning after June 15,
2005. The Company does not anticipate that the adoption of this standard will
have a material impact on its financial position, results of operations, or cash
flows.
Note 2 - Capitalization
Common Stock -During the three months ended March 31, 2005, there were 18,631
common shares (approximately $0.4 million) issued under the Company's Dividend
Reinvestment and Common Stock Purchase Plan. On April 28, 2005, the Company
filed with the Securities and Exchange Commission on Form S-3 to issue shares
under its Dividend Reinvestment and Common Stock Purchase Plan at a 5% discount
on optional cash payments and reinvested dividends for a six-month period
commencing on June 1, 2005, and concluding on December 1, 2005.
Long-term Debt -On May 6, 2005, Tidewater filed an application with the PSC
seeking approval to finance up to $16.0 million in the form of long-term debt
securities. Of this amount, Tidewater received loan approval in April 2005 under
the Delaware State Revolving Fund (SRF) program of $2.0 million. The Delaware
SRF program allows, but does not obligate, Tidewater to draw down against a
General Obligation Note for two specific projects over a two-year period ending
in April 2007. The interest rate is set on the loan closing date and is based on
62.5% of the interest rate for a 10+ year high quality corporate bond. Tidewater
has received a commitment letter from CoBank, a rural cooperative financial
institution, approving the conversion of Tidewater's existing $7.0 million
short-term borrowings with CoBank and an additional $7.0 million of funding for
an aggregated $14.0 million mortgage type loan to be repaid over a term of 25
years. The terms of the CoBank loan allows, but does not obligate, Tidewater to
draw down against the additional $7.0 million at any time after the loan closing
through August 31, 2006. During that period, there is a commitment fee of 12.5
basis points, or 0.125%, on the unused balance. The interest rate for the CoBank
loan will be a variable rate set weekly by CoBank, with Tidewater having an
option to fix the interest rate at any time over the life of the loan at a
margin over CoBank's cost of funds. The SRF and CoBank borrowings must be
approved by the PSC prior to the loan closings.
7
Note 3 - Earnings Per Share
Basic earnings per share (EPS) are computed on the basis of the weighted average
number of shares outstanding. Diluted EPS assumes the conversion of both the
Convertible Preferred Stock $7.00 Series and the Convertible Preferred Stock
$8.00 Series.
(In Thousands Except for per Share Amounts)
Three Months Ended March 31,
Weighted Weighted
2005 Average 2004 Average
Basic: Income Shares Income Shares
- --------------------------------------------------------------------------------
Net Income $ 1,380 11,367 $ 1,034 10,579
Preferred Dividend (64) (64)
------- ------- ------- -------
Earnings Applicable to Common Stock $ 1,316 11,367 $ 970 10,579
Basic EPS $ 0.12 $ 0.09
- --------------------------------------------------------------------------------
Diluted:
- --------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 1,316 11,367 $ 970 10,579
$7.00 Series Preferred Dividend 26 179 26 179
$8.00 Series Preferred Dividend 24 164 24 164
------- ------- ------- -------
Adjusted Earnings Applicable to
Common Stock $ 1,366 11,710 $ 1,020 10,922
Diluted EPS $ 0.12 $ 0.09
Note 4 - Business Segment Data
The Company has identified two reportable segments. One is the regulated
business of collecting, treating and distributing water on a retail and
wholesale basis to residential, commercial, industrial and fire protection
customers in parts of New Jersey and Delaware. This segment also includes the
operations of 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 services within these States.
The other segment primarily includes non-regulated contract services for the
operation and maintenance of municipal and private water and wastewater systems
in New Jersey and Delaware. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies in the
Consolidated Notes to the Financial Statements in the Company's Annual Report
for the period ended December 31, 2004 filed on Form 10-K/A. 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. These
inter-segment transactions are eliminated in the Company's consolidated
financial statements.
