UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December 31, 2007
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from _________________ to______________________
Commission
File Number 0-422
MIDDLESEX
WATER COMPANY
(Exact
name of registrant as specified in its charter)
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New
Jersey
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22-1114430
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(State
of Incorporation)
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(IRS
employer identification no.)
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1500
Ronson Road, Iselin NJ 08830
(Address
of principal executive offices, including zip code)
(732)
634-1500
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class:
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Name
of each exchange on which registered:
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None
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None
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, No par
Value
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
¨
No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
¨
No
þ
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
þ
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.
þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.
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Large
accelerated filer
¨
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Accelerated
filer
þ
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Non-accelerated
filer
¨
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Smaller
reporting company
¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
¨
No
þ
The
aggregate market value of the voting stock held by non-affiliates of the
registrant at June 30, 2007 was $244,022,786 based on the closing market price
of $19.21 per share.
The
number of shares outstanding for each of the registrant's classes of common
stock, as of March 3, 2008:
Common
Stock, No par Value
13,262,182
shares outstanding
Documents
Incorporated by
Reference
Proxy
Statement to be filed in connection with the Registrant’s Annual Meeting of
Shareholders to be held on May 21, 2008, which will be filed with the Securities
and Exchange Commission within 120 days, is incorporated as to Part
III.
MIDDLESEX
WATER COMPANY
FORM
10-K
INDEX
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PAGE
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Forward-Looking
Statements
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1
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PART
I
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Item
1.
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Business:
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Overview
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2
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Financial
Information
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4
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Water
Supplies and Contracts
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4
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Employees
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5
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Competition
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5
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Regulation
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6
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Management
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8
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Item
1A.
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Risk
Factors
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10
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Item
1B.
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Unresolved
Staff Comments
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14
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Item
2.
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Properties
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14
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Item
3.
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Legal
Proceedings
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16
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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16
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PART
II
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Item
5.
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Market
for the Registrant's Common Equity and Related Stockholder
Matters
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16
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Item
6.
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Selected
Financial Data
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18
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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18
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Item
7A.
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Qualitative
and Quantitative Disclosure About Market Risk
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26
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Item
8.
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Financial
Statements and Supplementary Data
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27
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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50
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Item
9A.
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Controls
and Procedures
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51
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Item
9B.
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Other
Information
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53
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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54
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Item
11.
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Executive
Compensation
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54
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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54
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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54
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Item
14.
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Principal
Accountant Fees and Services
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54
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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54
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Signatures
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56 | |||
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Exhibit
Index
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57 | |||
Forward-Looking
Statements
Certain
statements contained in this annual report and in the documents incorporated
by
reference constitute “forward-looking statements” within the meaning of Section
21E of the Securities Exchange Act of 1934 and Section 27A of the Securities
Act
of 1933. The Company intends that these statements be covered by the
safe harbors created under those laws. These statements include, but
are not limited to:
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-
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statements
as to expected financial condition, performance, prospects and earnings
of
the Company;
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-
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statements
regarding strategic plans for
growth;
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-
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statements
regarding the amount and timing of rate increases and other regulatory
matters;
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-
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statements
as to the Company’s expected liquidity needs during fiscal 2008 and beyond
and statements as to the sources and availability of funds to meet
its
liquidity needs;
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-
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statements
as to expected rates, consumption volumes, service fees, revenues,
margins, expenses and operating
results;
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-
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statements
as to the Company’s compliance with environmental laws and regulations and
estimations of the materiality of any related
costs;
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-
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statements
as to the safety and reliability of the Company’s equipment, facilities
and operations;
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-
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statements
as to financial projections;
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-
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statements
as to the ability of the Company to pay
dividends;
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statements
as to the Company’s plans to renew municipal franchises and consents in
the territories it serves;
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-
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expectations
as to the amount of cash contributions to fund the Company’s retirement
benefit plans, including statements as to anticipated discount rates
and
rates of return on plan assets;
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-
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statements
as to trends; and
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-
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statements
regarding the availability and quality of our water
supply.
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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:
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the
effects of general economic
conditions;
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increases
in competition in the markets served by the
Company;
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the
ability of the Company to control operating expenses and to achieve
efficiencies in its operations;
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the
availability of adequate supplies of
water;
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actions
taken by government regulators, including decisions on base rate
increase
requests;
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new
or additional water quality
standards;
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weather
variations and other natural
phenomena;
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the
existence of attractive acquisition candidates and the risks involved
in
pursuing those acquisitions;
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acts
of war or terrorism;
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significant
changes in the housing starts in
Delaware;
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the
availability and cost of capital resources;
and
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other
factors discussed elsewhere in this
prospectus.
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Many
of
these factors are beyond the Company’s ability to control or
predict. Given these uncertainties, readers are cautioned not to
place undue reliance on any forward-looking statements, which only speak to
the
Company’s understanding as of the date of this report. The Company does not
undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date
of
this prospectus or to reflect the occurrence of unanticipated events, except
as
may be required under applicable securities laws.
For
an
additional discussion of factors that may affect the Company’s business and
results of operations, see Item 1A - Risk Factors.
PART
I
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Item
1.
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Business.
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Overview
Middlesex
Water Company (“Middlesex”) was incorporated as a water utility company in 1897
and owns and operates regulated water utility and wastewater systems
in New Jersey and Delaware. The Company also operates water and
wastewater systems under contract on behalf of municipal and private clients
in
New Jersey and Delaware.
The
terms
“the Company,” “we,” “our,” and “us” refer to Middlesex Water Company and its
subsidiaries, including Tidewater Utilities, Inc. (Tidewater) and Tidewater’s
wholly-owned subsidiaries, Southern Shores Water Company, LLC (Southern Shores)
and White Marsh Environmental Systems, Inc. (White Marsh). The Company’s other
subsidiaries are 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 Tidewater Environmental Services, Inc. (TESI).
Middlesex
principal executive offices are located at 1500 Ronson Road, Iselin, New Jersey
08830. Our telephone number is (732) 634-1500. Our internet website address
is
http://www.middlesexwater.com. We make available, free of charge through our
internet website, reports and amendments filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, after such material
is
electronically filed with or furnished to the Securities and Exchange Commission
(SEC).
Middlesex
System
The
Middlesex System in New Jersey provides water services to approximately 59,400
retail customers, primarily in eastern Middlesex County, New Jersey and provides
water under wholesale contracts to the City of Rahway, Township of Edison,
the
Boroughs of Highland Park and Sayreville and both the Old Bridge and the
Marlboro Township Municipal Utilities Authorities. The Middlesex System treats,
stores and distributes water for residential, commercial, industrial and fire
prevention purposes. The Middlesex System also provides water treatment and
pumping services to the Township of East Brunswick under contract. The Middlesex
System, through its retail and contract sales, produced approximately 64% of
2007 revenue.
The
Middlesex System’s retail customers are located in an area of approximately 55
square miles in Woodbridge Township, the City of South Amboy, the Boroughs
of
Metuchen and Carteret, portions of the Township of Edison and the Borough of
South Plainfield in Middlesex County and, to a minor extent, a portion of the
Township of Clark in Union County. Retail customers include a mix of residential
customers, large industrial concerns and commercial and light industrial
facilities. These customers are located in generally well-developed areas of
central New Jersey. The contract customers of the Middlesex System comprise
an
area of approximately 146 square miles with a population of approximately
303,000. Contract sales to Edison, Sayreville, Old Bridge, Marlboro and Rahway
are supplemental to the existing water systems of these customers. The State
of
New Jersey in the mid-1980’s approved plans to increase available surface water
supply to the South River Basin area of the state to facilitate a reduction
in
groundwater use in this area. The Middlesex System provides treated surface
water under long-term agreements to East Brunswick, Marlboro, Old Bridge and
Sayreville consistent with the state-approved plan.
Middlesex
provides water service to approximately 300 customers in Cumberland County,
New
Jersey. This system is referred to as Bayview and is not physically
interconnected with the Middlesex system. Bayview produced less than 1% of
our
total revenue in 2007.
Tidewater
System
Tidewater,
together with its wholly-owned subsidiary, Southern Shores, provides water
services to approximately 31,600 retail customers for domestic, commercial
and
fire protection purposes in over 300 separate community water systems in New
Castle, Kent and Sussex Counties, Delaware. An additional wholly-owned
subsidiary, White Marsh, operates water and wastewater systems under contract
for approximately 5,100 residential customers and also owns the office building
that Tidewater uses as its business office. White Marsh’s rates for water and
wastewater operations are not regulated by the Delaware Public Service
Commission (PSC). The Tidewater System produced approximately 23% of total
revenue in 2007.
Utility
Service Affiliates-Perth Amboy
USA-PA
operates the City of Perth Amboy, NJ’s water and wastewater systems under a
20-year agreement, which expires in 2018. USA-PA serves approximately
9,700 customers, most of whom are served by both systems. The agreement was
effected under New Jersey’s Water Supply Public-Private Contracting Act and the
New Jersey Wastewater Public/Private Contracting Act and requires USA-PA to
lease from Perth Amboy all of its employees who currently work on the Perth
Amboy water and wastewater systems. Under the agreement, USA-PA receives both
fixed and variable fees. The variable position is based on customer
billing. Fixed fee revenues were $7.8 million in 2007 and are to increase over
the term of the 20-year contract to $10.2 million based upon a schedule of
rates. USA-PA produced approximately 9% of total revenue in 2007.
In
connection with the agreement, Middlesex guaranteed a series of Perth Amboy’s
municipal bonds in the principal amount of approximately $26.3 million, of
which
approximately $22.6 million remains outstanding. In connection with the
agreement with Perth Amboy, USA-PA entered into a 20-year subcontract with
a
wastewater operating company for the operation and maintenance of the Perth
Amboy wastewater system. The subcontract provides for the sharing of certain
fixed and variable fees and operating expenses.
Pinelands
System
Pinelands
Water provides water services to approximately 2,500 residential customers
in
Burlington County, New Jersey. Pinelands Water produced less than 1% of total
revenue in 2007. Pinelands Water is not physically interconnected
with the Middlesex System.
Pinelands
Wastewater provides wastewater services to approximately 2,500 primarily
residential retail customers. Under contract, it also services one municipal
wastewater system in Burlington County, New Jersey with about 200 residential
customers. Pinelands Wastewater produced approximately 1% of total
revenue in 2007.
Utility
Service Affiliates, Inc.
USA
provides residential customers a service line maintenance program called
LineCare
SM
.
LineCare
SM
is an
affordable maintenance program that covers all parts, material and labor
required to repair or replace specific elements of the customer’s water service
line and customer shut-off valve in the event of a failure. USA produced less
than 1% of total revenue in 2007.
TESI
System
TESI,
which was formed in 2005, provides wastewater services to approximately 1,400
residential retail customers in Delaware. TESI produced less than 1% of our
total revenue in 2007.
Financial
Information
Consolidated
operating revenues and operating income are as follows:
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(Thousands
of Dollars)
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||||||||||||
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Years
Ended December 31
,
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2007
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2006
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2005
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Operating
Revenues
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$ | 86,114 | $ | 81,061 | $ | 74,613 | ||||||
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Operating
Income
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$ | 22,671 | $ | 21,318 | $ | 17,218 | ||||||
Operating
revenues were earned from the following sources:
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Years
Ended December 31
,
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||||||||||||
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2007
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2006
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2005
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Residential
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45.0 | % | 42.6 | % | 41.9 | % | ||||||
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Commercial
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9.7 | 10.0 | 9.8 | |||||||||
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Industrial
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9.9 | 10.7 | 11.0 | |||||||||
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Fire
Protection
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10.3 | 10.7 | 10.4 | |||||||||
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Contract
Sales
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12.5 | 12.3 | 13.4 | |||||||||
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Contract
Operations
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10.3 | 11.0 | 10.8 | |||||||||
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Other
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2.3 | 2.7 | 2.7 | |||||||||
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TOTAL
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100.0 | % | 100.0 | % | 100.0 | % | ||||||
Water
Supplies and Contracts
Our
New
Jersey and Delaware water supply systems are physically separate and are not
interconnected. In New Jersey, the Pinelands System and Bayview System are
not
interconnected with the Middlesex System or each other. We believe that we
have
adequate sources of water supply to meet the current service requirements of
our
present customers in New Jersey and Delaware.
Middlesex
System
Our
Middlesex System, which produced approximately 16.8 billion gallons in 2007,
obtains water from surface sources and wells, or groundwater sources. In 2007,
surface sources of water provided approximately
70%
of the Middlesex System’s water supply, groundwater sources provided
approximately 23% from 31 wells and the balance was purchased from a
non-affiliated water utility. Middlesex System’s distribution storage facilities
are used to supply water to customers at times of peak demand, outages and
emergencies.
The
principal source of surface water for the Middlesex System is the Delaware
&
Raritan Canal, which is owned by the State of New Jersey and operated as a
water
resource by the New Jersey Water Supply Authority. Middlesex is under
contract with the New Jersey Water Supply Authority, which expires November
30,
2023. The contract provides for average purchases of 27 million gallons per
day
(mgd) of untreated water from the Delaware & Raritan Canal, augmented by the
Round Valley/Spruce Run Reservoir System. Surface water is pumped to, and
treated, at the Middlesex Carl J. Olsen (CJO) Plant. Middlesex also has an
agreement with a non-affiliated regulated water utility for the purchase of
treated water. This long-term agreement, which expires February 27, 2011,
provides for minimum purchase of 3 mgd of treated water with provisions for
additional purchases.
Tidewater
System
Our
Tidewater System, which produced approximately 2.1 billion gallons in 2007,
obtains 100% of its groundwater sources from 193 wells. In 2007, 11 new wells
were placed into service. We deactivated, sealed and abandoned 20
wells for either water quality reasons or for the purpose of consolidating
production facilities for more cost-efficient operation. Tidewater continues
to
submit applications to Delaware regulatory authorities for the approval of
additional wells as growth, demand and water quality warrants. The Tidewater
System does not have a central treatment facility but has several regional
treatment plants. Several of its water systems in New Castle, Kent and Sussex
Counties, Delaware have interconnected transmission systems.
Pinelands
System
Water
supply to our Pinelands System is derived from groundwater sources from four
wells which provided overall system delivery of 206 million gallons in 2007.
