================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
The companies referred to herein are defined in Note l(a), Notes to the
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's actual capital expenditures for 1996 and 1997 and projected
requirements through 2000 are detailed as follows:
(in millions)
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
CJO Plant $ 0.9 $ 3.1 $ 18.0 $ 15.0 $ --
Delaware Systems 1.6 1.4 4.6 1.4 0.2
RENEW Program 0.9 1.8 2.0 2.0 2.0
Scheduled upgrades to
existing systems 3.7 4.4 3.7 4.7 3.6
----- ------ ------ ------ -----
Total $ 7.1 $ 10.7 $ 28.3 $ 23.1 $ 5.8
----- ------ ------ ------ -----
The upgrade of the Carl J. Olsen Water Treatment Plant (CJO Plant), which began
construction in November 1997, is necessary to comply with new and anticipated
environmental laws and regulations and to expand the plant's production
capacity. The project is scheduled for completion in June 1999. Delaware
expenditures reflect the continued water system development of Tidewater and
Public, which was acquired in July 1997. Middlesex's RENEW Program is designed
to rehabilitate approximately 7 to 9 miles per year, 200 miles in total, of
unlined cast-iron pipe by adding a cement mortar lining. This program will
result in improved overall water quality and service and will strengthen the
water distribution infrastructure. Scheduled upgrades include transmission and
distribution mains, hydrants, service lines, meters and transportation and
general equipment.
Sources of Capital - Expenditures in 1997 were financed by utilization of the
December 31, 1996 cash balance, internally generated funds from operations and
the sale of common stock through the Dividend Reinvestment and Common Stock
Purchase Plan (DRP).
On January 23, 1998, Middlesex received approval from the Board of Public
Utilities (BPU) to issue $23.0 million of tax-exempt New Jersey Economic
Development Authority bonds, which are expected to be issued in March 1998. This
bond issue will be used to finance a substantial part of the CJO Plant project.
The remainder of the project and other capital expenditures will be financed
through internally generated funds and sale of common stock through DRP. In
October 1997, the Board of Directors approved a 5% discount on shares of common
stock sold to participants of its DRP between the period of January 2, 1998 and
June 1, 1998. In addition, the Company will utilize short-term borrowings
through lines of credit. Middlesex has available $20.0 million under these
commitments and began to draw upon them in January 1998. In December 1997, the
Board of Directors approved an increase in the lines of credit to $30.0 million.
A subsequent offering of common equity will be considered based on the level of
funds generated internally and from the DRP.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net income increased 13.4% to $5.9 million in 1997 compared with $5.2 million in
the prior year. Operating revenues increased by $2.3 million to $40.3 million
due to favorable weather conditions in New Jersey and Delaware, continued growth
in Tidewater's customer base of 12%, rate increases implemented by the Pinelands
Companies, increased contract revenues from USA and the inclusion of Public's
operating results since August 1997.
Offsetting effects to net income were higher operations and maintenance expenses
of $0.8 million or 4.1%, which reflected increased purchased water of $0.3
million; transmission and distribution expenses of $0.3 million; administrative
and general expenses of $0.3 million and the inclusion of operating expenses for
Public of $0.2 million. These increases were offset by reductions in purchased
power and water treatment expenses of $0.3 million.
Depreciation expense increased 4.8% due to a higher level of depreciable plant
in service. Taxes, other than income taxes increased $0.2 million and were
related primarily to revenue-related taxes. A higher level of taxable income
resulted in a $0.6 million increase in federal taxes.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Consolidated operating revenues in 1996 were $0.2 million higher than in 1995.
Consumption was lower in all major classes of customers. These decreases were
offset by additional fixed service charges as a result of an increased customer
base in Delaware of 12.5% and the inclusion of revenues from the Pinelands
Companies and USA for a full year in 1996.
Operations and maintenance expenses were $0.9 million or 4.8% higher in 1996
over 1995 due principally to increases in purchased water of $0.3 million; water
treatment of $0.3 million; pumping expenses of $0.2 million; and customer
accounts and administrative and general expenses of $0.3 million; offset by a
decrease in transmission and distribution expenses of $0.2 million.
Depreciation increased $0.1 million or 4.1% due to a higher depreciation base.
Federal income taxes decreased $0.5 million due to lower taxable income.
Interest expenses increased $0.2 million or 5.3% as a result of the long-term
borrowings by Tidewater.
As a result, net income decreased $0.5 million or 9.4%.
REGULATORY MATTERS
On January 29, 1998, the BPU approved an increase in the rates of Middlesex by
4.4% or $1.5 million. The original petition was filed in November 1996.
10 ========================= CONTINUING THE EXCELLENCE =========================
================================================================================
Under the approval, the allowed return on equity is 11.0% with an overall rate
of return of 8.56%. The increase includes the recovery of postretirement costs
other than pension expenses which are mandated by the Company's compliance with
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The last increase in base rates
granted by the BPU was $2.8 million or 9.33% in April 1993.
In January 1997, the BPU approved a stipulation agreed to by the parties to the
Pinelands Water and Wastewater Companies' rate cases which were filed in
February 1996. The stipulations allow for a combined rate increase which will
result in $0.4 million additional revenues. The new rates will be phased in over
a three-year period to minimize the impact on customers. Phases one and two were
implemented in January of 1997 and 1998, respectively.
ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," (SFAS
No. 128). This statement supersedes Accounting Principles Bulletin Opinion No.
15, "Earnings Per Share," and simplifies the reporting and computing of earnings
per share (EPS). SFAS No. 128 requires dual presentation of basic and diluted
earnings per share on the face of the income statement and requires a
reconciliation of the basic EPS computation to the diluted EPS computation. At
December 31, 1997, the Company adopted SFAS No. 128, with no impact resulting on
EPS as computed in the periods presented.