8
(Dollars in Thousands)
Three Months Ended
March 31,
Operations by Segments: 2005 2004
- -----------------------------------------------------------------------------
Revenues:
Regulated $ 14,759 $ 13,391
Non - Regulated 2,014 2,515
Inter-segment Elimination (30) (30)
---------------------------
Consolidated Revenues $ 16,743 $ 15,876
---------------------------
Operating Income:
Regulated $ 2,374 $ 2,073
Non - Regulated 130 147
---------------------------
Consolidated Operating Income $ 2,504 $ 2,220
---------------------------
Net Income:
Regulated $ 1,273 $ 925
Non - Regulated 107 109
---------------------------
Consolidated Net Income $ 1,380 $ 1,034
---------------------------
Capital Expenditures:
Regulated $ 4,133 $ 2,844
Non - Regulated 59 74
---------------------------
Total Capital Expenditures $ 4,192 $ 2,918
---------------------------
As of As of
March 31,2005 December 31,2004
------------- ----------------
Assets:
Regulated $ 301,446 $ 302,765
Non - Regulated 5,061 4,943
Inter-segment Elimination (2,181) (2,074)
---------------------------
Consolidated Assets $ 304,326 $ 305,634
---------------------------
Note 5 - Short-term Borrowings
The Board of Directors has authorized lines of credit for up to an aggregate of
$40.0 million. As of March 31, 2005, the Company has established lines of credit
aggregating $40.0 million. At March 31, 2005, the outstanding borrowings under
these credit lines were $9.5 million at a weighted average interest rate of
4.05%. As of that date, the Company had borrowing capacity of $30.5 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 $10.4
million and $13.8 million at 3.85% and 1.56% for the three months ended March
31, 2005 and 2004, respectively.
9
Note 6 - 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 2005 are $7.3
million. 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
March 31, 2005 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.
Water Supply - Middlesex has an agreement with the New Jersey Water Supply
Authority (NJWSA) for the purchase of untreated water. The agreement expires
November 30, 2023 and provides for an average purchase of 27 million gallons a
day (mgd). Pricing includes a two tier pricing schedule for the first 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. Middlesex is currently negotiating an extension of the
agreement as to its duration and daily minimum purchase. The cost of the treated
water is set by the BPU and is not subject to negotiation.
Purchased water costs are shown below:
(Millions of Dollars)
Three Months Ended
March 31,
Purchased Water 2005 2004
--------------- ------- -------
Untreated $ 0.6 $ 0.6
Treated 0.4 0.4
------- -------
Total Costs $ 1.0 $ 1.0
======= =======
Construction - Based on its capital budget, the Company plans to spend
approximately $28.5 million on its construction program in 2005.
10
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.
The Company is defendant in various lawsuits in the normal course of business.
We believe the resolution of pending claims and legal proceedings will not have
a material adverse effect on the Company's consolidated financial statements.
Change in Control Agreements - The Company has Change in Control Agreements with
certain of its Officers that provide compensation and benefits in the event of
termination of employment in connection with a change in control of the Company.
Note 7 - Employee Retirement Benefit Plans
Pension - The Company has a noncontributory defined benefit pension plan, which
covers all employees with more than 1,000 hours of service. The Company expects
to make cash contributions of $0.8 million during the current year. These
contributions are expected to be made during the second quarter of 2005. In
addition, the Company maintains an unfunded supplemental pension plan for its
executives.
Post-retirement Benefits Other Than Pensions - The Company has a post-retirement
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. The Company expects to make total cash
contributions of $1.2 million during the current year. These contributions will
be made each quarter during 2005.
The following table sets forth information relating to the Company's periodic
costs for its retirement plans.