The
pumping capacity of the four wells is 2.2 million gallons per day.
Bayview
System
Water
supply to Bayview customers is derived from groundwater water sources from
two
wells, which delivered approximately 11 million gallons in 2007.
Pinelands
Wastewater System
The
Pinelands Wastewater System discharges into the South Branch of the Rancocas
Creek through a tertiary treatment plant that provides clarification,
sedimentation, filtration and disinfection. The total capacity of the plant
is
0.5 mgd, and the system provided overall treatment to 109 million gallons in
2007.
TESI
System
The
TESI
System owns and operates six wastewater treatment systems in Southern Delaware.
The treatment plants provide clarification, sedimentation, and disinfection.
The
combined total treatment capacity of the plants is 0.6 mgd. Current average
flow
is approximately 0.2 mgd.
Employees
As
of
December 31, 2007, we had a total of 254 employees. In addition, we lease 19
full-time employees under the USA-PA contract with the City of Perth Amboy,
New
Jersey. No employees are represented by a union except the leased employees
who
are subject to a collective bargaining agreement with the City of Perth Amboy.
We believe our employee relations are good. Wages and benefits, other than
for
leased employees, are reviewed annually and are considered competitive within
both the industry and the regions where we operate.
Competition
Our
business in our franchised service area is substantially free from direct
competition with other public utilities, municipalities and other entities.
However, our ability to provide contract water supply and wastewater services
and operations and maintenance services is subject to competition from other
public utilities, municipalities and other entities. Although Tidewater has
been
granted an exclusive franchise for each of its existing community water systems,
its ability to expand service areas can be affected by the PSC awarding
franchises to other regulated water utilities with whom we compete for such
franchises and for projects.
Regulation
We
are
regulated as to rates charged to customers for water and wastewater services
in
New Jersey and Delaware, as to the quality of the services we provide and as
to
certain other matters. Our USA, USA-PA and White Marsh subsidiaries are not
regulated utilities. We are subject to environmental and water quality
regulation by the United States Environmental Protection Agency (EPA), and
the
New Jersey Department of Environmental Protection (DEP) with respect to
operations in New Jersey and by Department of Natural Resources and
Environmental Control (DNREC), the Delaware Department of Health and Social
Services-Division of Public Health (DPH), and the Delaware River Basin
Commission (DRBC) with respect to operations in Delaware. In addition, our
issuances of securities are subject to the prior approval of the SEC and the
New
Jersey Board of Public Utilities (BPU) or the PSC.
Regulation
of Rates and Services
New
Jersey water and wastewater service operations (excluding the operations of
USA
and USA-PA) are subject to regulation by the BPU. Similarly, our Delaware water
and wastewater operations (excluding the operations of White Marsh) are subject
to regulation by the PSC. These regulatory authorities have jurisdiction with
respect to rates, service, the issuance of securities and other matters of
utility companies operating within the States of New Jersey and Delaware,
respectively. For ratemaking purposes, we account separately for operations
in
New Jersey and Delaware to facilitate independent ratemaking by the BPU for
New
Jersey operations and the PSC for Delaware operations.
In
determining our rates, the BPU and the PSC consider the income, expenses, rate
base of property used and useful in providing service to the public and a fair
rate of return on investments within their separate jurisdictions. Rate
determinations by the BPU do not guarantee particular rates of return to us
for
our New Jersey operations nor do rate determinations by the PSC guarantee
particular rates of return for our Delaware operations. Thus, we may
not achieve the rates of return permitted by the BPU or the PSC.
Effective
October 26, 2007, Middlesex
received approval from the New Jersey Board of Public Utilities (BPU) for a
9.1%, or $5.0 million increase in its base water rates. The increase
was predicated on a rate base of $164.4 million and an authorized return on
equity of 10.0%. Middlesex had originally filed for an $8.9 million
or 16.5% base rate increase with the BPU on April 18, 2007. The rate
increase is intended to recover increased costs of operations, maintenance,
labor and benefits, purchased power, purchased water and taxes, as well as
capital investment of approximately $23.0 million since June
2005.
On
April
28, 2006, Tidewater filed for a $5.5 million, or 38.6%, base rate increase
with
the Delaware Public Service Commission (PSC). The request was intended to
recover increased costs of operations, maintenance and taxes, as well as capital
investment of approximately $23.8 million since rates were last established
in
March 2005. Since June 27, 2006, Tidewater had been billing and recognizing
additional revenues through a 15% interim rate increase subject to refund as
allowed under PSC regulations. A settlement was reached amongst the parties
which concluded that a 26.9% overall increase in base rates would be
implemented. The PSC approved the settlement and the remaining 11.9%
increase was put into effect on February 28, 2007. The combined
effect of the interim and final rate increases was $3.9 million in additional
annual operating revenues.
Effective
April 13, 2006, Pinelands Water and Pinelands Wastewater received approval
from
the New Jersey Board of Public Utilities (BPU) for base rate increases of 7.02%
and 0.98%, respectively. These increases represent a total base rate increase
of
approximately $0.1 million for Pinelands to offset increased costs associated
with capital improvements and the operation and maintenance of their
systems.
In
accordance with the tariff established for Southern Shores, an annual rate
increase of 3% was implemented on January 1, 2008. Under the terms of
a contract with Southern Shores Homeowners Association, the increase cannot
exceed the lesser of the regional Consumer Price Index or 3%.
There
can
be no assurance that any future rate increases will be granted or, if granted,
that they will be in the amounts requested.
Water
Quality and Environmental Regulations
Both
the
EPA and the DEP regulate our operations in New Jersey with respect to water
supply, treatment and distribution systems and the quality of the water, as
do
the EPA, DNREC, DPH and DRBC with respect to operations in
Delaware.
Federal,
New Jersey and Delaware regulations adopted relating to water quality require
us
to perform expanded types of testing to ensure that our water meets state and
federal water quality requirements. In addition, environmental regulatory
agencies are reviewing current regulations governing the limits of certain
organic compounds found in the water as byproducts of treatment. We participate
in industry-related research to identify the various types of technology that
might reduce the level of organic, inorganic and synthetic compounds found
in
the water. The cost to water companies of complying with the proposed water
quality standards depends in part on the limits set in the regulations and
on
the method selected to implement such reduction. We believe the CJO Plant
capabilities put us in a strong position to meet any such future standards
with
regard to our Middlesex System. We regularly test our water to
determine compliance with existing federal, New Jersey and Delaware primary
water quality standards.
Well
water treatment in our Tidewater System is by chlorination for disinfection
purposes and, in some cases, pH correction and filtration for nitrate and iron
removal.
Well
water treatment in the Pinelands and Bayview Systems (disinfection only) is
done
at individual well sites.
The
DEP
and the DPH monitor our activities and review the results of water quality
tests
that are performed for adherence to applicable regulations. Other regulations
applicable to us include the Lead and Copper Rule, the maximum contaminant
levels established for various volatile organic compounds, the Federal Surface
Water Treatment Rule and the Total Coliform Rule.
Management
This
table lists information concerning our executive management team:
|
Name
|
Age
|
Principal
Position(s)
|
||
|
Dennis
W. Doll
|
49
|
President
and Chief Executive Officer
|
||
|
A.
Bruce O’Connor
|
49
|
Vice
President and Chief Financial Officer
|
||
|
Ronald
F. Williams
|
58
|
Vice
President-Operations and Chief Operating Officer
|
||
|
Kenneth
J. Quinn
|
60
|
Vice
President-General Counsel, Secretary and Treasurer
|
||
|
James
P. Garrett
|
61
|
Vice
President–Human Resources
|
||
|
Richard
M. Risoldi
|
51
|
Vice
President–Subsidiary Operations
|
||
|
Bernadette
M. Sohler
|
47
|
Vice
President-Corporate Affairs
|
||
|
Gerard
L. Esposito
|
56
|
President,
Tidewater Utilities, Inc.
|
Dennis
W. Doll
– Mr. Doll
joined the Company in November 2004 as Executive Vice President. He was elected
President and Chief Executive Officer and became a Director of Middlesex
effective January 1, 2006. Prior to joining the Company, Mr. Doll was employed
by Elizabethtown Water Company since 1985, serving most recently as a member
of
the senior leadership team of the Northeast Region of American Water, comprised
of various regulated utilities and other non-regulated subsidiaries in the
water
and wastewater fields. Mr. Doll is a director of the New Jersey Utilities
Association and the National Association of Water Companies.
A.
Bruce O’Connor
– Mr.
O’Connor, a Certified Public Accountant, joined the Company in 1990 as Assistant
Controller and was elected Controller in 1992 and Vice President in 1995. He
was
elected Vice President and Chief Financial Officer in 1996. He is
responsible for financial reporting, customer service, rate cases, cash
management and financings. He is Treasurer and a Director of Tidewater
Utilities, Inc., Tidewater Environmental Services, Inc., Utility Service
Affiliates, Inc., and White Marsh Environmental Systems, Inc. He is
Vice President, Treasurer and a Director of Utility Service Affiliates (Perth
Amboy) Inc., Pinelands Water Company and Pinelands Wastewater
Company.
Ronald
F. Williams
– Mr.
Williams joined the Company in 1995 as Assistant Vice President–Operations,
responsible for the Company’s Engineering and Distribution Departments. He was
elected Vice President–Operations in October 1995 and designated Chief Operating
Officer in 2004. Mr. Williams was elected to the additional posts of Assistant
Secretary and Assistant Treasurer for Middlesex in 2004. He was
formerly employed by Garden State Water Company as President and Chief Executive
Officer. He is a Director and President of Utility Service Affiliates (Perth
Amboy) Inc.
Kenneth
J. Quinn
– Mr. Quinn
joined the Company in 2002 as General Counsel and was elected Assistant
Secretary in 2003. In 2004, Mr. Quinn was elected Vice President,
Secretary and Treasurer for Middlesex and Secretary and Assistant Treasurer
for
all subsidiaries of Middlesex. Prior to joining the Company he had
been employed in private law practice. Prior to that, Mr. Quinn spent 10 years
as in-house counsel to two major banking institutions located in New Jersey.
In
May 2003, he was elected Assistant Secretary of Tidewater Utilities, Inc.,
Pinelands Water Company, Pinelands Wastewater Company, Utility Service
Affiliates (Perth Amboy) Inc., Bayview Water Company and White Marsh
Environmental Systems, Inc. He is a member of the New Jersey State Bar
Association and is also a member of the Public Utility Law Section of the
Bar.
James
P. Garrett
– Mr.
Garrett, a licensed attorney, joined the Company in 2003 as Assistant Vice
President–Human Resources. In May 2004, he was elected Vice President- Human
Resources and is responsible for all human resources and information technology
throughout the Company. Prior to his hire, Mr. Garrett was employed
by a national retail chain as Director of Organizational
Development.
Richard
M. Risoldi
– Mr.
Risoldi joined the Company in 1989 as Director of Production, responsible for
the operation and maintenance of the Company’s treatment and pumping
facilities. He was appointed Assistant Vice President of Operations
in 2003. He was elected Vice President in May 2004-Subsidiary Operations,
responsible for regulated subsidiary operations and business development. He
is
a Director of Tidewater Utilities, Inc., Tidewater Environmental Services,
Inc.,
White Marsh Environmental Systems Inc and USA-PA. He also serves as
Director and President of Pinelands Water Company, Pinelands Wastewater Company
and Utility Service Affiliates, Inc.
Bernadette
M. Sohler –
Ms.
Sohler joined the Company in 1994 and was named Director of Communications
in
2003 and promoted to Vice President-Corporate Affairs in March 2007 with
responsibilities for corporate, investor and employee communications, media
and
government relations, marketing, community affairs and corporate philanthropic
activities. She also serves as Vice President of Utilities Service
Affiliates, Inc.
Gerard
L. Esposito
– Mr.
Esposito joined Tidewater Utilities, Inc. in 1998 as Executive Vice
President. He was elected President of Tidewater and White Marsh
Environmental Systems, Inc. in 2003 and elected President of Tidewater
Environmental Services, Inc. in January 2005. Prior to joining the Company
he
worked in various executive positions for Delaware environmental protection
and
water quality governmental agencies. He is a Director of Tidewater Utilities,
Inc., Tidewater Environmental Services, Inc., and White Marsh Environmental
Systems, Inc.
|
Item
1A.
|
Risk
Factors.
|
Our
revenue and earnings depend on the rates we charge our customers. We cannot
raise utility rates in our regulated businesses without filing a petition with
the appropriate governmental agency. If these agencies modify, delay, or deny
our petition, our revenues will not increase and our earnings will decline
unless we are able to reduce costs.
The
BPU
regulates our public utility companies in New Jersey with respect to rates
and
charges for service, classification of accounts, awards of new service
territory, acquisitions, financings and other matters. That means, for example,
that we cannot raise the utility rates we charge to our customers without first
filing a petition with the BPU and going through a lengthy administrative
process. In much the same way, the PSC regulates our public utility companies
in
Delaware. We cannot give assurance of when we will request approval for any
such
matter, nor can we predict whether the BPU or PSC will approve, deny or reduce
the amount of such requests.
Certain
costs of doing business are not completely within our control. The failure
to
obtain any rate increase would prevent us from increasing our revenues and,
unless we are able to reduce costs, would result in reduced
earnings.
We
are subject to environmental laws and regulations, including water quality
and
wastewater effluent quality regulations, as well as other state and local
regulations. Compliance with those laws and regulations requires us to incur
costs and we are subject to fines or other sanctions for
non-compliance
The
EPA
and DEP regulate our operations in New Jersey with respect to water supply,
treatment and distribution systems and the quality of the water. Our
operations in Delaware are regulated by the EPA, DNREC, DPH, and DRBC with
respect to water supply, treatment and distribution systems and the quality
of
water. Federal, New Jersey and Delaware regulations relating to water quality
require us to perform expanded types of testing to ensure that our water meets
state and federal water quality requirements. We are subject to EPA regulations
under the Federal Safe Drinking Water Act, which include the Lead and Copper
Rule, the maximum contaminant levels established for various volatile organic
compounds, the Federal Surface Water Treatment Rule and the Total Coliform
Rule.