In June 1997, the FASB also issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosure About Segments of an Enterprise and
Related Information." The Company is evaluating the requirements of SFAS No. 130
and SFAS No. 131, which are required to be adopted in the 1998 fiscal year.
These statements relate solely to disclosure provisions and, therefore, will not
have any effect on the Company's financial position, results of operations or
cash flows.
YEAR 2000 DISCLOSURE
The Company has assessed the effect of the Year 2000 issue on its computer
systems and believes that all of its systems are in compliance.
OUTLOOK
Revenues and earnings are expected to improve in 1998 based on anticipated
customer growth in Delaware, the second phase of the Pinelands rate increase and
the implementation of the Middlesex rate increase. The level of improvement may
be impacted by weather conditions.
Currently, there are no plans to file for rate relief in Delaware. The timing of
the current year capital program and customer growth will determine Tidewater's
need to file for rate relief. The timing of capital expenditures for the CJO
Plant project will also guide Middlesex's need to file for an increase in rates.
Middlesex continues to pursue growth opportunities through acquisitions and
public/private partnerships. These opportunities in both the regulated and
non-regulated sectors that are financially sound, complement existing operations
and increase shareholder value will be pursued.
Certain matters discussed in this annual report are "forward-looking statements"
intended to qualify for safe harbors from liability established by the Private
Securities Litigation Reform Act of 1995. Such statements address future plans,
objectives, expectations and events concerning various matters such as capital
expenditures, earnings, litigation, growth potential, rate and other regulatory
matters, liquidity and capital resources and accounting matters. Actual results
in each case could differ materially from those currently anticipated in such
statements. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
REPORT OF MANAGEMENT
The consolidated financial statements and other financial information included
in this annual report have been prepared by and are the responsibility of
Management. The statements have been prepared in conformity with generally
accepted accounting principles considered appropriate under the circumstances
and include amounts based on necessary judgment and estimates deemed
appropriate.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are protected from improper use and
loss and to provide reliable financial information.
The consolidated financial statements of the Company have been audited by its
independent auditors, Deloitte & Touche LLP, and their report is included
herein.
The Board of Directors, through its Audit Committee consisting solely of outside
Directors, is responsible for overseeing and reviewing the Company's financial
reporting and accounting practices. The Audit Committee meets periodically with
the independent auditors to review the scope of their work and discuss any
changes and developments that may impact the Company.
/s/ J. Richard Tompkins /s/ A. Bruce O'Connor
- ------------------------------ ---------------------------------
J. Richard Tompkins A. Bruce O'Connor
Chairman of the Board Vice President and
and President Controller
February 13, 1998
========================= CONTINUING THE EXCELLENCE ========================= 11
================================================================================
MIDDLESEX WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------------
UTILITY PLANT Water Production $ 27,689,254 $ 27,378,668
(NOTE 5): Transmission and Distribution 113,104,789 103,852,969
General 18,845,301 18,156,233
Construction Work in Progress 5,683,217 319,238
-------------------------------------------------------------
TOTAL 165,322,561 149,707,108
Less Accumulated Depreciation 30,251,825 28,462,588
-------------------------------------------------------------
UTILITY PLANT - NET 135,070,736 121,244,520
-------------------------------------------------------------
NONUTILITY ASSETS - NET 2,038,568 1,774,106
- --------------------------------------------------------------------------------
CURRENT ASSETS: Cash and Cash Equivalents 2,513,294 4,045,362
Accounts Receivable 3,794,860 4,022,129
Unbilled Revenues 2,175,934 2,175,478
Materials and Supplies
(at average cost) 960,577 1,034,572
Prepayments and Other
Current Assets 606,274 647,500
-------------------------------------------------------------
TOTAL CURRENT ASSETS 10,050,939 11,925,041
- --------------------------------------------------------------------------------
DEFERRED CHARGES: Unamortized Debt Expense 2,773,233 2,848,352
Preliminary Survey and
Investigation Charges 213,650 1,716,884
Regulatory Assets:
Income Taxes (Note 3) 6,031,247 6,181,048
Postretirement Costs (Note 4) 1,328,722 1,003,716
Other (Note 2) 2,253,678 1,965,855
-------------------------------------------------------------
TOTAL DEFERRED CHARGES 12,600,530 13,715,855
-------------------------------------------------------------
TOTAL $159,760,773 $148,659,522
-------------------------------------------------------------
See Notes to Consolidated Financial Statements.
12 ========================= CONTINUING THE EXCELLENCE =========================
================================================================================
CAPITALIZATION AND LIABILITIES
DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------------
CAPITALIZATION
(SEE ACCOMPANYING
STATEMENTS AND NOTE 9): Common Stock $ 31,138,484 $ 29,988,966
Retained Earnings 20,087,065 19,226,847
--------------------------------------------------------
TOTAL COMMON EQUITY 51,225,549 49,215,813
--------------------------------------------------------
Cumulative Preferred Stock 4,995,635 2,666,305
Long-term Debt 52,918,245 52,960,953
--------------------------------------------------------
TOTAL CAPITALIZATION 109,139,429 104,843,071
- --------------------------------------------------------------------------------
CURRENT LIABILITIES: Current Portion of
Long-term Debt 42,708 39,047
Notes Payable 564,701 --
Accounts Payable 3,602,420 1,686,652
Customer Deposits 393,376 377,702
Taxes Accrued 5,142,089 4,529,l85
Interest Accrued 1,183,561 1,168,242
Other 2,039,828 2,125,683
--------------------------------------------------------
TOTAL CURRENT LIABILITIES 12,968,683 9,926,511
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 5)
- --------------------------------------------------------------------------------
DEFERRED CREDITS: Customer Advances for
Construction 10,830,646 8,977,08l
Accumulated Deferred Investment
Tax Credits (Note 3) 2,237,060 2,308,736
Accumulated Deferred Federal
Income Taxes (Note 3) 12,177,993 l2,088,144
Other 2,051,895 l,715,458
--------------------------------------------------------
TOTAL DEFERRED CREDITS 27,297,594 25,089,419
--------------------------------------------------------
CONTRIBUTIONS IN AID OF
CONSTRUCTION 10,355,067 8,800,52l
--------------------------------------------------------
TOTAL $159,760,773 $148,659,522
--------------------------------------------------------
See Notes to Consolidated Financial Statements.