(Dollars in Thousands)
Pension Benefits Other Benefits
Three Months Ended March 31,
2005 2004 2005 2004
--------------------------------
Service Cost $ 264 $ 186 $ 126 $ 106
Interest Cost 374 346 161 145
Expected Return on Assets (384) (372) (66) (53)
Amortization of Unrecognized Losses 3 -- 82 73
Amortization of Unrecognized Prior Service Cost 23 23 -- --
Amortization of Transition Obligation -- -- 34 34
--------------------------------
Net Periodic Benefit Cost $ 280 $ 183 $ 337 $ 305
--------------------------------
11
Note 8 - Other Comprehensive Income
Comprehensive income is as follows:
Three Months Ended
March 31,
2005 2004
----------------------------
Net Income $ 1,379,702 $ 1,033,640
Other Comprehensive Income:
Change in Value of Equity Investments,
Net of Income Tax (613) --
----------------------------
Other Comprehensive Income (613) --
----------------------------
Comprehensive Income $ 1,379,089 $ 1,033,640
----------------------------
Note 9 - Restatement of Condensed 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 Condensed Consolidated Balance Sheet as of March 31, 2005, reflects 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 Condensed Consolidated Statement of Cash Flows for the three months ended
March 31, 2004,reflects 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.
12
A summary of the significant effects of the restatement is as follows:
Condensed Consolidated Balance Sheet Effects:
March 31, 2005
--------------
As Previously As
Reported Restated
-------- --------
Transmission and Distribution $190,591,871 $197,429,415
Total Assets 297,488,517 304,326,061
Customer Advances for Construction 12,032,771 13,871,817
Contributions in Aid of Construction 16,627,018 21,625,516
Total Capitalization and Liabilities 297,488,517 304,326,061
Condensed Consolidated Statement of Cash Flows Effects:
Three Months Ended
March 31, 2004
--------------
As Previously As
Reported Restated
-------- --------
Utility Plant Expenditures $(2,935,590) $(2,918,050)
Net Cash Used in Investing Activities (2,788,246) (2,770,706)
Construction Advances and Contributions - Net (183,889) (201,429)
Net Cash Provided by Financing Activities 140,336 122,796
Supplemental Disclosure of Non-Cash Activity
Utility Plant received as Construction Advances
and Contributions $ -- $ 252,743
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements of the Company included
elsewhere herein and with the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2004.
Forward-Looking Statements
Certain statements contained in this quarterly 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 quarterly report.
Many of these factors are beyond the Company's ability to control or predict.
Given these uncertainties, readers are cautioned not to place undue reliance on
any forward-looking statements, which only speak to the
14
Company's understanding as of the date of this quarterly 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 quarterly 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 Risk Factors in the Company's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2004.
Overview
The 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 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. Through 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 25,000 retail customers in New Castle, Kent, and Sussex
Counties, Delaware. Our TESI subsidiary commenced operations during 2005 as a
regulated wastewater utility in Delaware. Although TESI has responded to
numerous requests for proposal, the Company does not have any customers or
revenues as of March 31, 2005. Our other Delaware subsidiary, White Marsh,
serves 1,900 customers in Kent and Sussex Counties.
Our USA subsidiary provides customers within the Middlesex System a service line
maintenance program called LineCareSM.
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 relief, and customer growth.
15
Recent Developments
Rate Increases
The Company anticipates that its Middlesex subsidiary will file for a base rate
increase with the New Jersey Board of Public Utilities (BPU) during the second
quarter of 2005. This increase is intended to recover the costs of increased
capital investments, including a $9.7 million raw water pipeline, as well as
higher operating and corporate governance expenses.
As part of an approved settlement with the Delaware Public Service Commission
(PSC) on October 19, 2004, Tidewater was eligible to apply for a second phase
rate increase of $0.5 million, provided it completed a number of capital
projects within a specified time schedule. Tidewater filed an application for
this increase on March 28, 2005. Upon verification of project completion, the
new rates became effective on April 27, 2005. 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 3% was implemented on January 1, 2005. The increase cannot exceed
the lesser of the regional Consumer Price Index or 3%.
Results of Operations - Three Months Ended March 31, 2005
Operating revenues for the three months ended March 31, 2005 increased $0.9
million or 5.5% from the same period in 2004. Water sales improved by $0.9
million in our New Jersey systems, which was primarily a result of base rate
increases. The increased water sales were partially offset by decreased water
consumption during the current year period as compared to the prior year.