There are also similar state regulations by the DEP in New Jersey. The DEP
and
DPH monitor our activities and review the results of water quality tests that
we
perform for adherence to applicable regulations. In addition, environmental
regulatory agencies are continually reviewing regulations governing the limits
of certain organic compounds found in the water as byproducts of
treatment.
We
are
also subject to regulations related to fire protection services. In
Delaware, fire protection is regulated statewide by the Office of State Fire
Marshal. In New Jersey there is no state-wide fire protection
regulatory agency. However, state regulations exist as to the size of
piping required regarding the provision of fire protection
services.
The
cost
of compliance with the water and wastewater effluent quality standards depends
in part on the limits set in the regulations and on the method selected to
implement them. If new or more restrictive standards are imposed, the cost
of
compliance could be very high and have an adverse impact on our revenues and
results of operations if we cannot recover those costs through our rates that
we
charge our customers. The cost of compliance with fire protection
requirements could also be high and make us less profitable if we cannot recover
those costs through our rates charged to our customers.
In
addition, if we fail to comply with environmental or other laws and regulations
to which our business is subject, we could be fined or subject to other
sanctions, which could adversely impact our business or results of
operations.
We
depend upon our ability to raise money in the capital markets to finance some
of
the costs of complying with laws and regulations, including environmental laws
and regulations or to pay for some of the costs of improvements to or the
expansion of our utility system assets. Our regulated utility companies cannot
issue debt or equity securities without regulatory approval.
We
require financing to fund the ongoing capital program for the improvement of
our
utility system assets and for planned expansion of those systems. We expect
to
spend between $122 million and $159 million for capital projects through
2010. We must obtain regulatory approval to sell debt or equity
securities to raise money for these projects. If sufficient capital is not
available or the cost of capital is too high, or if the regulatory authorities
deny a petition of ours to sell debt or equity securities, we may not be able
to
meet the costs of complying with environmental laws and regulations or the
costs
of improving and expanding our utility system assets to the level we believe
necessary. This might result in the imposition of fines or
restrictions on our operations and may curtail our ability to improve upon
and
expand our utility system assets.
Weather
conditions and overuse of underground aquifers may interfere with our sources
of
water, demand for water services and our ability to supply water to
customers.
Our
ability to meet the existing and future water demands of our customers depends
on an adequate supply of water. Unexpected conditions may interfere with our
water supply sources. Drought and overuse of underground aquifers may limit
the
availability of ground and/or surface water. Freezing weather may also
contribute to water transmission interruptions caused by pipe and/or main
breakage. Any interruption in our water supply could cause a reduction in our
revenue and profitability. These factors might adversely affect our ability
to
supply water in sufficient quantities to our customers. Governmental drought
restrictions might result in decreased use of water services and can adversely
affect our revenue and earnings.
Our
business is subject to seasonal fluctuations, which could affect demand for
our
water service and our revenues.
Demand
for our water during the warmer months is generally greater than during cooler
months due primarily to additional consumption of water in connection with
irrigation systems, swimming pools, cooling systems and other outside water
use.
Throughout the year, and particularly during typically warmer months, demand
may
vary with temperature and rainfall levels. In the event that
temperatures during the typically warmer months are cooler than normal, or
if
there is more rainfall than normal, the demand for our water may decrease and
adversely affect our revenues.
Our
water sources may become contaminated by naturally-occurring or man-made
compounds and events. This may cause disruption in services and impose costs
to
restore the water to required levels of quality.
Our
sources of water may become contaminated by naturally-occurring or man-made
compounds and events. In the event that our water supply is contaminated, we
may
have to interrupt the use of that water supply until we are able to install
treatment equipment or substitute the flow of water from an uncontaminated
water
source through our transmission and distribution systems. We may also incur
significant costs in treating the contaminated water through the use of our
current treatment facilities, or development of new treatment methods. Our
inability to substitute water supply from an uncontaminated water source, or
to
adequately treat the contaminated water source in a cost-effective manner may
reduce our revenues and make us less profitable.
We
face competition from other water and wastewater utilities and service providers
which might hinder our growth and reduce our profitability.
We
face
risks of competition from other utilities authorized by federal, state or local
agencies. Once a state utility regulator grants a franchise to a utility to
serve a specific territory, that utility has an exclusive right to service
that
territory. Although a new franchise offers some protection against competitors,
the pursuit of franchises is competitive, especially in Delaware where new
franchises may be awarded to utilities based upon competitive negotiation.
Competing utilities have challenged, and may in the future challenge, our
applications for new franchises. Also, third parties entering into long-term
agreements to operate municipal systems might adversely affect us and our
long-term agreements to supply water on a contract basis to municipalities,
which adversely affect our operating results.
We
have a long-term contractual obligation for water and wastewater system
operation and maintenance under which we may incur costs in excess of payments
received.
Middlesex
Water Company and USA-PA operate and maintain the water and wastewater systems
of the City of Perth Amboy, New Jersey under a 20-year contract expiring in
2018. This contract does not protect us against incurring costs in excess of
revenues we earn pursuant to the contract. There can be no absolute assurance
that we will not experience losses resulting from this contract. Losses under
this contract or our failure or inability to perform may have a material adverse
effect on our financial condition and results of operations. Also, in connection
with the contract, 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. As of December 31, 2007, approximately $22.6 million of the Series
C
Serial Bonds remain outstanding. If Perth Amboy defaults on its obligations
to
pay the bonds we have guaranteed, we would have to raise funds to meet our
obligations under that guarantee.
An
important element of our growth strategy is the acquisition of water and
wastewater assets, operations, contracts or companies. Any pending or future
acquisitions we decide to undertake may involve risks.
The
acquisition and/or operation of water and wastewater systems is an important
element in our growth strategy. This strategy depends on identifying suitable
opportunities and reaching mutually agreeable terms with acquisition candidates
or contract partners. These negotiations, as well as the integration of acquired
businesses, could require us to incur significant costs and cause diversion
of
our management’s time and resources. Further, acquisitions may result in
dilution of our equity securities, incurrence of debt and contingent
liabilities, fluctuations in quarterly results and other related expenses.
In
addition, the assets, operations, contracts or companies we acquire may not
achieve the sales and profitability expected.
The
current concentration of our business in central New Jersey and Delaware makes
us susceptible to any adverse development in local regulatory, economic,
demographic, competitive and weather conditions.
Our
New
Jersey water and wastewater businesses provide services to customers who are
located primarily in eastern Middlesex County, New Jersey. Water service is
provided under wholesale contracts to the Township of Edison, the Boroughs
of
Highland Park and Sayreville, both the Old Bridge and the Marlboro Township
Municipal Utilities Authorities, and the City of Rahway in Union County, New
Jersey. We also provide water and wastewater services to customers in
the State of Delaware. Our revenues and operating results are
therefore subject to local regulatory, economic, demographic, competitive and
weather conditions in a relatively concentrated geographic area. A
change in any of these conditions could make it more costly or difficult for
us
to conduct our business. In addition, any such change would have a
disproportionate effect on us, compared to water utility companies that do
not
have such a geographic concentration.
The
necessity for increased security has and may continue to result in increased
operating costs.
Since
the
September 11, 2001 terrorist attacks and the continuing threats to the health
and security of the United States of America, we have taken steps to increase
security measures at our facilities and heighten employee awareness of threats
to our water supply. We have tightened our security measures regarding the
delivery and handling of certain chemicals used in our business. We are at
risk
for terrorist attacks and have incurred, and will continue to incur costs for
security precautions to protect our facilities, operations and supplies from
such risks.
Our
ability to achieve growth is somewhat dependent on the residential building
market in the territories we serve. If housing starts decline
significantly, our rate of growth may not meet our expectations.
We
expect
our revenues to increase from customer growth for our regulated water and
wastewater operations as a result of the anticipated
construction and sale of new housing units in the territories we
serve. Although the residential building market in Delaware has
experienced growth in recent years, this growth may not continue in the
future. If housing starts in the territories we serve decline
significantly as a result of economic conditions or otherwise, our revenue
growth may not meet our expectations and our financial results could be
negatively impacted.
We
have restrictions on our dividends. There can also be no assurance that we
will
continue to pay dividends in the future or, if dividends are paid, that they
will be in amounts similar to past dividends.
Our
Restated Certificate of Incorporation and our Indenture of Mortgage dated as
of
April 1, 1927, as supplemented, impose conditions on our ability to pay
dividends. We have paid dividends on our common stock each year since 1912
and
have increased the amount of dividends paid each year since 1973.
Our
earnings, financial condition, capital requirements, applicable regulations
and
other factors, including the timeliness and adequacy of rate increases, will
determine both our ability to pay dividends on common stock and the amount
of
those dividends. There can be no assurance that we will continue to pay
dividends in the future or, if dividends are paid, that they will be in amounts
similar to past dividends.
If
we are unable to pay the principal and interest on our indebtedness as it comes
due or we default under certain other provisions of our loan documents, our
indebtedness could be accelerated and our results of operations and financial
condition could be adversely affected.
Our
ability to pay the principal and interest on our indebtedness as it comes due
will depend upon our current and future performance. Our performance
is affected by many factors, some of which are beyond our control. We
believe that our cash generated from operations, and, if necessary, borrowings
under our existing credit facilities, will be sufficient to enable us to make
our debt payments as they become due. If, however, we do not generate
sufficient cash, we may be required to refinance our obligations or sell
additional equity, which may be on terms that are not as favorable to
us.
No
assurance can be given that any refinancing or sale or equity will be possible
when needed or that we will be able to negotiate acceptable terms. In
addition, our failure to comply with certain provisions contained in our trust
indentures and loan agreements relating to our outstanding indebtedness could
lead to a default under these documents, which could result in an acceleration
of our indebtedness.
We
depend significantly on the services of the members of our senior management
team, and the departure of any of those persons could cause our operating
results to suffer.
Our
success depends significantly on the continued individual and collective
contributions of our senior management team. If we lose the services
of any member of our senior management or are unable to hire and retain
experienced management personnel, it could affect our operating
results.
We
are subject to anti-takeover measures that may be used by existing management
to
discourage, delay or prevent changes of control that might benefit
non-management shareholders.
Subsection
10A of the New Jersey Business Corporation Act, known as the New Jersey
Shareholders Protection Act, applies to us. The Shareholders Protection Act
deters merger proposals, tender offers or other attempts to effect changes
in
control that are not approved by our Board of Directors. In addition, we have
a
classified Board of Directors, which means only one-third of the Directors
are
elected each year. A classified Board can make it harder for an acquirer to
gain
control by voting its candidates onto the Board of Directors and may also deter
merger proposals and tender offers. Our Board of Directors also has the ability,
subject to obtaining BPU approval, to issue one or more series of preferred
stock having such number of shares, designation, preferences, voting rights,
limitations and other rights as the Board of Directors may fix. This could
be
used by the Board of Directors to discourage, delay or prevent an acquisition
that might benefit non-management shareholders.
|
Item
1B.
|
Unresolved
Staff Comments.
|
None.
|
Item
2.
|
Properties.
|
Utility
Plant
The
water
utility plant in our systems consist of source of supply, pumping, water
treatment, transmission and distribution, general facilities and all
appurtenances, including all connecting pipes.
Middlesex
System
The
Middlesex System’s principal source of surface supply is the Delaware &
Raritan Canal owned by the State of New Jersey and operated as a water resource
by the New Jersey Water Supply Authority.
Water
is
withdrawn from the Delaware & Raritan Canal at New Brunswick, New Jersey
through our intake and pumping station, located on state-owned land bordering
the canal. Water is transported through two raw water pipelines for
treatment and distribution at our CJO Plant in Edison, New Jersey.
The
CJO
Plant includes chemical storage and chemical feed equipment, two dual rapid
mixing basins, four upflow clarifiers which are also called superpulsators,
four
underground reinforced chlorine contact tanks, twelve rapid filters containing
gravel, sand and anthracite for water treatment and a steel washwater tank.
The
CJO Plant also includes a computerized Supervisory Control and Data Acquisitions
system to monitor and control the CJO Plant and the water supply and
distribution system in the Middlesex System. There is an on-site
State certified laboratory capable of performing bacteriological, chemical,
process control and advanced instrumental chemical sampling and analysis. The
firm design capacity of the CJO Plant is 45 mgd (60 mgd maximum capacity).
The
main pumping station at the CJO Plant has a design capacity of 90 mgd. The
four
electric motor-driven, vertical turbine pumps presently installed have an
aggregate capacity of 72 mgd.
In
addition, there is a 15 mgd auxiliary pumping station located at the CJO Plant
location. It has a dedicated substation and emergency power supply provided
by a
diesel-driven generator. It pumps from the 10 million gallon distribution
storage reservoir directly into the distribution system.
The
transmission and distribution system is comprised of 732 miles of mains and
includes 23,200 feet of 48-inch reinforced concrete transmission main connecting
the CJO Plant to our distribution pipe network and related storage facilities.
Also included is a 58,600 foot transmission main and a 38,800 foot transmission
main, augmented with a long-term, non-exclusive agreement with the East
Brunswick system to transport water to several of our contract
customers.
Middlesex
System’s storage facilities consist of a 10 million gallon reservoir at the CJO
Plant, 5 million gallon and 2 million gallon reservoirs in Edison (Grandview),
a
5 million gallon reservoir in Carteret (Eborn) and a 2 million gallon reservoir
at the Park Avenue Well Field.
In
New
Jersey, we own the properties on which Middlesex System’s 31 wells are located,
the properties on which our storage tanks are located as well as the property
where the CJO Plant is located. We also own our headquarters complex
located at 1500 Ronson Road, Iselin, New Jersey, consisting of a 27,000 square
foot office building and an adjacent 16,500 square foot maintenance
facility.
Tidewater
System
The
Tidewater System is comprised of 91 production plants that vary in pumping
capacity from 26,000 gallons per day to 2.0 mgd. Water is transported to our
customers through 562 miles of transmission and distribution mains. Storage
facilities include 49 tanks, with an aggregate capacity of 6.0 million gallons.
Our Delaware operations are managed from Tidewater’s offices in Dover, Delaware
and Millsboro, Delaware. Tidewater’s Dover, Delaware office property, located on
property owned by White Marsh, consists of a 6,800 square foot office building
situated on an eleven-acre lot.