========================= CONTINUING THE EXCELLENCE ========================= 13
=====================================================================================================================
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
OPERATING REVENUES (NOTE 2) $40,294,118 $38,024,669 $37,846,899
- -----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Operations:
Water Purchased (Note 5) 3,234,770 2,965,616 2,656,423
Other 14,562,190 14,284,315 13,573,581
Maintenance 1,741,487 1,527,842 1,686,051
Depreciation 3,070,843 2,929,106 2,813,927
Taxes, other than Income Taxes 5,781,641 5,569,047 5,479,299
Federal Income Taxes (Note 3) 3,135,118 2,526,297 2,975,227
- -----------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 31,526,049 29,802,223 29,184,508
- -----------------------------------------------------------------------------------------------------------------
OPERATING INCOME 8,768,069 8,222,446 8,662,391
- -----------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Allowance for Funds Used During Construction - Equity 97,314 39,891 21,654
Other - Net 281,622 185,277 134,461
- -----------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 378,936 225,168 156,115
- -----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES 9,147,005 8,447,614 8,818,506
- -----------------------------------------------------------------------------------------------------------------
INTEREST CHARGES:
Interest on Long-term Debt 3,163,035 3,166,786 2,981,258
Allowance for Funds Used During Construction - Debt (50,598) (23,723) (5,606)
Amortization of Debt Expense 121,089 120,930 121,138
Other Interest Expense 52,573 16,161 17,972
- -----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST CHARGES 3,286,099 3,280,154 3,114,762
- -----------------------------------------------------------------------------------------------------------------
NET INCOME 5,860,906 5,167,460 5,703,744
- -----------------------------------------------------------------------------------------------------------------
PREFERRED STOCK DIVIDEND REQUIREMENTS 226,027 158,926 158,932
- -----------------------------------------------------------------------------------------------------------------
EARNINGS APPLICABLE TO COMMON STOCK $ 5,634,879 $ 5,008,534 $ 5,544,812
- -----------------------------------------------------------------------------------------------------------------
EARNINGS AND DIVIDENDS PER SHARE OF COMMON STOCK:
Basic and Diluted Earnings per Share $ 1.33 $ 1.20 $ 1.36
Dividends Paid per Share $ 1.12 l/2 $ 1.l0 1/2 $ 1.08 l/2
Average Number of Shares Outstanding 4,235,082 4,169,334 4,078,890
- -----------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
14 ========================= CONTINUING THE EXCELLENCE ===============================================================
=============================================================================================
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------------------------------------
Common Stock, No Par Value (Notes 4 and 9):
Shares Authorized - 6,000,000
Shares Outstanding - 1997 - 4,269,217 $31,425,398
1996 - 4,204,949 $30,281,565
Restricted Stock Plan (286,914) (292,599)
- ---------------------------------------------------------------------------------------------
TOTAL COMMON STOCK $31,138,484 $29,988,966
- ---------------------------------------------------------------------------------------------
Cumulative Preference Stock, No Par Value:
Shares Authorized - 100,000
Shares Outstanding - None
Cumulative Preferred Stock, No Par Value (Note 9):
Shares Authorized - 150,000
Convertible:
Shares Outstanding, $7.00 Series - 1997 - 14,881 $ 1,562,505
1996 - 14,901 $ 1,564,605
Shares Outstanding, $8.00 Series - 20,000 2,331,430
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 CUMULATIVE PREFERRED STOCK $ 4,995,635 $ 2,666,305
- ---------------------------------------------------------------------------------------------
Long-term Debt (Note 9):
8.05%, Amortizing Secured Note, due December 20, 2021 $ 3,460,953 $ 3,500,000
First Mortgage Bonds:
7.25%, Series R, due July 1, 2021 6,000,000 6,000,000
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
- ---------------------------------------------------------------------------------------------
SUBTOTAL LONG-TERM DEBT $52,960,953 $53,000,000
- ---------------------------------------------------------------------------------------------
Less: Current Portion of Long-term Debt $ (42,708) $ (39,047)
- ---------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $52,918,245 $52,960,953
- ---------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
========================= CONTINUING THE EXCELLENCE ===================================== 15
===========================================================================================================
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 5,860,906 $ 5,167,460 $ 5,703,744
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 3,145,218 3,011,337 2,925,928
Provision for Deferred Income Taxes 778,521 811,993 278,384
Allowance for Funds Used During Construction (147,912) (63,614) (27,260)
Changes in Current Assets and Liabilities:
Accounts Receivable 305,079 202,524 12,147
Materials and Supplies 73,995 (3,771) (36,907)
Accounts Payable 1,875,893 165,137 (95,430)
Accrued Income Taxes 612,904 207,266 (122,453)
Accrued Interest 11,170 (48,609) 82,628
Unbilled Revenues 29,344 (5,335) (26,348)
Other - Net 81,594 812,337 227,334
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,626,712 10,256,725 8,921,767
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (10,233,685) (6,172,482) (8,990,408)
Cash from Acquisition of Subsidiary 158,436 -- --
Notes Receivable 5,963 -- (1,250,000)
Preliminary Survey & Investigation Charges (458,016) (883,015) (180,541)
Marketable Securities -- -- 931,750
Other - Net (779,145) (657,958) (93,919)
- -----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (11,306,447) (7,713,455) (9,583,118)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (41,780) (1,200,000) --
Proceeds from Issuance of Long-term Debt -- 1,000,000 3,700,000
Temporary Cash Investments-Restricted 9,996 (152,593) 212,362
Proceeds from Issuance of Common Stock - Net 1,147,418 1,168,122 1,669,171
Deferred Debt Issuance Expenses -- (251) (53,719)
Payment of Preferred Dividends (239,361) (158,926) (158,497)
Payment of Common Dividends (4,761,327) (4,604,504) (4,421,852)
Construction Advances and Contributions - Net 1,032,721 549,604 884,140
Redemption of Preferred Stock -- -- (123,800)
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,852,333) (3,398,548) 1,707,805
- -----------------------------------------------------------------------------------------------------------
NET CHANGES IN CASH AND CASH EQUIVALENTS (1,532,068) (855,278) 1,046,454
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,045,362 4,900,640 3,854,186
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,513,294 $ 4,045,362 $ 4,900,640
- -----------------------------------------------------------------------------------------------------------
*Excludes Allowance for Funds Used During Construction.