Revenues rose in our Delaware service territories by $0.5 million. Customer
growth in Delaware provided additional water consumption sales, facility charges
and connection fees totaling $0.4 million. Base rate increases accounted for
$0.1 million of the increase.
USA had reduced revenues of $0.5 million as compared to the same period in 2004.
This reduction was due to our meter services venture completing its original
contracts during December 2004. USA has not bid on, and consequently has not
obtained any additional meter services contracts for 2005. Revenues for all of
our other operations were consistent with the same period in 2004.
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 adversely impact future
water consumption in spite of 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, and there can be no
assurance that we will be the successful bidder. USA did not submit bids for any
meter service contracts during the first quarter and currently does not expect
to submit any bids in the second quarter. As a result of anticipated regulation
of wastewater services in Delaware, we have established a new regulated
wastewater operation (TESI) that commenced 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.
Operating expenses increased $0.6 million or 4.3%. Operation and maintenance
expenses increased $0.2 million or 1.8%. Payroll and benefits costs, insurance
and corporate governance related fees increased $0.3 million. Water treatment
costs for the Middlesex System increased $0.1 million. The continuing growth of
our Delaware systems resulted in higher costs of water treatment, additional
employees and related benefit expenses of $0.2 million. These increases were
partially offset by reduced costs related to our meter services venture, which
decreased $0.5 million due to the completion of the original projects during
December 2004. All other operating expenses increased $0.1 million.
16
Depreciation expense increased $0.1 million or 7.8%, primarily as a result of a
higher level of utility plant in service. Since March 31, 2004, our net
investment in utility plant has increased by $21.9 million.
Other taxes increased by $0.1 million, reflecting higher taxes on taxable gross
revenues. Higher income taxes of $0.2 million over the prior year are
attributable to improved operating results for 2005 as compared to 2004.
Other income increased $0.2 million, primarily due to higher AFUDC as a result
of increases in capital projects in New Jersey and Delaware.
Interest expense increased by $0.1 million, primarily due to higher average
long-term borrowings and higher average interest rates charged on short-term
borrowings as compared to the prior year period.
Net income increased by 33.5% to $1.4 million, and basic and diluted earnings
per share increased from $0.09 to $0.12.
Liquidity and Capital Resources
Cash flows from operations are largely dependent 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 the three
months ended March 31, 2005, cash flows from operating activities were $3.0
million, which was comparable to the prior year. The $3.0 million of net cash
flow from operations allowed us to fund approximately 71% of our utility plant
expenditures for the period, with the remainder funded with restricted cash from
the proceeds of previously issued long-term borrowings.
The Company's capital program for 2005 is estimated to be $28.5 million and
includes $16.5 million for water system additions and improvements for our
Delaware systems, $3.4 million to complete the new raw water line to the
Middlesex primary water treatment plant that began in 2004, and $3.3 million for
the RENEW Program, which is our program to clean and cement line approximately
nine miles of unlined mains in the Middlesex System. There remains a total of
approximately 129 miles of unlined mains in the 730-mile Middlesex System. The
capital program also includes $5.3 million for other 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
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 New Jersey Environmental Infrastructure
Trust loans (currently, $9.1 million) and Delaware State Revolving Fund (SRF)
loans (currently, $1.5 million), which 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 $40.0 million of available
lines of credit with three commercial banks. As of March 31, 2005, there was
$9.5 million outstanding against the lines of credit.