Pinelands
System
Pinelands
Water owns well site and storage properties in Southampton Township, New Jersey.
The Pinelands Water storage facility is a 1.2 million gallon standpipe. Water
is
transported to our customers through 18 miles of transmission and distribution
mains.
Pinelands
Wastewater System
Pinelands
Wastewater owns a 12 acre site on which its 0.5 million gallons per day capacity
tertiary treatment plant and connecting pipes are located. Its wastewater
collection system is comprised of approximately 25 miles of main.
Bayview
System
Bayview
owns two well sites, which are located in Downe Township, Cumberland County,
New
Jersey. Water is transported to its customers through our 4.2 mile distribution
system.
TESI
System
The
TESI
System owns and operates six wastewater treatment systems in Southern Delaware.
The treatment plants provide clarification, sedimentation, and disinfection.
The
combined total capacity of the plants is 0.6 mgd.
USA-PA,
USA and White Marsh
Our
non-regulated subsidiaries, namely USA-PA, USA and White Marsh, do not own
utility plant property.
|
Item
3.
|
Legal
Proceedings.
|
In
July
2005, Tidewater received a notice of violation and request for corrective action
issued by the Delaware State Fire Marshal regarding the alleged failure of
one
of the community water systems operated by Tidewater to meet Delaware fire
protection requirements. Tidewater appealed the Fire Marshal’s
decision with the Delaware State Fire Prevention Commission (the “SFPC”) and, in
November 2005, the SFPC denied Tidewater’s appeal. In October 2007,
Tidewater agreed to dismiss its appeal of the SFPC’s decision with the Sussex
County Superior Court in Delaware of the notice of violation and request for
corrective action issued by the Fire Marshal. In return for the
dismissal both parties have agreed that 15 of the original 67 community water
systems previously identified will require certain modifications over a ten-year
period in order to provide full fire protection. The expected capital investment
to comply with the settlement is $12.0 to $14.0 million and will be expended
ratably over the ten-year period. We will apply to the PSC to
increase base rates to recover the costs of any such modifications. Although
these types of modifications have routinely been included in previous rate
matters, the PSC may not approve a portion or all of the costs associated with
the fire protection upgrades.
The
Company is a defendant in lawsuits in the normal course of business. We believe
the resolution of pending claims and legal proceedings will not have a material
adverse effect on the Company’s consolidated financial statements.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
None.
PART
II
|
Item
5.
|
Market
for the Registrant's Common Equity and Related Stockholder
Matters.
|
The
Company’s common stock is traded on the NASDAQ Stock Market, under the symbol
MSEX. The following table shows the range of high and low share prices per
share
for the common stock and the dividend paid to shareholders in such
quarter. As of December 31, 2007, there were 1,975 holders of
record.
|
2007
|
High
|
Low
|
Dividend
|
|||||||||
|
Fourth
Quarter
|
$ | 19.25 | $ | 18.10 | $ | 0.1750 | ||||||
|
Third
Quarter
|
20.24 | 18.05 | 0.1725 | |||||||||
|
Second
Quarter
|
19.48 | 18.12 | 0.1725 | |||||||||
|
First
Quarter
|
19.07 | 17.75 | 0.1725 | |||||||||
|
2006
|
High
|
Low
|
Dividend
|
|||||||||
|
Fourth
Quarter
|
$ | 19.50 | $ | 17.96 | $ | 0.1725 | ||||||
|
Third
Quarter
|
20.50 | 17.58 | 0.1700 | |||||||||
|
Second
Quarter
|
19.34 | 16.50 | 0.1700 | |||||||||
|
First
Quarter
|
19.72 | 17.03 | 0.1700 | |||||||||
The
Company has paid dividends on its common stock each year since 1912. Although
it
is the present intention of the Board of Directors of the Company to continue
to
pay regular quarterly cash dividends on its common stock, the payment of future
dividends is contingent upon the future earnings of the Company, its financial
condition and other factors deemed relevant by the Board of Directors at its
discretion.
If
four
or more quarterly dividends are in arrears, the preferred shareholders, as
a
class, are entitled to elect two members to the Board of Directors in addition
to Directors elected by holders of the common stock. In the event dividends
on
the preferred stock are in arrears, no dividends may be declared or paid on
the
common stock of the Company. Substantially all of the Utility Plant of the
Company is subject to the lien of its mortgage, which also includes certain
restrictions as to cash dividend payments and other distributions on common
stock.
The
Company maintains an escrow account for 71,253 shares of the Company's common
stock which were awarded under the 1997 Restricted Stock Plan, which has
expired. Such stock is subject to an agreement requiring forfeiture by the
employee in the event of termination of employment within five years of the
award other than as a result of retirement, death, disability or change in
control. The Company filed a petition with the BPU requesting approval of
stock-based compensation plan called the 2008 Restricted Stock
Plan. The Company intends to seek shareholder approval for the new
plan at its May 21, 2008 annual meeting of shareholders. The maximum
number of shares authorized for grant under the proposed plan is 300,000
shares.
Set
forth
below is a line graph comparing the yearly change in the cumulative total return
(which includes reinvestment of dividends) of a $100 investment for the
Company’s common stock, a peer group of investor-owned water utilities, and the
Dow Jones Wilshire 5000 Stock Index for the period of five years commencing
December 31, 2002. The current peer group includes American States
Water Company, Aqua America Inc., Artesian Resources Corp., California Water
Service Company, Connecticut Water Service, Inc., Pennichuck Corp., SJW Corp.,
Southwest Water Company, York Water Company and the Company. The Dow
Jones Wilshire 5000 Stock Index measures the performance of all U.S.
headquartered equity securities with readily available price
data.
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|||||||||||||||||||
|
Middlesex
Water Company
|
100.00 | 133.47 | 128.85 | 122.12 | 136.78 | 143.58 | ||||||||||||||||||
|
Dow
Jones Wilshire 5000
|
100.00 | 131.64 | 148.26 | 157.64 | 182.66 | 193.13 | ||||||||||||||||||
|
Peer
Group
|
100.00 | 127.98 | 147.66 | 193.41 | 193.90 | 186.27 | ||||||||||||||||||
|
Item
6.
|
Selected
Financial Data.
|
|
CONSOLIDATED
SELECTED FINANCIAL
DATA
|
|||||||||||||||||||||
|
(In
Thousands except per Share
Amounts)
|
|||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Operating
Revenues
|
$ | 86,114 | $ | 81,061 | $ | 74,613 | $ | 70,991 | $ | 64,111 | |||||||||||
|
Operating
Expenses:
|
|||||||||||||||||||||
|
Operations
and
Maintenance
|
46,240 | 43,345 | 42,156 | 39,984 | 36,195 | ||||||||||||||||
|
Depreciation
|
7,539 | 7,060 | 6,460 | 5,846 | 5,363 | ||||||||||||||||
|
Other
Taxes
|
9,664 | 9,338 | 8,779 | 8,228 | 7,816 | ||||||||||||||||
|
Total
Operating Expenses
|
63,443 | 59,743 | 57,395 | 54,058 | 49,374 | ||||||||||||||||
|
Operating
Income
|
22,671 | 21,318 | 17,218 | 16,933 | 14,737 | ||||||||||||||||
|
Other
Income,
Net
|
1,527 | 774 | 740 | 795 | 358 | ||||||||||||||||
|
Interest
Charges
|
6,619 | 7,012 | 6,245 | 5,468 | 5,227 | ||||||||||||||||
|
Income
Taxes
|
5,736 | 5,041 | 3,237 | 3,814 | 3,237 | ||||||||||||||||
| Net Income | 11,843 | 10,039 | 8,476 | 8,446 | 6,631 | ||||||||||||||||
|
Preferred
Stock
Dividend
|
248 | 248 | 251 | 255 | 255 | ||||||||||||||||
|
Earnings
Applicable to Common
Stock
|
$ | 11,595 | $ | 9,791 | $ | 8,225 | $ | 8,191 | $ | 6,376 | |||||||||||
|
Earnings
per
Share:
|
|||||||||||||||||||||
|
Basic
|
$ | 0.88 | $ | 0.83 | $ | 0.72 | $ | 0.74 | $ | 0.61 | |||||||||||
|
Diluted
|
$ | 0.87 | $ | 0.82 | $ | 0.71 | $ | 0.73 | $ | 0.61 | |||||||||||
|
Average
Shares
Outstanding:
|
|||||||||||||||||||||
|
Basic
|
13,203 | 11,844 | 11,445 | 11,080 | 10,475 | ||||||||||||||||
|
Diluted
|
13,534 | 12,175 | 11,784 | 11,423 | 10,818 | ||||||||||||||||
|
Dividends
Declared and
Paid
|
$ | 0.693 | $ | 0.683 | $ | 0.673 | $ | 0.663 | $ | 0.649 | |||||||||||
|
Total
Assets
|
$ | 392,675 | $ | 370,267 | $ | 324,383 | $ | 305,634 | $ | 267,956 | |||||||||||
|
Convertible
Preferred
Stock
|
$ | 2,856 | $ | 2,856 | $ | 2,856 | $ | 2,961 | $ | 2,961 | |||||||||||
|
Long-term
Debt
|
$ | 131,615 | $ | 130,706 | $ | 128,175 | $ | 115,281 | $ | 97,377 | |||||||||||
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operation.
|
The
following discussion of the Company’s historical results of operations and
financial condition should be read in conjunction with the Company’s
consolidated financial statements and related notes.
Overview
Middlesex
Water Company has operated as a water utility in New Jersey since 1897, and
in
Delaware, through our wholly-owned subsidiary, Tidewater, since
1992. We are in the business of collecting, treating, distributing
and selling water for domestic, commercial, municipal, industrial and fire
protection purposes. We also operate a New Jersey municipal water and wastewater
system under contract and provide wastewater services in New Jersey and Delaware
through our subsidiaries. We are regulated as to rates charged to
customers for water and wastewater services, as to the quality of water service
we provide and as to certain other matters in New Jersey and in Delaware. Only
our USA, USA-PA and White Marsh subsidiaries are not regulated
utilities.
Our
New
Jersey water utility system (the Middlesex System) provides water services
to
approximately 59,400 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 303,000. In
partnership with our subsidiary, USA-PA, we operate the water supply system
and
wastewater system for the City of Perth Amboy, New Jersey. Our other New Jersey
subsidiaries, Pinelands Water and Pinelands Wastewater, provide water and
wastewater services to residents in Southampton Township, New
Jersey.
Our
Delaware subsidiaries, Tidewater and Southern Shores, provide water services
to
approximately 31,600 retail customers in New Castle, Kent and Sussex Counties,
Delaware. Our TESI subsidiary provides wastewater services to approximately
1,400 residential retail customers. Our other Delaware subsidiary, White Marsh,
services an additional 5,100 customers in Kent and Sussex Counties through
62
operations and maintenance contracts.
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.
We
expect
the growth of our regulated wastewater business in Delaware will eventually
become a more significant component of our operations.
Our
ability to increase operating income and net income is based significantly
on
four factors: weather, adequate and timely rate relief, effective cost
management, and customer growth. These factors are evident in the discussions
below which compare our results of operations from prior years.
Operating
Results by Segment
The
Company has two operating segments, Regulated and Non-Regulated. Our Regulated
segment contributed 90%, 89% and 89% of total revenues, and 94%, 94% and 95%
of
net income for the years ended December 31, 2007, 2006 and 2005, respectively.
The discussion of the Company’s results of operations is on a consolidated
basis, and includes significant factors by subsidiary. The segments in the
tables included below are comprised of the following companies: Regulated-
Middlesex, Tidewater, Pinelands, Southern Shores, and TESI; Non-Regulated-
USA,
USA-PA, and White Marsh.
Results
of Operations in 2007 Compared to 2006
|
(Millions
of Dollars)
|
||||||||||||||||||||||||
|
Years
ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||
|
Regulated
|
Non-
Regulated
|
Total
|
Regulated
|
Non-
Regulated
|
Total
|
|||||||||||||||||||
|
Revenues
|
$ | 77.1 | $ | 9.0 | $ | 86.1 | $ | 71.9 | $ | 9.2 | $ | 81.1 | ||||||||||||
|
Operations
and maintenance
|
38.8 | 7.4 | 46.2 | 35.7 | 7.7 | 43.4 | ||||||||||||||||||
|
Depreciation
|
7.4 | 0.1 | 7.5 | 7.0 | 0.1 | 7.1 | ||||||||||||||||||
|
Other
taxes
|
9.5 | 0.2 | 9.7 | 9.1 | 0.2 | 9.3 | ||||||||||||||||||
|
Operating
income
|
21.4 | 1.3 | 22.7 | 20.1 | 1.2 | 21.3 | ||||||||||||||||||
|
Other
income (expense)
|
1.5 | - | 1.5 | 0.9 | (0.1 | ) | 0.8 | |||||||||||||||||
|
Interest
expense
|
6.6 | - | 6.6 | 7.0 | - | 7.0 | ||||||||||||||||||
|
Income
taxes
|
5.2 | 0.6 | 5.8 | 4.6 | 0.5 | 5.1 | ||||||||||||||||||
|
Net
income
|
$ | 11.1 | $ | 0.7 | $ | 11.8 | $ | 9.4 | $ | 0.6 | $ | 10.0 | ||||||||||||
Operating
revenues for the year rose $5.0 million, or 6.2% over the same period in 2006.
Revenues improved by $3.7 million in our Tidewater System, of which $2.4 million
was a result of a base rate increase that was granted to
Tidewater. The rate increase was implemented in two parts; a 15%
interim rate increase in June 2006 and an additional 12% final increase on
February 28, 2007. Customer growth and higher consumption contributed
$1.9 million of increased revenues. Our Tidewater System experienced record
water production and consumption billed due to extended favorable weather during
the spring and summer. Fees charged to new customers for initial
connection to our Delaware water systems were lower by $0.6 million as new
residential and commercial development has slowed in our Delaware service
territories. Revenues in our Middlesex system increased by $0.7
million as a result of a 9.1% base rate increase implemented on October 26,
2007. Middlesex revenues also increased by $0.3 million due to
increased sales to our contract customers. TESI revenues increased by
$0.3 million, as we connected new customers to our existing and new wastewater
systems in Delaware.