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Interest (net of amounts capitalized) $ 3,045,867 $ 3,116,338 $ 2,877,483
Income Taxes $ 1,702,200 $ 2,117,998 $ 3,078,000
- -----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
16 ========================= CONTINUING THE EXCELLENCE ====================================================
================================================================================
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31,
1997 1996 1995
- --------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 19,226,847 $ 18,822,817 $ 17,699,422
NET INCOME 5,860,906 5,167,460 5,703,744
- --------------------------------------------------------------------------------
TOTAL 25,087,753 23,990,277 23,403,166
- --------------------------------------------------------------------------------
CASH DIVIDENDS:
Cumulative Preferred Stock 239,361 158,926 158,497
Common Stock 4,761,327 4,604,504 4,421,852
- --------------------------------------------------------------------------------
TOTAL DEDUCTIONS 5,000,688 4,763,430 4,580,349
- --------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 20,087,065 $ 19,226,847 $ 18,822,817
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Wastewater Company, and Utility Service Affiliates, Inc.
(USA). Public Water Supply Company, Inc. (Public), acquired in July 1997, and
White Marsh Environmental Systems, Inc., are wholly owned subsidiaries of
Tidewater. The financial statements for Middlesex and its wholly owned
subsidiaries (the Company) are reported on a consolidated basis. All
intercompany accounts and transactions have been eliminated.
(b) System of Accounts - Middlesex, Pinelands Water and Pinelands Wastewater
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 Public maintain their accounts in accordance with the Public
Service Commission of Delaware (PSC) requirements.
(c) Utility Plant - 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. Middlesex, Tidewater,
Pinelands Water and Pinelands Wastewater capitalize an Allowance for Funds Used
During Construction on individual projects with costs exceeding specific
thresholds for each company. 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, together with removal costs, less salvage. 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, 1997, there was no event or change in
circumstance that would indicate that the carrying amount of any long-lived
asset was not recoverable.
(d) Accounts Receivable - Provision for allowance for doubtful accounts at
December 31, 1997, 1996 and 1995, and the corresponding expense and deduction
for those years, is each less than $0.1 million.
(e) Revenues - In general, revenues are recorded as service is rendered and
include estimates for amounts unbilled at the end of the period for water used
subsequent to the last billing cycle. Service charges are billed in advance by
the Delaware subsidiaries and are recognized in revenue as the service is
provided.
(f) Deferred Charges - Unamortized Debt Expense is amortized over the lives of
the related issues. As authorized by the BPU, main cleaning and lining costs,
tank painting and regulatory expenses are amortized over 3 to 14-year periods.
(g) 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.
========================= CONTINUING THE EXCELLENCE ========================= 17
================================================================================
(h) 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, money market funds and U.S. Treasury Bills maturing in less than 90
days.
(i) Use of Estimates - Conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements. Actual results could differ from those
estimates.
(j) New Accounting Standards - In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," (SFAS No. 130) and SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information," (SFAS No. 131). The
Company is evaluating the requirements of SFAS No. 130 and SFAS No. 131, which
are required to be adopted in the 1998 fiscal year. These statements relate
solely to disclosure provisions and, therefore, will not have any effect on the
Company's financial position, results of operations or cash flows.
(k) Certain prior year amounts have been reclassified to conform to the current
year reporting.
NOTE 2 - RATES AND REVENUES
On January 29, 1998, Middlesex received approval from the BPU for an overall
rate increase of 4.4% or $1.5 million based on an original petition filed in
November 1996. Under the approval, the allowed return on equity is 11.0% with an
overall rate of return of 8.56%. The increase includes recovery of
postretirement costs other than pension expenses which are mandated by the
Company's compliance with SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" and a return on the 4.1% increase
to rate base since the last rate case. The last increase in base rates granted
by the BPU was $2.8 million or 9.33% in April 1993.
On January 23, 1998, Middlesex received approval from the BPU to issue $23.0
million of tax-exempt New Jersey Economic Development Authority bonds. The
proceeds of the bonds will be used to finance a significant portion of the
upgrade of the Carl J. Olsen Water Treatment Plant (CJO Plant). The bonds will
be competitively bid and are expected to be issued in March 1998.