On May 6, 2005, Tidewater filed an application with the PSC seeking approval to
finance up to $16.0 million in the form of long-term debt securities. Of this
amount, Tidewater received loan approval in April 2005 under the Delaware SRF
program of $2.0 million. The Delaware SRF program allows, but does not obligate,
Tidewater to draw down against a General Obligation Note for two specific
projects over a two-year period ending in April 2007. The interest rate is set
on the loan closing date and is based on 62.5% of the interest rate for a 10+
year high quality corporate bond. Tidewater has received a commitment letter
from CoBank, a rural cooperative financial institution, approving the conversion
of Tidewater's existing $7.0 million short-term borrowings with CoBank and an
additional $7.0 million of funding for an aggregated $14.0 million mortgage type
loan to be repaid over a term of 25 years. The terms of the CoBank loan allows,
but does not obligate, Tidewater to draw down against the additional $7.0
million at any time after the loan closing through August 31, 2006. During that
period, there is a commitment fee of 12.5 basis points, or 0.125%, on the unused
balance. The interest rate for the CoBank loan will be a variable rate set
weekly by CoBank, with Tidewater having an option to fix the interest rate at
any time over the life of the loan at a margin over CoBank's cost of funds. The
SRF and CoBank borrowings must be approved by the PSC prior to the loan
closings.
17
The Company periodically issues shares of common stock in connection with its
dividend reinvestment and stock purchase plan. On April 27, 2005, the Company
filed with the Securities and Exchange Commission on Form S-3 to issue shares
under its Dividend Reinvestment and Common Stock Purchase Plan at a 5% discount
on optional cash payments and reinvested dividends for a six-month period
commencing on June 1, 2005, and concluding on December 1, 2005. From time to
time, the Company may issue additional equity to reduce short-term indebtedness
and for other general corporate purposes.
Going forward into 2006 through 2007, we currently project that we will 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 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.
In addition to the effect of weather conditions on revenues, increases in
certain operating costs will impact our liquidity and capital resources. As
described in our overview section, we have recently received rate relief for
Middlesex, the Pinelands Companies and Tidewater. Changes in operating costs and
timing of capital projects will have an impact on revenues, earnings, and cash
flows and will also impact the timing of filings for future rate increases.
Recent Accounting Pronouncements - See Note 1 of the Notes to Unaudited
Condensed Consolidated Financial Statements for a discussion of recent
accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures of Market Risk
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rates through the use of
fixed rate, long-term debt and, to a lesser extent, short-term debt. The
Company's interest rate risk related to existing fixed rate, long-term debt is
not material due to the term of the majority of our Amortizing Secured Notes and
First Mortgage Bonds, which have maturity dates ranging from 2009 to 2038. Over
the next twelve months, approximately $1.1 million of the current portion of
eleven existing long-term debt instruments will mature. Applying a hypothetical
change in the rate of interest charged by 10% on those borrowings would not have
a material effect on earnings.
18
Item 4. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding disclosure.
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 cash flow statements needed to be
restated. The restatement is necessary to reflect the non-cash contributions of
utility plant from developers and the related construction advances or
contributions at the date the Company took ownership of the property, to reflect
only the related cash activity for construction advances and contributions for
utility plant, and add supplemental non-cash disclosure related to contributions
of utility plant. The Consolidated Balance Sheets as of December 31, 2003 and
2004 and the Consolidated Statements of Cash Flows for the fiscal periods ended
December 31, 2002, 2003 and 2004 were restated on Form 10K/A.
As required by Rule 13a-15 under the Exchange Act, an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was conducted by the Company's Chief Executive Officer along with
the Company's Chief Financial Officer. Based upon that evaluation, which
included consideration of the restatements, the Company's Chief Executive
Officer and the Company's Chief Financial Officer concluded that the Company's
disclosure controls and procedures were not effective as of the end of the
period covered by this Report. As a result of this conclusion, the Company
performed additional review and analysis to ensure its consolidated financial
statements are prepared in accordance with generally accepted accounting
principles. Accordingly, management believes that the condensed 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.
Based on the foregoing, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's internal controls over
financial reporting were not effective in meeting the objectives as described
above during the quarter 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 has
subsequently 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.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the Company's Annual Report on Form 10-K/A for the year
ended December 31, 2004.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
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.
32 Section 906 Certification by Dennis G. Sullivan pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Section 906 Certification by A. Bruce O'Connor pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDDLESEX WATER COMPANY
By: /s/ A. Bruce O'Connor
---------------------
A. Bruce O'Connor
Vice President and
Chief Financial Officer
Date: November 23, 2005
21