While
we
anticipate continued organic customer and consumption growth among our Delaware
systems, such growth and increased consumption cannot be guaranteed. Our water
systems are highly dependent on the effects of weather, which may adversely
impact future consumption despite customer growth. Appreciable organic customer
and consumption growth is less likely in our New Jersey systems due to the
extent to which our service territory is developed. The Company
expects its 2008 operating revenues to reflect the full effect of the October
2007 Middlesex $5.0 million rate increase.
Operation
and maintenance expenses increased $2.8 million, or 6.5%. Labor costs were
$1.3
million higher due to wage increases and increased headcount to meet the needs
of the growing Delaware customer base, risk management, training and
safety. As expected, electric generation costs for our Middlesex
system increased due to the renewal in late 2006 of our contract with the power
purveyor. That factor accounted for most of the $0.6 million in
additional power costs. Pumping and water treatment costs increased a
combined $0.2 million due to higher costs for chemicals and disposal of
residuals. Costs for water main breaks in our New Jersey system and
transportation fuel were $0.2 million higher than the same period in 2006 due
to
the number and size of the breaks and higher gasoline prices. The cost to
operate our TESI regulated wastewater facilities in Delaware increased by $0.2
million as we acquired the Milton, Delaware wastewater system during the
year. All other operating costs increased by $0.3
million.
Electric
generation costs for our Middlesex system are expected to increase in 2008
due
to the renewal in late 2007 of our power contract that reflects an 18%
increase. Payroll and related employee benefit costs are expected to
be higher in 2007 due to headcount increase. However, the unit cost for our
employee’s health benefits will not increase until December 2008.
Depreciation
expense for 2007 increased by $0.4 million, or 5.6%, due to a higher level
of
utility plant in service. As our investments in utility plant and operating
expenses increase, we continue to seek timely rate relief through base rate
filings as discussed above.
Other
taxes increased by $0.4 million generally reflecting additional taxes on higher
taxable gross revenues, payroll and real estate.
Other
income increased $0.7 million, primarily due to a gain of $0.2 million on the
sale of non-utility real property in New Jersey and a gain of $0.4 million
on
the sale of certain water service rights in Delaware.
Interest
expense decreased by $0.4 million, or 5.7%, as a result of a lower level of
average short-term debt outstanding when compared to 2006.
Income
tax expense based on our current year operating results was $0.9 million higher
than 2006 and reflects the increased revenues due to higher water rates in
New
Jersey and Delaware, the record customer usage in Delaware and the sale of
non-essential assets. This was partially offset by $0.2 million of
solar tax credits recorded during 2007.
Net
income increased to $11.8 million from $10.0 million in the prior year, and
basic earnings per share increased from $0.83 to $0.88. Diluted earnings per
share increased from $0.82 to $0.87.
Results
of Operations in 2006 Compared to 2005
|
(Millions
of Dollars)
|
||||||||||||||||||||||||
|
Years
ended December 31,
|
||||||||||||||||||||||||
|
2006
|
2005
|
|||||||||||||||||||||||
|
Regulated
|
Non-
Regulated
|
Total
|
Regulated
|
Non-
Regulated
|
Total
|
|||||||||||||||||||
|
Revenues
|
$ | 71.9 | $ | 9.2 | $ | 81.1 | $ | 66.3 | $ | 8.3 | $ | 74.6 | ||||||||||||
|
Operations
and maintenance
|
35.7 | 7.7 | 43.4 | 35.0 | 7.2 | 42.2 | ||||||||||||||||||
|
Depreciation
|
7.0 | 0.1 | 7.1 | 6.3 | 0.1 | 6.4 | ||||||||||||||||||
|
Other
taxes
|
9.1 | 0.2 | 9.3 | 8.6 | 0.2 | 8.8 | ||||||||||||||||||
|
Operating
income
|
20.1 | 1.2 | 21.3 | 16.4 | 0.8 | 17.2 | ||||||||||||||||||
|
Other
income (expense)
|
0.9 | (0.1 | ) | 0.8 | 0.7 | -- | 0.7 | |||||||||||||||||
|
Interest
expense
|
7.0 | -- | 7.0 | 6.2 | -- | 6.2 | ||||||||||||||||||
|
Income
taxes
|
4.6 | 0.5 | 5.1 | 2.9 | 0.3 | 3.2 | ||||||||||||||||||
|
Net
income
|
$ | 9.4 | $ | 0.6 | $ | 10.0 | $ | 8.0 | $ | 0.5 | $ | 8.5 | ||||||||||||
Operating
revenues for the year rose $6.5 million, or 8.7% over the same period in 2005.
Water sales improved by $2.8 million in our Middlesex System, of which $4.1
million was a result of base rate increase that was granted to Middlesex on
December 8, 2005. This increase was somewhat offset by lower
consumption revenues of $1.3 million due to unfavorable weather from mid-July
through the late fall of 2006 as compared to the prior year. Customer growth
of
7.07% in Delaware provided additional water consumption sales, facility charges
and connection fees of $0.9 million, higher base rates provided $1.0 million
and
increased consumption for existing customers provided an additional $0.6
million. New unregulated wastewater contracts in Delaware provided $0.4 million
in additional revenues. Revenues from our operations and maintenance contract
with the City of Perth Amboy increased by $0.4 million due to scheduled fixed
fee adjustments under the agreement. USA had increased revenues for its
LineCare
SM
maintenance
program of $0.1 million. TESI revenues increased by $0.1
million, as we connected new customers to our wastewater systems in
Delaware. All other operations contributed $0.2 million of additional
revenues.
Operation
and maintenance expenses increased $1.2 million or 2.8% as compared to the
same
period in 2005. Continued growth of our Delaware water and wastewater operations
led to higher costs of $1.1 million. Despite lower water production volume
of
3.2% for our Middlesex System, costs increased by $0.3 million due to increased
unit costs for electricity, chemicals and residuals removal. Costs for providing
services under our contract with the City of Perth Amboy increased by $0.1
million and costs for providing services under our
contracts
in Delaware increased by $0.2 million. Audit fees declined by $0.3 million
as
the Company changed independent accounting firms beginning with the 2006 audit
period. Labor and benefits expenses fell by $0.3 million due to
vacant positions and improved performance on investments. All other operating
costs increased by $0.1 million.
Depreciation
expense for 2006 increased by $0.7 million, or 10.9%, due to a higher level
of
utility plant in service. As our investments in utility plant and operating
expenses increase, we continue to seek timely rate relief through base rate
filings as discussed above.
Other
taxes increased by $0.5 million generally reflecting additional taxes on higher
taxable gross revenues, payroll and real estate.
Other
income decreased $0.1 million, primarily due to higher Allowance for Funds
Used
During Construction (AFUDC) as capital spending increased compared to the prior
year.
Interest
expense increased by $0.8 million, or 12.9%, as a result of a higher level
of
long-term debt, and higher average interest rates and increased weighted average
short-term borrowings as compared to the prior year period.
Income
tax expense based on the 2006 operating results was $1.9 million higher than
2005 and reflects the increased revenues due to higher water rates in New Jersey
and Delaware and increased water consumption in Delaware.
Net
income increased to $10.0 million from $8.5 million in the prior year, and
basic
earnings per share increased from $0.72 to $0.83. Diluted earnings per share
increased from $0.71 to $0.82.
Outlook
In
addition to factors previously discussed under “Results of Operations in 2007
Compared to 2006,” our revenues are expected to increase in 2008 from
anticipated customer growth in Delaware for our regulated water operations
and,
to a lesser degree, from growth in our regulated wastewater operations in
Delaware. We also expect revenues to increase as a result of
the settlement of our 2007 Middlesex rate case effective October 26,
2007. The approved increase of 9.1% is expected to generate $5.0
million of revenues on an annual basis assuming actual market conditions are
consistent with our projections.
Revenues
and earnings will also be influenced by weather. Changes in these factors,
as
well as increases in capital expenditures and operating costs are the primary
factors that determine the need for rate increase filings.
We
continue to explore viable plans to streamline operations and reduce costs
in
all aspects of our business.
We
expect
our interest expense to increase during 2008 as a result of higher expected
average borrowings against the short-term credit facilities in order to finance
a portion of our capital expenditures during the coming year (see Liquidity
and
Capital Resources).
Our
strategy includes continued revenue growth through acquisitions, internal
expansion, contract operations and when necessary, rate relief. We will continue
to pursue opportunities in both the regulated and non-regulated sectors that
are
financially sound, complement existing operations and increase shareholder
value.
Liquidity
and Capital Resources
Cash
flows from operations are largely based on three factors: weather, adequate
and
timely rate increases, and customer growth. The effect of those factors on
net
income is discussed in results of operations. For 2007, cash flows from
operating activities increased $2.7 million to $18.8 million, as compared to
the
prior year. This increase was primarily attributable to higher net income and
depreciation. The $18.8 million of net cash flow from operations enabled us
to
fund approximately 86% of our utility plant expenditures for the period
internally, with the remainder funded with proceeds from equity issued under
our
Dividend Reinvestment Plan, long-term borrowings and short-term
borrowings.
For
2006,
cash flows from operating activities increased $2.6 million to $16.1 million,
as
compared to the prior year. This increase was primarily attributable to higher
net income, depreciation and the timing of collection of customer billings.
These decreases in cash flows were partially offset by receipts of advance
service fees and the timing of payments for interest and employee benefit plans.
The $16.1 million of net cash flow from operations allowed us to fund
approximately 52% of our utility plant expenditures for the period internally,
with the remainder funded with proceeds from equity issued under a formal
offering in November 2006 and our Dividend Reinvestment Plan and both short-term
and long-term borrowings.
Increases
in certain operating costs will impact our liquidity and capital resources.
As
described in our results of operations discussion, during 2007 we received
rate
relief for Tidewater and Middlesex. We continually monitor the need for timely
rate filing to minimize any regulatory lag between increasing operating and
capital costs and appropriate rate relief. There is no certainty,
however, that the BPU or PSC will approve any or all future requested
increases.
Sources
of Liquidity
Short-term
Debt.
The Company has established lines of credit aggregating $40.0
million. At December 31, 2007, the outstanding borrowings under these credit
lines was $6.3 million at a weighted average interest rate of
5.79%.
The
weighted average daily amounts of borrowings outstanding under the Company’s
credit lines and the weighted average interest rates on those amounts were
$2.6
million and $9.5 million at 6.36% and 6.13% for the years ended December 31,
2007 and 2006, respectively.
Long-term
Debt.
Subject to regulatory approval, the Company periodically finances capital
projects under State Revolving Fund (SRF) loan programs in New Jersey and
Delaware. These government programs provide financing at interest rates that
are
typically below rates available in the financial markets. A portion of the
borrowings under the New Jersey SRF is interest free. We participated in the
Delaware and New Jersey SRF loan programs during 2007 and expect to participate
in the 2008 New Jersey SRF program for up to $3.5 million.
During
2007, Middlesex closed on $3.5 million of first mortgage bonds through the
New
Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey SRF
loan
program in order to finance our 2008 RENEW program. The proceeds of these bonds
and any interest earned are held by a trustee, and are classified as Restricted
Cash on the Consolidated Balance Sheet.
During
2007, Tidewater closed on a $1.1 million loan with the Delaware
SRF. The proceeds will be used to fund two specific projects of the
2007 capital program in Delaware.
Substantially
all of the Utility Plant of the Company is subject to the lien of its mortgage,
which also includes debt service and capital ratio covenants, certain
restrictions as to cash dividend payments and other distributions on common
stock. The Company is in compliance with all of its mortgage covenants and
restrictions.
Common
Stock
. The Company periodically issues shares of common stock in
connection with its Dividend Reinvestment and Common Stock Purchase Plan (the
Plan). The Company raised $1.1 million through the issuance of shares under
the
Plan during 2007. Periodically, the Company may issue additional equity to
reduce short-term indebtedness and for other general corporate purposes.
The last public offering of its common stock closed in November
2006. The majority of the net proceeds of approximately $26.2 million
from that common stock offering of 1,495,000 shares were used to repay all
of
the Company’s short-term borrowings outstanding at that time.
Capital
Expenditures and Commitments
Under
our
capital program for 2008, we plan to expend $14.3 million for additions and
improvements for our Delaware water systems, which include the construction
of
several storage tanks and the creation of new wells and interconnections. We
expect to spend approximately $3.8 million for construction of wastewater
systems in Delaware. We expect to spend $2.9 million as we begin to implement
a
Company-wide information system upgrade. We expect to spend $3.5 million for
our
RENEW program, which is our program to clean and cement line unlined mains
in
the Middlesex System. There remains a total of approximately 112 miles of
unlined mains in the 730-mile Middlesex System. In 2007, eight miles
of unlined mains were cleaned and cement lined. The capital program also
includes $12.4 million for scheduled upgrades to our existing systems in New
Jersey. The scheduled upgrades consist of $4.3 million for improvements to
existing plant, $5.2 million for mains, $0.6 million for service lines, $0.4
million for meters, $0.3 million for hydrants, and $1.6 million for other
infrastructure needs.
To
pay
for our capital program in 2008, we will utilize internally generated funds
and
funds available and held in trust under existing NJEIT loans (currently, $3.7
million) and Delaware SRF loans (currently, $3.1 million). The SRF programs
provide low cost financing for projects that meet certain water quality and
system improvement benchmarks. If necessary, we will also utilize short-term
borrowings through $40.0 million of available lines of credit with several
financial institutions. As of December 31, 2007, we had $6.3 million
outstanding against the lines of credit.
Going
forward into 2009 through 2010, we currently project that we may be required
to
expend between $88.4 million and $121.8 million for capital projects. The exact
amount is dependent on customer growth, residential housing sales and project
scheduling. In particular, Middlesex has filed a prudency review application
with the BPU for a proposed major transmission pipeline designed to strengthen
its existing transmission network and provide system
redundancy. Initial estimates to construct the pipeline are $26.2
million. The duration and outcome of the BPU review process may
affect the construction schedule as well as the project viability.
To
the
extent possible and because of favorable interest rates available to regulated
water utilities, we expect to finance our capital expenditures under the SRF
loan programs. We also expect to use internally generated funds and proceeds
from the sale of common stock through the Dividend Reinvestment and Common
Stock
Purchase Plan. It may also be necessary to sell shares of our Common
Stock through a public offering.