In January 1997, the BPU approved a stipulation agreed to by the parties to the
Pinelands Water and Wastewater Companies' rate cases which were filed on
February 21, 1996. The stipulations allow for a combined rate increase which
will result in $0.4 million additional revenues. To minimize the impact on
customers, the new rates will be phased in over a three-year period which began
in 1997. The second phase of the increase was implemented in January 1998.
Included in Deferred Charges-Other is $0.2 million of deferred costs at December
31, 1997, which Middlesex, Pinelands Water and Pinelands Wastewater are
recovering through rates over periods of 3 to 14 years. The BPU has excluded
these costs from their rate bases and, therefore, they are not earning a return
on the unamortized costs during the recovery periods.
NOTE 3 - INCOME TAXES
Federal 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)
1997 1996 1995
- --------------------------------------------------------------------------------
Income Tax at Statutory Rate
of 34% $2,956 $2,616 $2,951
Tax Effect of:
Allowance for Funds Used
During Construction (49) (22) (9)
Other (133) (68) 33
- --------------------------------------------------------------------------------
Total Federal Income Tax
Expense $2,774 $2,526 $2,975
- --------------------------------------------------------------------------------
Federal income tax expense is comprised of the following:
Current $2,117 $1,835 $2,726
Deferred:
Customer Advances 63 35 (265)
Accelerated Depreciation 753 760 637
Investment Tax Credit (72) (72) (72)
Other (87) (32) (51)
- --------------------------------------------------------------------------------
Total Federal Income Tax
Expense $2,774 $2,526 $2,975
- --------------------------------------------------------------------------------
Charged to: Operating Expenses $3,135 $2,526 $2,975
Other Income-Net (361) -- --
- --------------------------------------------------------------------------------
Total Provision $2,774 $2,526 $2,975
- --------------------------------------------------------------------------------
The statutory review period for income tax returns for the years prior to 1994
has been closed.
Under SFAS No. 109, "Accounting for Income Taxes," the Company is required to
set up deferred income taxes for all temporary differences regardless of the
regulatory ratemaking treatment. However, if it is probable that these
additional taxes will be passed on to ratepayers, an offsetting regulatory asset
or liability is to be recorded. Management believes that it is probable that the
consolidated deferred income tax liability of approximately $6.0 million will be
recovered in future rates. Therefore, a regulatory asset has been set up to
offset the increased liability.
18 ======================== CONTINUING THE EXCELLENCE ==========================
================================================================================
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)
1997 1996
- --------------------------------------------------------------------------------
Utility Plant Related $ 17,151 $ 16,278
Customer Advances (4,586) (3,920)
Other (387) (270)
- --------------------------------------------------------------------------------
Total Deferred Tax Liability $ 12,178 $ 12,088
- --------------------------------------------------------------------------------
NOTE 4 - 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. The Company
makes annual contributions to the plan consistent with the funding requirements
of Federal laws and regulations. In 1996, employees of Tidewater became eligible
to participate in the Plan.
Pension expenses for 1997, 1996 and 1995 were $0.3 million, $0.3 million and
$0.4 million, respectively.
Plan assets consist primarily of corporate equities, cash equivalents and stock
and bond funds. The following table sets forth the plan's funded status and
amounts recognized in the Company's balance sheets.
YEARS ENDED DECEMBER 31,
(THOUSANDS OF DOLLARS)
1997 1996
- --------------------------------------------------------------------------------
Actuarial present value of
plan benefits:
Vested benefits $ (9,487) $ (8,791)
Nonvested benefits (47) (42)
Impact of estimated future
compensation charges (3,350) (2,921)
- --------------------------------------------------------------------------------
Projected plan benefits (12,884) (11,754)
Plan assets at fair value 14,777 12,831
- --------------------------------------------------------------------------------
Plan assets in excess of
projected plan benefits 1,893 1,077
Unrecognized net obligation 58 72
Unrecognized prior service cost 113 120
Unrecognized net gain (2,363) (1,346)
- --------------------------------------------------------------------------------
Accrued pension cost recognized
in the balance sheet $ (299) $ (77)
- --------------------------------------------------------------------------------
Net pension cost includes the following components:
Service cost benefits earned
during the period $ 430 $ 408
Interest cost on projected
benefit obligation 827 787
Return on plan assets (1,002) (924)
Net amortization and deferral 17 21
- --------------------------------------------------------------------------------
Net pension cost $ 272 $ 292
- --------------------------------------------------------------------------------
The assumptions used in determining the actuarial present value of the projected
obligation at December 31, 1997 and 1996 were discount rates of 7.0% and 7.25%,
respectively and a compensation increase of 4.75%. The expected long-term rate
of return on plan assets used in determining net periodic cost was 8.0%. The
actual returns on Plan assets at December 31, 1997 and 1996 were 20.0% and
12.1%, respectively.
The Company maintains an unfunded supplemental pension plan for its executives.
At December 31, 1997, 1996 and 1995 expenses for the supplemental plan were $0.3
million, $0.3 million and $0.2 million, and the projected benefit obligations
were $1.7 million, $1.4 million and $1.3 million, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (PBOP)
Middlesex provides certain health care and life insurance benefits for
substantially all of its retired employees, which are accounted for in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," (SFAS No. 106). SFAS No. 106 requires an accrual method of
accounting for PBOP. Previously, the cost of these benefits were expensed when
incurred.
In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," the Company has recognized a deferred regulatory asset relating to
the difference between the accrued PBOP costs determined under SFAS No. 106 and
the pay-as-you-go amounts previously expensed. The regulatory assets at December
31, 1997 and 1996 were $1.3 million and $1.2 million, respectively. As part of
its most recent rate case (see Note 2), PBOP expenses, as determined in
accordance with SFAS 106, will be recoverable in base rates. The expenses
include the amortization of the previously deferred regulatory asset.
The Company recognized PBOP expenses of $0.2 million for each of the years ended
December 31, 1997, 1996 and 1995. The plan's funded status is as follows:
YEARS ENDED DECEMBER 31,
(THOUSANDS OF DOLLARS)
1997 1996
- --------------------------------------------------------------------------------
Retirees $ 1,679 $ 1,149
Fully eligible plan participants 803 354
Other active plan participants 1,453 1,543
- --------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation 3,935 3,046
Plan assets at fair value
Unrecognized net (loss) (734) (47)
Unrecognized prior service cost 157 169
Unrecognized transition
obligation (2,029) (2,164)
- --------------------------------------------------------------------------------
Accrued postretirement
benefit obligation $ 1,329 $ 1,004
- --------------------------------------------------------------------------------
======================== CONTINUING THE EXCELLENCE ========================== 19
================================================================================
Net postretirement benefit cost consisted of the following components:
YEARS ENDED DECEMBER 31,
(THOUSANDS OF DOLLARS)
1997 1996
- --------------------------------------------------------------------------------
Service cost - benefits earned
during the year $ 116 $ 101
Interest cost on accumulated
postretirement benefit obligation 258 211
Amortization of net loss 41 2
Amortization of prior service cost (11) (11)
Amortization of transition obligation 135 135
Regulatory deferral (325) (246)
- --------------------------------------------------------------------------------
Net postretirement benefit cost $ 214 $ 192
- --------------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for 1997 was 5%, which will remain constant
for all future years. A one-percentage point increase in the assumed health care
cost trend rate would increase the accumulated postretirement benefit obligation
by 14% and the 1997 net postretirement benefit cost by approximately 10%. The
assumed discount rates used in determining the accumulated postretirement
benefit obligation for 1997 and 1996 were 7.0% and 7.25%, respectively.
STOCK BASED COMPENSATION
The Company maintains a restricted stock plan, under which 30,550 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.
In May 1997, 100,000 additional shares were allocated to the restricted stock
plan, bringing the maximum number of shares authorized for grant under this plan
to 160,000 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.
The compensation expenses were $0.1 million for each of the years 1997, 1996 and
1995.
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation," (SFAS
No. 123) the Company elected to account for its stock based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Had compensation costs for the Company's restricted stock plan been
determined based on methodology prescribed in SFAS No. 123, there would have
been no effect on its results of operations or cash flows.
NOTE 5 - COMMITMENTS AND CONTINGENT LIABILITIES
SERVICE AGREEMENT - On May 19, 1995, Middlesex and USA jointly entered into a
five-year contract with the City of South Amboy to operate and maintain the
City's 2,600 customer water system. The Contract, which is subject to renewal
for three future five-year periods, is expected to produce a total of
approximately $1.5 million in revenues for the first five years. Revenues
recognized under the contract in 1997, 1996 and 1995 were $0.4 million, $0.3
million and less than $0.1 million, respectively.
WATER SUPPLY - Middlesex has an agreement with the Elizabethtown Water Company
for the purchase of treated water. This agreement, which expires December 31,
2005, provides for the minimum purchase of 3 million gallons daily (mgd) of
treated water with provisions for additional purchases. The 1997, 1996 and 1995
costs under this agreement were $1.5 million, $1.3 million and $0.9 million,
respectively.
Middlesex also has an agreement with the New Jersey Water Supply Authority
(NJWSA), which expires November 1, 2013, and provides for the minimum purchase
of 20 mgd of untreated water from the Delaware and Raritan Canal and the Raritan
River. In addition, the Company has a supplemental one-year agreement for an
additional 5 mgd through April 30, 1998. This agreement is renewable on an
annual basis. The total costs were $1.7 million for each of the years 1997, 1996
and 1995.
CONSTRUCTION - The Company plans to spend approximately $28.3 million, $23.1
million and $5.8 million in 1998, 1999 and 2000, respectively, on its
construction program. 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.
LITIGATION - A local entity and its owner have filed a negligence claim against
Middlesex, for which Middlesex is insured, with a claim for punitive damages
which is not insured. Their action alleges financial losses arising out of
improper water pressure and service. An amendment to the claim alleges damages
resulting from some poor quality water. Other parties who dealt with the
claimants have joined the matter. Without taking a position on the negligence
claim, Middlesex does not believe that the claim for punitive damages will
prevail. While the outcome of this case is not presently determinable,
management believes that the final resolution will not have a significant effect
on Middlesex's financial position or results of operations or cash flows.
A fire at a warehouse within Middlesex's service territory has resulted in
multiple party claims for unspecified amounts. This has led the warehouse
operator and certain tenants to assert claims against Middlesex for alleged
insufficient water pressure and supply, which claims are not covered by the
Company's insurance. Middlesex believes it has substantial defenses to the
claims.
NOTE 6 - LINES OF CREDIT AND NOTES PAYABLE
At December 31, 1997, 1996 and 1995 Middlesex had $20 million in committed lines
of credit, with no amounts outstanding. To accommodate the funding requirements
of the Company's 1998 capital program, in December 1997 the Board of Directors
authorized an increase in the amount of
20 ======================== CONTINUING THE EXCELLENCE ==========================
================================================================================
lines of credit to $30 million.
As part of the service agreement with the City of South Amboy, on June 1, 1995,
USA made an investment in the form of a $1.25 million loan. At December 31,
1997, a balance of $1.24 million was included in nonutility assets on the
Consolidated Balance Sheet. Principal repayment and the interest rate are based
upon renewal provisions of the contract.
NOTE 7 - RELATED PARTY TRANSACTIONS
During 1997, 1996 and 1995, Middlesex had transactions with a construction
company in which a member of the Board of Directors has a financial interest.