Contractual
Obligations
In
the
course of normal business activities, the Company enters into a variety of
contractual obligations and commercial commitments. Some of these items result
in direct obligations on the Company’s balance sheet while others are
commitments, some firm and some based on uncertainties, which are disclosed
in
the Company’s other underlying consolidated financial statements.
The
table
below presents our known contractual obligations for the periods specified
as of
December 31, 2007.
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 were $7.8 million in 2007 and will
increase over the term of the contract to $10.2 million by the end of the
contract.
In
connection with the agreement, Perth Amboy, through the Middlesex County
Improvement Authority, issued approximately $68.0 million in three series of
bonds. Middlesex guaranteed one of those series of bonds, designated the Series
C Serial Bonds, in the principal amount of approximately $26.3 million. Perth
Amboy guaranteed the two other series of bonds. The Series C Serial Bonds have
various maturity dates with the final maturity date on September 1, 2015. As
of
December 31, 2007, approximately $22.6 million of the Series C Serial Bonds
remained outstanding.
We
are
obligated to perform under the guarantee in the event notice is received from
the Series C Serial Bonds trustee of an impending debt service deficiency.
If
Middlesex funds any debt service obligations as guarantor, there is a provision
in the agreement that requires Perth Amboy to reimburse us. There are other
provisions in the agreement that we believe make it unlikely that we will be
required to perform under the guarantee, such as scheduled annual rate increases
for the water and wastewater services as well as rate increases due to
unforeseen circumstances. In the event revenues from customers could not satisfy
the reimbursement requirements, Perth Amboy has Ad Valorem taxing powers, which
could be used to raise the needed amount.
Critical
Accounting Policies and Estimates
The
application of accounting policies and standards often requires the use of
estimates, assumptions and judgments. Changes in these variables may lead to
significantly different financial statement results. Our critical accounting
policies are set forth below.
Regulatory
Accounting
We
maintain our books and records in accordance with accounting principles
generally accepted in the United States of America. Middlesex and
certain of its subsidiaries, which account for 90% of Operating Revenues and
98%
of Total Assets, are subject to regulation in the states in which they operate.
Those companies are required to maintain their accounts in accordance with
regulatory authorities’ rules and guidelines, which may differ from other
authoritative accounting pronouncements. In those instances, the Company follows
the
guidance
provided in the Financial Accounting Standards Board (FASB), Statement of
Financial Accounting Standards (SFAS) No. 71, “Accounting For the Effects of
Certain Types of Regulation” (SFAS 71).
In
accordance with SFAS No. 71, costs and obligations are deferred if it is
probable that these items will be recognized for rate-making purposes in future
rates. Accordingly, we have recorded costs and obligations, which will be
amortized over various future periods. Any change in the assessment of the
probability of rate-making treatment will require us to change the accounting
treatment of the deferred item. We have no reason to believe any of the deferred
items that are recorded would be treated differently by the regulators in the
future.
Revenues
Revenues
from metered customers include amounts billed on a cycle basis and unbilled
amounts estimated from the last meter reading date to the end of the accounting
period. The estimated unbilled amounts are determined by utilizing factors
which
include historical consumption usage and current climate conditions. Differences
between estimated revenues and actual billings are recorded in a subsequent
period.
Revenues
from unmetered customers are billed at a fixed tariff rate in advance at the
beginning of each service period and are recognized in revenue ratably over
the
service period.
Revenues
from the Perth Amboy management contract are comprised of fixed and variable
fees. Fixed fees, which have been set for the life of the contract, are billed
monthly and recorded as earned. Variable fees, which are based on billings
and
other factors and are not significant, are recorded upon approval of the amount
by Perth Amboy.
Pension
Plan
We
maintain a noncontributory defined benefit pension plan which covers
substantially all employees with more than 1,000 hours of service and who were
hired prior to March 31, 2007.
The
discount rate utilized for determining future pension obligations has increased
from 5.52% at December 31, 2005 to 5.89% at December 31, 2006 and increased
to
6.59% at December 31, 2007. Lowering the discount rate by 0.5% would have
increased the net periodic pension cost by $1.3 million in 2007. Lowering the
expected long-term rate of return on the pension plans by 0.5% (from 8.0% to
7.5%) would have increased the net periodic pension cost in 2007 by
approximately $1.1 million.
The
discount rate for determining future pension obligations is determined based
on
market rates for long-term, high-quality corporate bonds at our December 31
measurement date. The expected long-term rate of return for pension assets
is
determined based on historical returns and our asset allocation.
Future
pension expense will depend on future investment performance, changes in future
discount rates and various other demographic factors related to the population
participating in the pension plan.
Recent
Accounting Standards
See
Note
1(m) of the Notes to Consolidated Financial Statements for a discussion of
recent accounting pronouncements.
|
Item
7A.
|
Qualitative
and Quantitative Disclosures About Market
Risk.
|
The
Company is subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rates through
the use of fixed rate long-term debt and, to a lesser extent, short-term
debt. The Company’s interest rate risk related to existing fixed
rate, long-term debt is not material due to the term of the majority of our
First Mortgage Bonds, which have final maturity dates ranging from 2009 to
2038. Over the next twelve months, approximately $2.7 million of the
current portion of 18 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 our earnings.
|
Item
8.
|
Financial
Statements and Supplementary Data.
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of Middlesex Water Company
We
have
audited the accompanying consolidated balance sheets and consolidated statements
of capital stock and long-term debt of Middlesex Water Company and subsidiaries
(the Company) as of December 31, 2007 and 2006, and the related consolidated
statements of income, stockholders' equity and comprehensive income, and
cash
flows for the years then ended. The Company's management is
responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated 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, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of the Company as of December
31, 2007 and 2006, and the results of its operations and its cash flows for
the
years then ended in conformity with accounting principles generally accepted
in
the United States of America.
As
discussed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for defined benefit pension and other
postretirement plans in 2006.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Middlesex Water Company’s internal
control over financial reporting as of December 31, 2007, based on
criteria established in
Internal Control – Integral
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 10, 2008 expressed
an
unqualified opinion.
/s/
Beard
Miller Company LLP
Beard
Miller Company LLP
Reading
Pennsylvania
March
10,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of Middlesex Water Company:
We
have
audited the consolidated statements of income, common stockholders' equity
and
comprehensive income, and cash flows of Middlesex Water Company and subsidiaries
(the “Company”) for the year ended December 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
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, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all material
respects, the results of their operations and their cash flows for the year
ended December 31, 2005 of the Company, in conformity with accounting principles
generally accepted in the United States of America.
/s/
DELOITTE & TOUCHE LLP
Parsippany,
New Jersey
March
16,
2006
MIDDLESEX
WATER COMPANY
CONSOLIDATED BALANCE
SHEETS
(In
thousands)
See
Notes
to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands except per share amounts)
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Operating
Revenues
|
$ | 86,114 | $ | 81,061 | $ | 74,613 | ||||||
|
Operating
Expenses:
|
||||||||||||
|
Operations
|
42,117 | 39,799 | 38,636 | |||||||||
|
Maintenance
|
4,123 | 3,546 | 3,520 | |||||||||
|
Depreciation
|
7,539 | 7,060 | 6,460 | |||||||||
|
Other
Taxes
|
9,664 | 9,338 | 8,779 | |||||||||
|
Total
Operating Expenses
|
63,443 | 59,743 | 57,395 | |||||||||
|
Operating
Income
|
22,671 | 21,318 | 17,218 | |||||||||
|
Other
Income (Expense):
|
||||||||||||
|
Allowance
for Funds Used During Construction
|
537 | 632 | 548 | |||||||||
|
Other
Income
|
1,153 | 160 | 220 | |||||||||
|
Other
Expense
|
(163 | ) | (18 | ) | (28 | ) | ||||||
|
Total
Other Income, net
|
1,527 | 774 | 740 | |||||||||
|
Interest
Charges
|
6,619 | 7,012 | 6,245 | |||||||||
|
Income
before Income Taxes
|
17,579 | 15,080 | 11,713 | |||||||||
|
Income
Taxes
|
5,736 | 5,041 | 3,237 | |||||||||
|
Net
Income
|
11,843 | 10,039 | 8,476 | |||||||||
|
Preferred
Stock Dividend Requirements
|
248 | 248 | 251 | |||||||||
|
Earnings
Applicable to Common Stock
|
$ | 11,595 | $ | 9,791 | $ | 8,225 | ||||||
|
Earnings
per share of Common Stock:
|
||||||||||||
|
Basic
|
$ | 0.88 | $ | 0.83 | $ | 0.72 | ||||||
|
Diluted
|
$ | 0.87 | $ | 0.82 | $ | 0.71 | ||||||
|
Average
Number of
|
||||||||||||
|
Common
Shares Outstanding :
|
||||||||||||
|
Basic
|
13,203 | 11,844 | 11,445 | |||||||||
|
Diluted
|
13,534 | 12,175 | 11,784 | |||||||||
|
Cash
Dividends Paid per Common Share
|
$ | 0.693 | $ | 0.683 | $ | 0.673 | ||||||
See
Notes
to Consolidated Financial Statements.
MIDDLESEX
WATER COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
See
Notes
to Consolidated Financial Statements.
MIDDLESEX
WATER COMPANY
CONSOLIDATED
STATEMENTS OF CAPITAL STOCK
AND
LONG-TERM DEBT
(In
thousands)
|
December 31,
|
December 31,
|
|||||||
|
2007
|
2006
|
|||||||
|
Common
Stock, No Par Value
|
||||||||
|
Shares
Authorized -
40,000
|
||||||||
|
Shares
Outstanding -
2007
- 13,246
|
|
$ | 105,668 | $ | 104,248 | |||
|
2006
- 13,168
|
||||||||
|
Retained
Earnings
|
27,441 | 25,001 | ||||||
|
Accumulated
Other Comprehensive Income, net of tax
|
69 | 94 | ||||||
|
TOTAL
COMMON EQUITY
|
$ | 133,178 | $ | 129,343 | ||||
|
Cumulative
Preference Stock, No Par Value:
|
||||||||
|
Shares
Authorized -100
|
||||||||
|
Shares
Outstanding - None
|
||||||||
|
Cumulative
Preferred Stock, No Par Value:
|
||||||||
|
Shares
Authorized -139
|
||||||||
|
Shares
Outstanding -37
|
||||||||
|
Convertible:
|
||||||||
|
Shares
Outstanding, $7.00 Series - 14
|
1,457 | 1,457 | ||||||
|
Shares
Outstanding, $8.00 Series - 12
|
1,399 | 1,399 | ||||||
|
Nonredeemable:
|
||||||||
|
Shares
Outstanding, $7.00 Series - 1
|
102 | 102 | ||||||
|
Shares
Outstanding, $4.75 Series - 10
|
1,000 | 1,000 | ||||||
|
TOTAL
PREFERRED STOCK
|
$ | 3,958 | $ | 3,958 | ||||
|
Long-term
Debt:
|
||||||||
|
8.05%,
Amortizing Secured Note, due December 20, 2021
|
$ | 2,800 | $ | 2,896 | ||||
|
6.25%,
Amortizing Secured Note, due May 22, 2028
|
8,575 | 8,995 | ||||||
|
6.44%,
Amortizing Secured Note, due August 25, 2030
|
6,347 | 6,627 | ||||||
|
6.46%,
Amortizing Secured Note, due September 19, 2031
|
6,627 | 6,907 | ||||||
|
4.22%,
State Revolving Trust Note, due December 31, 2022
|
691 | 739 | ||||||
|
3.30%
to 3.60%, State Revolving Trust Note, due May 1, 2025
|
3,168 | 3,100 | ||||||
|
3.49%,
State Revolving Trust Note, due January 25, 2027
|
603 | 598 | ||||||
|
4.03%,
State Revolving Trust Note, due December 1, 2026
|
974 | 914 | ||||||
|
4.00%
to 5.00%, State Revolving Trust Bond, due September 1,
2021
|
695 | 730 | ||||||
|
0.00%,
State Revolving Fund Bond, due September 1, 2021
|
538 | 577 | ||||||
|
First
Mortgage Bonds:
|
||||||||
|
5.20%,
Series S, due October 1, 2022
|
12,000 | 12,000 | ||||||
|
5.25%,
Series T, due October 1, 2023
|
6,500 | 6,500 | ||||||
|
6.40%,
Series U, due February 1, 2009
|
15,000 | 15,000 | ||||||
|
5.25%,
Series V, due February 1, 2029
|
10,000 | 10,000 | ||||||
|
5.35%,
Series W, due February 1, 2038
|
23,000 | 23,000 | ||||||
|
0.00%,
Series X, due September 1, 2018
|
591 | 647 | ||||||
|
4.25%
to 4.63%, Series Y, due September 1, 2018
|
765 | 820 | ||||||
|
0.00%,
Series Z, due September 1, 2019
|
1,342 | 1,455 | ||||||
|
5.25%
to 5.75%, Series AA, due September 1, 2019
|
1,785 | 1,890 | ||||||
|
0.00%,
Series BB, due September 1, 2021
|
1,685 | 1,805 | ||||||
|
4.00%
to 5.00%, Series CC, due September 1, 2021
|
1,995 | 2,090 | ||||||
|
5.10%,
Series DD, due January 1, 2032
|
6,000 | 6,000 | ||||||
|
0.00%,
Series EE, due September 1, 2024
|
7,112 | 7,482 | ||||||
|
3.00%
to 5.50%, Series FF, due September 1, 2024
|
8,385 | 8,735 | ||||||
|
0.00%,
Series GG, due August 1, 2026
|
1,710 | 1,750 | ||||||
|
4.00%
to 5.00%, Series HH, due August 1, 2026
|
1,950 | 1,950 | ||||||
|
0.00%,
Series II, due August 1, 2027
|
1,750 | - | ||||||
|
3.40%
to 5.00%, Series JJ, due August 1, 2027
|
1,750 | - | ||||||
|
SUBTOTAL
LONG-TERM DEBT
|
134,338 | 133,207 | ||||||
|
Less:
Current Portion of Long-term Debt
|
(2,723 | ) | (2,501 | ) | ||||
|
TOTAL
LONG-TERM DEBT
|
$ | 131,615 | $ | 130,706 | ||||
See
Notes
to Consolidated Financial Statements.