Major construction transactions were awarded on the basis of competitive bids
approved by the Board of Directors (with the interested Director abstaining) and
amounted to $0.7 million, $0.9 million and $0.9 million for the years 1997, 1996
and 1995, respectively. These amounts included $0.1 million due the construction
company at December 31, 1997, 1996 and 1995.
NOTE 8 - QUARTERLY OPERATING RESULTS - UNAUDITED
Quarterly operating results for 1997 and 1996 are as follows:
1ST 2ND 3RD 4TH
1997 QUARTER QUARTER QUARTER QUARTER YEAR
- --------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
Operating Revenues $ 9,336 $ 9,937 $10,968 $10,053 $40,294
Operating Income 2,023 2,120 2,682 1,943 8,768
Net Income 1,282 1,311 1,894 1,374 5,861
Basic and Diluted Earnings
per Common Share $ 0.30 $ 0.30 $ 0.43 $ 0.30 $ 1.33
1996
- --------------------------------------------------------------------------------
Operating Revenues $ 9,247 $ 9,632 $ 9,934 $ 9,212 $38,025
Operating Income 1,968 2,110 2,288 1,856 8,222
Net Income 1,153 1,307 1,494 1,213 5,167
Basic and Diluted Earnings
per Common Share $ 0.27 $ 0.30 $ 0.35 $ 0.28 $ 1.20
- --------------------------------------------------------------------------------
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 9 - CAPITALIZATION
All the transactions discussed below related to the issuance or redemption of
securities were approved by the BPU, except where noted.
COMMON STOCK
There are 900,000 shares of common stock authorized under the Dividend
Reinvestment and Common Stock Purchase Plan (DRP). The cumulative number of
shares issued under the DRP at December 31, 1997 is 747,291. In October 1997,
the Board of Directors approved a 5% discount on common stock sold to
participants of the Company's DRP between the period of January 2, 1998 and June
1, 1998. The offer is limited to the first 100,000 shares sold during the
discount period.
During 1997, 1996 and 1995, 64,148 shares ($1.1 million), 67,977 shares ($1.2
million) and 106,138 shares ($1.7 million) of common stock were issued under DRP
and the restricted stock plan, respectively.
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, 1997, no
restrictions were placed on common dividends.
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. In May 1997, the
number of authorized Preferred Stock, without par value, was increased from
69,418 shares to 150,000 shares. At December 31, 1997, 45,898 shares of
Preferred Stock presently authorized were outstanding and no dividends were in
arrears.
The conversion feature of the no par $7.00 Cumulative and Convertible Preferred
Stock, which was effective in 1997, allows the security holders to exchange one
convertible preferred share for six 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 six shares of
the Company's common stock for each share of convertible stock redeemed.
Both the $4.75 Series and the $7.00 Series are redeemable at the option of the
Company, and in November 1994, an offer to purchase the $7.00 Series at the
stated redemption price of $100 per share was extended to all holders of this
stock. At December 31, 1995, the Company had purchased and retired 1,483 shares
of the $7.00 Series. Since there was no premium associated with the redemption,
approval from the BPU was not required.
On July 31, 1997, Middlesex issued 20,000 shares of no par $8.00 Cumulative and
Convertible Preferred Stock convertible into 137,140 shares of Middlesex's
common stock for 100% of the common stock of Public. The preferred shares are
convertible at the election of the security holder within seven years from the
date of issuance at the common equivalent rate of 6.857 shares of common stock
for each share of preferred. The same conversion feature is granted to Middlesex
after seven years from the date of issuance.
The acquisition of Public, a 2,500 customer water system located in Sussex
County Delaware is being accounted for under the purchase method of accounting.
The acquisition price, representing the value of the convertible preferred stock
issued, was $2.3 million and resulted in an acquisition adjustment of $1.0
million. The acquisition adjustment will be amortized over the remaining
composite life of Public's utility plant.
The supplemental unaudited pro forma information as though
=========================== CONTINUING THE EXCELLENCE ======================= 21
================================================================================
the acquisition occurred as of January 1, 1996 was as follows:
1997 1996
------------------------------
Operating Revenues $ 40,984,570 $ 38,643,019
Net Income 5,863,880 5,246,734
Basic Earnings Per Share $ 1.31 $ 1.18
Diluted Earnings Per Share $ 1.30 $ 1.18
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," (SFAS No.
128). This statement simplifies the standards for computing and presenting
earnings per share (EPS) previously found in APB Opinion No. 15, "Earnings Per
Share," and makes them comparable to international EPS standards. SFAS No. 128
requires dual presentation of basic and diluted earnings per share on the face
of the income statement. Under SFAS No. 128, basic EPS is computed based upon
the weighted average number of common shares, and dilutive EPS is based upon the
weighted average number of common shares and potential dilutive common shares
that could occur if actions were taken with respect to convertible securities or
other obligations to issue common stock. At December 31, 1997, the Company
adopted SFAS No. 128, with no impact resulting on EPS as computed in the periods
presented.
LONG-TERM DEBT
On September 13, 1995, Tidewater received approval from the Delaware PSC to
borrow up to $3.5 million through an amortizing secured term bank loan. The
terms of the loan agreement provide for a maximum term of twenty five years from
the conclusion of the drawdown period with the interest rate fixed on the date
of any advance by the bank. In October 1995, Tidewater received an initial $2.5
million at a rate of 8.02%. In the fourth quarter of 1996, the remaining $1.0
million was borrowed resulting in an overall interest rate of 8.05% on the total
amount borrowed. Monthly principal payments began in January 1997 with the final
payment due in December 2021. The proceeds of the loan were used to fund capital
expenditures.