MIDDLESEX
WATER COMPANY
CONSOLIDATED
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(in
thousands)
|
Accumulated
|
||||||||||||||||||||
|
Common
|
Common
|
Other
|
||||||||||||||||||
|
Stock
|
Stock
|
Retained
|
Comprehensive
|
|||||||||||||||||
|
Shares
|
Amount
|
Earnings
|
Income
(Loss)
|
Total
|
||||||||||||||||
|
Balance
at January 1, 2005
|
11,358 | $ | 71,980 | $ | 23,103 | $ | 45 | $ | 95,128 | |||||||||||
|
Net
Income
|
8,476 | 8,476 | ||||||||||||||||||
|
Minimum
Pension Liability, Net of $135 Income Tax
|
(262 | ) | (262 | ) | ||||||||||||||||
|
Change
in Value of Equity Investments, Net of $5 Income Tax
|
10 | 10 | ||||||||||||||||||
|
Comprehensive
Income
|
8,224 | |||||||||||||||||||
|
Dividend
Reinvestment & Common Stock Purchase Plan
|
195 | 3,640 | 3,640 | |||||||||||||||||
|
Restricted
Stock Award - Net
|
19 | 436 | 436 | |||||||||||||||||
|
Preferred
Stock Conversion
|
12 | 105 | 105 | |||||||||||||||||
|
Cash
Dividends on Common Stock
|
(7,690 | ) | (7,690 | ) | ||||||||||||||||
|
Cash
Dividends on Preferred Stock
|
(251 | ) | (251 | ) | ||||||||||||||||
|
|
||||||||||||||||||||
|
Balance
at December 31, 2005
|
11,584 | 76,161 | 23,638 | (207 | ) | 99,592 | ||||||||||||||
|
Net
Income
|
10,039 | 10,039 | ||||||||||||||||||
|
Minimum
Pension Liability, Net of $135 Income Tax
|
262 | 262 | ||||||||||||||||||
|
Change
in Value of Equity Investments, Net of $20 Income Tax
|
39 | 39 | ||||||||||||||||||
|
Comprehensive
Income
|
10,340 | |||||||||||||||||||
|
Dividend
Reinvestment & Common Stock Purchase Plan
|
70 | 1,321 | 1,321 | |||||||||||||||||
|
Restricted
Stock Award - Net
|
19 | 275 | 275 | |||||||||||||||||
|
Issuance
of Common Stock
|
1,495 | 26,491 | 26,491 | |||||||||||||||||
|
Cash
Dividends on Common Stock
|
(8,190 | ) | (8,190 | ) | ||||||||||||||||
|
Cash
Dividends on Preferred Stock
|
(248 | ) | (248 | ) | ||||||||||||||||
|
Common
Stock Expenses
|
(238 | ) | (238 | ) | ||||||||||||||||
|
Balance
at December 31, 2006
|
13,168 | 104,248 | 25,001 | 94 | 129,343 | |||||||||||||||
|
Net
Income
|
11,843 | 11,843 | ||||||||||||||||||
|
Change
in Value of Equity Investments, Net of $13 Income Tax
|
(25 | ) | (25 | ) | ||||||||||||||||
|
Comprehensive
Income
|
11,818 | |||||||||||||||||||
|
Dividend
Reinvestment & Common Stock Purchase Plan
|
61 | 1,147 | 1,147 | |||||||||||||||||
|
Restricted
Stock Award - Net
|
17 | 273 | 273 | |||||||||||||||||
|
Cash
Dividends on Common Stock
|
(9,141 | ) | (9,141 | ) | ||||||||||||||||
|
Cash
Dividends on Preferred Stock
|
(248 | ) | (248 | ) | ||||||||||||||||
|
Common
Stock Expenses
|
(15 | ) | (15 | ) | ||||||||||||||||
|
Other
|
1 | 1 | ||||||||||||||||||
|
Balance
at December 31, 2007
|
13,246 | $ | 105,668 | $ | 27,441 | $ | 69 | $ | 133,178 | |||||||||||
See
Notes
to Consolidated Financial Statements.
Middlesex
Water Company
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), Tidewater Environmental Services, Inc.
(TESI), Pinelands Water Company (Pinelands Water) and Pinelands Wastewater
Company (Pinelands Wastewater) (collectively, Pinelands), Utility Service
Affiliates, Inc. (USA) and Utility Service Affiliates (Perth Amboy) Inc.
(USA-PA). Southern Shores Water Company, LLC (Southern Shores) and
White Marsh Environmental Systems, Inc. (White Marsh), are wholly-owned
subsidiaries of Tidewater. The financial statements for Middlesex and its
wholly-owned subsidiaries (the Company) are reported on a consolidated basis.
All significant intercompany accounts and transactions have been
eliminated.
Middlesex
Water Company has operated as a water utility in New Jersey since 1897, and
in
Delaware, through our wholly-owned subsidiary, Tidewater, since
1992. We are in the business of collecting, treating, distributing
and selling water for domestic, commercial, municipal, industrial and fire
protection purposes. We also operate a New Jersey municipal water and wastewater
system under contract and provide wastewater services in New Jersey and Delaware
through our subsidiaries. We are regulated as to rates charged to customers
for
water and wastewater services in New Jersey and Delaware, as to the quality
of
services we provide and as to certain other matters. Only our USA, USA-PA and
White Marsh subsidiaries are not regulated utilities.
Certain
reclassifications have been made to the prior year financial
statements to conform with current period presentation.
(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, TESI and Southern Shores
maintain their accounts in accordance with the Public Service Commission of
Delaware (PSC) requirements.
(c)
Utility Plant is stated at
original cost as defined for regulatory purposes. Property accounts are charged
with the cost of betterments and major replacements of property. Cost includes
direct material, labor and indirect charges for pension benefits and payroll
taxes. The cost of labor, materials, supervision and other expenses incurred
in
making repairs and minor replacements and in maintaining the properties is
charged to the appropriate expense accounts. At December 31, 2007, there was
no
event or change in circumstance that would indicate that the carrying amount
of
any long-lived asset was not recoverable.
(d)
Depreciation is computed
by each regulated member of the Company utilizing a rate approved by the
applicable regulatory authority. The Accumulated Provision for Depreciation
is
charged with the cost of property retired, less salvage. The
following table sets forth the range of depreciation rates for the major utility
plant categories used to calculate depreciation for the years ended December
31,
2007, 2006 and 2005. These rates have been approved by either the BPU or
PSC:
|
Source
of Supply
|
1.15%
- 3.44%
|
Transmission
and Distribution (T&D):
|
|
|
Pumping
|
2.87%
- 5.04%
|
T&D
– Mains
|
1.10%
- 3.13%
|
|
Water
Treatment
|
2.71%
- 7.64%
|
T&D
– Services
|
2.12%
- 2.81%
|
|
General
Plant
|
2.08%
- 17.84%
|
T&D
– Other
|
1.61%
- 4.63%
|
Non-regulated
fixed assets consist primarily of an office building, furniture and fixtures,
and transportation equipment. These assets are recorded at original cost and
depreciation is calculated based on the estimated useful lives, ranging from
3
to 40 years.
(e)
Customers’
Advances
for
Construction
–
Water
utility plant and/or cash advances are contributed to the Company by customers,
real estate developers and builders in order to extend water service to their
properties. These contributions are recorded as Customers’
Advances for Construction. Refunds on these advances are made by the Company
in
accordance with agreements with the contributing party and are based on either
additional operating revenues related to the utility plant or as new customers
are connected to and take service from the utility plant. After all
refunds are made, any remaining balance is transferred to Contributions in
Aid
of Construction.
Contributions
in Aid of Construction – Contributions in Aid of Construction include direct
non-refundable contributions of water utility plant and/or cash and the portion
of Customers’ Advances for Construction that become non-refundable.
Advances
and Contributions are not depreciated in accordance with BPU and PSC
requirements. In addition, these amounts reduce the investment base
for purposes of setting rates.
(f)
Allowance for Funds Used
During Construction (AFUDC) - Middlesex and its regulated subsidiaries
capitalize AFUDC, which represents the cost of financing projects during
construction. AFUDC is added to the construction costs of individual projects
exceeding specific cost and construction period thresholds established for
each
company and then depreciated along with the rest of the utility plant’s costs
over its estimated useful life. For the years ended December 31, 2007, 2006
and
2005 approximately $0.5 million, $0.6 million and $0.5 million, respectively
of
AFUDC was added to the cost of construction projects. AFUDC is
calculated using each company’s weighted cost of debt and equity as approved in
their most recent respective regulatory rate order. The average AFUDC rate
for
the years ended December 31, 2007, 2006 and 2005 for Middlesex and Tidewater
were 7.45% and 7.94%, respectively.
(g)
Accounts Receivable – We
record bad debt expense based on historical write-offs. The allowance for
doubtful accounts was $0.3 million at December 31, 2007, $0.3 million at
December 31, 2006, and $0.2 million at December 31, 2005. The corresponding
expense for the year ended December 31, 2007, 2006 and 2005 was $0.1 million,
$0.3 million and $0.2 million, respectively.
(h)
Revenues - General metered
customer’s bills for regulated water service are typically comprised of two
components; a fixed service charge and a volumetric or consumption charge.
Revenues from general metered service water customers, except Tidewater, include
amounts billed in arrears on a cycle basis and unbilled amounts estimated from
the last meter reading date to the end of the accounting period. The estimated
unbilled amounts are determined by utilizing factors which include historical
consumption usage and current climate conditions. Actual billings may differ
from our estimates. Revenues are adjusted in the period that the difference
is
identified. Tidewater customers are billed in advance for their fixed service
charge and these revenues are recognized as the service is provided to the
customer.
Southern
Shores is an unmetered system. Customers are billed a fixed service charge
in
advance at the beginning of each month and revenues are recognized as
earned. Revenues from the City of Perth Amboy management contract are
comprised of fixed and variable fees. Fixed fees, which have been set for the
life of the contract, are billed monthly and recorded as earned. Variable fees,
which are not significant, are recorded upon approval of the amount by the
City
of Perth Amboy.
USA
bills
customers on a quarterly or annual basis for its LineCare
SM
service
line maintenance program. Quarterly amounts billed are recognized as earned.
Amounts that are billed on an annual basis are deferred and recognized as
revenue ratably over the year.
(i)
Deferred Charges and Other
Assets - Unamortized Debt Expense is amortized over the lives of the related
issues. Restricted Cash represents proceeds from loans entered into through
state financing programs and is held in trusts. The proceeds are restricted
for
specific capital expenditures and debt service requirements.
(j)
Income Taxes - Middlesex
files a consolidated federal income tax return for the Company and income taxes
are allocated based on the separate return method. Investment tax
credits have been deferred and are amortized over the estimated useful life
of
the related property.
(k)
Statements of Cash Flows -
For purposes of reporting cash flows, the Company considers all highly liquid
investments with original maturity dates of three months or less to be cash
equivalents. Cash and cash equivalents represent bank balances and money market
funds with investments maturing in less than 90 days.
(l)
Use of Estimates -
Conformity with accounting principles generally accepted in the United States
of
America requires management to make estimates and assumptions that affect the
reported amounts in the financial statements. Actual results could
differ from those estimates.
(m)
Recent Accounting
Pronouncements – In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS 157, Fair Value Measurements, which establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. In February
2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB
Statement No. 157, which deferred the effective date of SFAS 157 to fiscal
years
beginning after November 15, 2008 for nonfinancial assets and nonfinancial
liabilities. The Company does not expect that the adoption of SFAS
157 will have a material impact on its financial
statements.
In
February 2007, the FASB issued FSP FAS 158-1, “Conforming Amendments
to the Illustrations in FASB Statements No. 87, No. 88, and No 106 and
to the Related Staff Implementation Guides.” This FSP makes conforming
amendments to other FASB statements and staff implementation guides and provides
technical corrections to SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans.” The conforming amendments in
this FSP did not have a material impact on the Company
’
s consolidated
financial statements or disclosures.
FASB
statement No. 141 (R) “Business Combinations” was issued in December of 2007.
This Statement establishes principles and requirements for how the acquirer
of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in
the
acquiree. The Statement also provides guidance for recognizing and measuring
the
goodwill acquired in the business combination and determines what information
to
disclose to enable users of the financial statements to evaluate the nature
and
financial effects of the business combination. The guidance will become
effective as of the beginning of a company’s fiscal year beginning after
December 15, 2008. This new pronouncement will impact the Company’s accounting
for business combinations completed beginning January 1, 2009.
In
May
2007, the FASB issued FSP FIN 48-1 “Definition of Settlement in FASB
Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to
determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective
retroactively to January 1, 2007. The implementation of this standard did not
have a material impact on our consolidated financial position or results of
operations.
In
July
2006, the FASB issued FASB Interpretation No. 48 (FIN 48) “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,”
to clarify certain aspects of accounting for uncertain tax
positions,
including recognition and measurement of those tax positions. This
interpretation is effective for fiscal years beginning after December 15,
2006. The adoption of this interpretation did not materially impact the
Company’s results of operations and financial condition.
(n)
Other Comprehensive Income
– Total comprehensive income includes changes in equity that are excluded from
the consolidated statements of income and are recorded into a separate section
of capitalization on the consolidated balance sheets. The Company’s accumulated
other comprehensive income shown on the consolidated balance sheets consists
of
unrealized gains on investment holdings.
(o)
Regulatory Accounting - We
maintain our books and records in accordance with accounting principles
generally accepted in the United States of America. Middlesex and
certain of its subsidiaries, which account for 90% of Operating Revenues and
98%
of Total Assets, are subject to regulation in the state in which they operate.
Those companies are required to maintain their accounts in accordance with
regulatory authorities’ rules and guidelines, which may differ from other
authoritative accounting pronouncements. In those instances, the
Company follows the guidance provided in SFAS No. 71, “Accounting for the
Effects of Certain Types of Regulation.”