As part of the asset purchase by the Pinelands Companies, promissory notes of
$1.2 million were issued. On November 21, 1996, the Company purchased, at a
nominal discount, and retired the promissory notes. The purchase was funded with
internally generated cash.
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. At December 31, 1997 and 1996, the carrying and fair market
value of the Company's bonds were as follows:
(THOUSANDS OF DOLLARS)
1997 1996
- --------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------
First Mortgage Bonds $49,500 $49,800 $49,500 $46,900
- --------------------------------------------------------------------------------
For other long-term debt for which there were no quoted market price, it was not
practicable to estimate their fair value. The carrying amounts of these
instruments at December 31, 1997 and 1996 were $3.5 million. Customer advances
for construction have a carrying value of $10.8 million and $9.0 million at
December 31, 1997 and 1996, 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.
INDEPENDENT AUDITORS' REPORT DELOITTE &
MIDDLESEX WATER COMPANY TOUCHE LLP
[logo]
We have audited the accompanying consolidated balance sheets and consolidated
statements of capital stock and long-term debt of Middlesex Water Company and
its subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, retained earnings and of cash flows for each of the three
years in the period ended December 31, 1997. 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 generally accepted auditing
standards. 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 Middlesex Water Company and its
subsidiaries at December 31, 1997 and 1996 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Parsippany, New Jersey
February 13, 1998
22 ======================== CONTINUING THE EXCELLENCE ==========================
================================================================================
CONSOLIDATED SELECTED FINANCIAL DATA
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
1997 1996 1995 1994 1993 1992 1987
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES $ 40,294 $ 38,025 $ 37,847 $ 36,122 $ 35,479 $ 30,861 $ 22,370
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Operations and Maintenance 19,538 18,778 17,916 16,911 16,753 14,715 10,423
Depreciation 3,071 2,929 2,814 2,650 2,376 1,961 1,251
Taxes, other than Income Taxes 5,782 5,569 5,479 5,343 5,222 4,620 3,554
Income Taxes 3,135 2,526 2,975 2,766 3,072 2,351 1,973
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 31,526 29,802 29,184 27,670 27,423 23,647 17,201
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 8,768 8,223 8,663 8,452 8,056 7,214 5,169
OTHER INCOME 379 225 156 87 438 515 156
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE
INTEREST CHARGES 9,147 8,448 8,819 8,539 8,494 7,729 5,325
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST CHARGES 3,286 3,280 3,115 3,044 3,014 3,267 2,127
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME 5,861 5,168 5,704 5,495 5,480 4,462 3,198
PREFERRED STOCK DIVIDEND
REQUIREMENTS 226 159 159 188 256 186 180
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS APPLICABLE TO
COMMON STOCK $ 5,635 $ 5,009 $ 5,545 $ 5,307 $ 5,224 $ 4,276 $ 3,018
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC/DILUTED EARNINGS PER
SHARE OF COMMON STOCK $ 1.33 $ 1.20 $ 1.36 $ 1.33 $ 1.33 $ 1.20 $ 1.01
Average Number of Shares
Outstanding for the Year 4,234,082 4,169,334 4,078,890 4,003,393 3,924,363 3,568,499 3,002,756
Dividends Declared and Paid $ 1.12 1/2 $ 1.10 1/2 $ 1.08 1/2 $ 1.05 3/4 $ 1.01 1/4 $ 0.97 $ 0.83 3/4
Total Assets $ 159,761 $ 148,660 $ 144,822 $ 132,413 $ 125,676 $ 113,843 $ 76,142
Redeemable Preferred Stock $ -- $ -- $ -- $ -- $ 1,158 $ 1,224 $ 1,554
Long-term Debt $ 52,918 $ 52,961 $ 52,960 $ 49,500 $ 37,000 $ 42,550 $ 29,350
- -----------------------------------------------------------------------------------------------------------------------------------
STATISTICAL SUMMARY
1997 1996 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES (THOUSANDS OF DOLLARS):
- -----------------------------------------------------------------------------------------------------------------------------------
Residential $ 16,291 $ 15,091 $ 15,202 $ 14,306 $ 14,042 $ 11,733 $ 10,083
Commercial 4,576 4,347 4,393 4,282 4,170 3,616 2,891
Industrial 6,631 6,621 6,669 6,598 6,481 6,044 4,848
Fire Protection 4,662 4,637 4,543 4,352 4,312 3,905 3,141
Contract Sales 7,380 6,778 6,658 6,322 6,232 5,477 1,338
Other 754 551 382 262 242 86 69
- -----------------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 40,294 $ 38,025 $ 37,847 $ 36,122 $ 35,479 $ 30,861 $ 22,370
CAPITALIZATION RATIOS:
Long-term Debt 49% 51% 51% 51% 50% 49% 50%
Preferred Stock 5 3 3 3 4 5 5
Common Stock Equity 46 46 46 46 46 46 45
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RATIOS 100% 100% 100% 100% 100% 100% 100%
Book Value of Common Stock $ 12.00 $ 11.70 $ 11.52 $ 11.13 $ 10.77 $ 10.29 $ 8.66
Meters in Service 67,673 63,775 61,332 58,371 57,318 56,340 51,226
Population Served (Retail) 271,000 255,000 245,000 233,000 229,000 225,000 205,000
Miles of Main 1,149 1,067 1,035 972 947 920 639
Fire Hydrants 4,850 4,750 4,690 4,558 4,503 4,445 3,915
Pumpage (million gallons) 17,476 16,791 17,380 16,794 16,789 15,174 11,576
- -----------------------------------------------------------------------------------------------------------------------------------
=========================== CONTINUING THE EXCELLENCE ========================================================================== 23