(p)
Pension Plan - We maintain
a noncontributory defined benefit pension plan which covers substantially all
employees with more than 1,000 hours of service, and who were hired as of March
31, 2007. The discount rate utilized for determining pension costs decreased
from 5.88% for the year ended December 31, 2005 to 5.52% for the year ended
December 31, 2006 and increased to 5.89% for the year ended December 31, 2007.
Future
actual
pension expense will depend on future investment performance, changes in future
discount rates and various other factors related to the population participating
in the pension plans.
Note
2 - Rate and Regulatory Matters
Effective
October 26, 2007, Middlesex received approval from the New Jersey Board of
Public Utilities (BPU) for a 9.1%, or $5.0 million increase in its base water
rates. The increase was predicated on a rate base of $164.4 million
and an authorized return on equity of 10.0%. Middlesex had originally
filed for an $8.9 million or 16.5% base rate increase with the BPU on April
18,
2007. The rate increase is intended to recover increased costs of
operations, maintenance, labor and benefits, purchased power, purchased water
and taxes, as well as capital investment of approximately $23.0 million since
June 2005.
On
April
28, 2006, Tidewater filed for a $5.5 million, or 38.6%, base rate increase
with
the Delaware Public Service Commission (PSC). The request is intended to recover
increased costs of operations, maintenance and taxes, as well as capital
investment of approximately $23.8 million since rates were last established
in
March 2005. Since June 27, 2006, Tidewater has been billing and recognizing
additional revenues through a 15% interim rate increase subject to refund as
allowed under PSC regulations. A settlement was reached amongst the parties
which concluded that a 26.9% overall increase in base rates would be
implemented. The PSC approved the settlement and the remaining 11.9%
increase was put into effect on February 28, 2007.
Effective
April 13, 2006, Pinelands Water and Pinelands Wastewater received approval
from
the New Jersey Board of Public Utilities (BPU) for base rate increases of 7.02%
and 0.98%, respectively. These increases represent a total base rate increase
of
approximately $0.1 million for Pinelands to offset increased costs associated
with capital improvements, and the operation and maintenance of their
systems.
In
accordance with the tariff established for Southern Shores, an annual rate
increase of 3% was implemented on January 1, 2008. Under the terms of
a contract with Southern Shores Homeowners Association, the increase cannot
exceed the lesser of the regional Consumer Price Index or 3%.
We
have
recorded certain costs as regulatory assets because we expect full recovery
of,
or are currently recovering, these costs in the rates we charge customers.
These
deferred costs have been excluded from rate base and, therefore, we are not
earning a return on the unamortized balances. These items are
detailed as follows:
|
(Thousands
of Dollars)
|
|||||||||
|
December
31,
|
|||||||||
|
Regulatory
Assets
|
2007
|
2006
|
Remaining
Recovery
Periods
|
||||||
|
Postretirement
Benefits
|
$ | 7,279 | $ | 11,130 |
Various
|
||||
|
Income
Taxes
|
8,222 | 6,813 |
Various
|
||||||
|
Tank
Painting
|
225 | 275 |
3-8
years
|
||||||
|
Rate
Cases and Other
|
364 | 124 |
Up
to 2 years
|
||||||
|
Total
|
$ | 16,090 | $ | 18,342 | |||||
Postretirement
benefits include pension and other postretirement benefits that have been
recorded on the Consolidated Balance Sheet upon adoption of SFAS 158. These
amounts represent obligations in excess of current funding, which the Company
believes will be fully recovered in rates set by the regulatory
authorities.
The
recovery period for income taxes is dependent upon when the temporary
differences between the tax and book treatment of various items
reverse.
The
Company uses composite depreciation rates for its regulated utility assets,
which is currently an acceptable method under generally accepted accounting
principles and is widely used in the utility industry. Historically, under
the
composite depreciation method, the anticipated costs of removing assets upon
retirement are provided for over the life of those assets as a component of
depreciation expense. The Company recovers certain asset retirement costs
through rates charged to customers as an approved component of depreciation
expense. As of December 31, 2007 and 2006, the Company has approximately $5.7
million and $6.2 million, respectively, of expected costs of removal recovered
currently in rates in excess of actual costs incurred. These amounts are
recorded as regulatory liabilities.
The
Company is recovering in current rates acquisition premiums totaling $0.8
million over the remaining lives of the underlying Utility Plant. These deferred
costs have been included in rate base as utility plant and a return is being
earned on the unamortized balances during the recovery periods.
Note
3 - Income Taxes
Income
tax expense differs from the amount computed by applying the statutory rate
on
book income subject to tax for the following reasons:
|
Years
Ended December 31,
|
||||||||||||
|
(Thousands
of Dollars)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Income
Tax at Statutory Rate
|
$ | 6,021 | $ | 5,155 | $ | 3,982 | ||||||
|
Tax
Effect of:
|
||||||||||||
|
Utility
Plant Related
|
(595 | ) | (338 | ) | (899 | ) | ||||||
|
State
Income Taxes – Net
|
350 | 257 | 176 | |||||||||
|
Employee
Benefits
|
(49 | ) | (48 | ) | (25 | ) | ||||||
|
Other
|
9 | 15 | 3 | |||||||||
|
Total
Income Tax Expense
|
$ | 5,736 | $ | 5,041 | $ | 3,237 | ||||||
Income
tax expense is comprised of the following:
|
Current:
|
||||||||||||
|
Federal
|
$ | 4,894 | $ | 3,846 | $ | 2,889 | ||||||
|
State
|
413 | 298 | 183 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
634 | 884 | 160 | |||||||||
|
State
|
117 | 92 | 84 | |||||||||
|
Investment
Tax Credits
|
(322 | ) | (79 | ) | (79 | ) | ||||||
|
Total
Income Tax Expense
|
$ | 5,736 | $ | 5,041 | $ | 3,237 | ||||||
The
statutory review period for income tax returns for the years prior to 2004
has
been closed. Federal income tax returns for 2005 and 2006 are
currently under review by the Internal Revenue Service. Although the
review is still in process, no material adjustments have been proposed by the
examiner. In the event that there are interest and penalties
associated with income tax adjustments, these amounts would be reported under
interest expense and other expense, respectively.
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:
|
December
31,
|
||||||||
|
(Thousands
of Dollars)
|
||||||||
|
2007
|
2006
|
|||||||
|
Utility
Plant Related
|
$ | 24,892 | $ | 23,656 | ||||
|
Customer
Advances
|
(4,117 | ) | (4,189 | ) | ||||
|
Employee
Benefits
|
(2,544 | ) | (3,515 | ) | ||||
|
Other
|
(291 | ) | (173 | ) | ||||
|
Total
Deferred Tax Liability
|
$ | 17,940 | $ | 15,779 | ||||
Note
4 - Commitments and Contingent Liabilities
Guarantees
-
USA-PA operates
the City of Perth Amboy’s (Perth Amboy) water and wastewater systems under a
service contract agreement through June 30, 2018. The agreement was effected
under New Jersey’s Water Supply Public/Private Contracting Act and the New
Jersey Wastewater Public/Private Contracting Act. Under the
agreement, USA-PA receives a fixed fee and a variable fee based on increased
system billing. Scheduled fixed fee payments for 2007, 2006 and 2005 were $7.8
million, $7.6 million and $7.4 million, respectively. The fixed fees
will increase over the term of the contract to $10.2 million.
In
connection with the agreement, Perth Amboy, through the Middlesex County
Improvement Authority, issued approximately $68.0 million in three series of
bonds. Middlesex guaranteed one of those series of bonds, designated the Series
C Serial Bonds, in the principal amount of approximately $26.3 million. Perth
Amboy guaranteed the two other series of bonds. The Series C Serial Bonds have
various maturity dates with the final maturity date on September 1, 2015. As
of
December 31, 2007, approximately $22.6 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 through November 30, 2023, which provides for an average
purchase of 27 million gallons a day (mgd). Pricing is set annually by the
NJWSA
through a public rate making process. The agreement has provisions for
additional pricing in the event Middlesex overdrafts or exceeds certain monthly
and annual thresholds.
Middlesex
also has an agreement with a non-affiliated regulated water utility for the
purchase of treated water. This agreement, which expires February 27, 2011,
provides for the minimum purchase of 3 mgd of treated water with provisions
for
additional purchases.
Purchased
water costs are shown below:
|
(Millions
of Dollars)
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
Purchased
Water
|
2007
|
2006
|
2005
|
|||||||||
|
Untreated
|
$ | 2.4 | $ | 2.3 | $ | 2.3 | ||||||
|
Treated
|
2.1 | 1.9 | 1.9 | |||||||||
|
Total
Costs
|
$ | 4.5 | $ | 4.2 | $ | 4.2 | ||||||
Construction
–The
Company may
spend up to $36.9 million in 2008, $76.9 million in 2009 and $44.9 million
in
2010 on its construction program.
The
development of these estimates is based in part upon projected housing
development and sales in Delaware.
Litigation
–
In
July 2005,
Tidewater received a notice of violation and request for corrective action
issued by the Delaware State Fire Marshal regarding the alleged failure of
one
of the community water systems operated by Tidewater to meet Delaware fire
protection requirements. Tidewater appealed the Fire Marshal’s
decision with the Delaware State Fire Prevention Commission (the “SFPC”) and, in
November 2005, the SFPC denied Tidewater’s appeal. In October 2007,
Tidewater agreed to dismiss its appeal of the SFPC’s decision with the Sussex
County Superior Court in Delaware of the notice of violation and request for
corrective action issued by the Fire Marshal. In return for the
dismissal both parties have agreed that 15 of the original 67 community water
systems previously identified will require certain modifications over a ten-year
period in order to provide full fire protection. The expected capital investment
to comply with the settlement is $12.0 to $14.0 million and will be expended
ratably over the ten-year period. We will apply to the PSC to
increase base rates to recover the costs of any such modifications. Although
these types of modifications have routinely been included in previous rate
matters, the PSC may not approve a portion or all of the costs associated with
the fire protection upgrades.
Change
in Control Agreements
–
The Company has Change in Control Agreements with certain of its officers
that
provide compensation and benefits in the event of termination of employment
in
connection with a change in control of the Company.
Note
5 – Short-term Borrowings
Information
regarding the Company’s short-term borrowings for the years ended December 31,
2007 and 2006 is summarized below:
|
(Millions
of Dollars)
|
||||||||
|
2007
|
2006
|
|||||||
|
Established
Lines at Year-End
|
$ | 40.0 | $ | 37.0 | ||||
|
Maximum
Amount Outstanding
|
6.6 | 18.2 | ||||||
|
Average
Outstanding
|
2.6 | 9.5 | ||||||
|
Notes
Payable at Year-End
|
6.3 |
None
|
||||||
|
Weighted
Average Interest Rate
|
6.36 | % | 6.13 | % | ||||
|
Weighted
Average Interest Rate at Year-End
|
5.79 | % |
None
|
|||||
The
maturity date for the $6.3 million borrowing, with an interest rate of 5.79%,
outstanding as of December 31, 2007 was January 7, 2008.
Interest
rates for short-term borrowings are below the prime rate with no requirement
for
compensating balances.
Note
6 - Capitalization
All
the
transactions discussed below related to the issuance of securities were approved
by either the BPU or PSC, except where otherwise noted.
Common
Stock
In
June
2007, the number of shares authorized under the Dividend Reinvestment and Common
Stock Purchase Plan (DRP) increased from 1,700,000 shares to 2,300,000
shares. The cumulative number of shares issued under the DRP at
December 31, 2007, is 1,642,877. The Company also has shares authorized and
outstanding under a restricted stock plan, which is described in Note 7 –
Employee Benefit Plans.
In
November 2006, the Company sold and issued 1,495,000 shares of its common stock
in a public offering that was priced at $18.46. The majority of the net proceeds
of approximately $26.2 million were used to repay all of the Company’s
short-term borrowings outstanding at that time. Remaining proceeds
from the public offering were used to fund a portion of the 2007 capital
program.
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,
2007, no preferred stock dividends were in arrears.
Preferred
Stock
If
four
or more quarterly dividends are in arrears, the preferred shareholders, as
a
class, are entitled to elect two members to the Board of Directors in addition
to Directors elected by holders of the common stock. At December 31, 2007 and
2006, 36,898 shares of preferred stock presently authorized were outstanding
and
there were no dividends in arrears.
The
conversion feature of the no par $7.00 Series Cumulative and Convertible
Preferred Stock allows the security holders to exchange one convertible
preferred share for twelve shares of the Company's common stock. In
addition, the Company may redeem up to 10% of the outstanding convertible stock
in any calendar year at a price equal to the fair market value of twelve shares
of the Company's common stock for each share of convertible stock redeemed.
During September 2005, 1,000 shares of the no par $7.00 Series Cumulative and
Convertible Preferred Stock was converted into 12,000 of common
stock.
The
conversion feature of the no par $8.00 Series Cumulative and Convertible
Preferred Stock allows the security holders to exchange one convertible
preferred share for 13.714 shares of the Company's common stock. The
preferred shares are convertible into common stock at the election of the
security holder or Middlesex.
Long-term
Debt
In
December 2007, Tidewater closed on a $1.1 million loan with the Delaware State
Revolving Fund (SRF). This loan allows, but does not obligate,
Tidewater to draw down against a General Obligation Note for two specific
projects no later than July 31, 2008. The interest rate on any draw-down will
be
set at 3.64% with a final maturity of July 1, 2028 on the amount actually
borrowed.
In
November 2007, Middlesex issued $3.5 million of first mortgage bonds through
the
New Jersey Environmental Infrastructure Trust under the New Jersey SRF program.
The Company closed on the first mortgage bonds designated as Series II and
JJ on
November 8, 2007.
In
November 2006, Middlesex issued $3.7 million of first mortgage bonds through
the
New Jersey Environmental Infrastructure Trust under the New Jersey SRF program.
The Company closed on the first mortgage bonds designated as Series GG and
HH on
November 4, 2006.
In
May
2006, Tidewater closed on a $1.0 million loan with the Delaware State Revolving
Fund (SRF). The proceeds were used to fund capital improvements for
one specific community water system in Delaware. The interest rate on
the loan is 4.03% and will have a final maturity on December 1,
2026.
First
Mortgage Bonds Series S through W and Series DD are term bonds with single
maturity dates. With the exception of $15.0 million for repayment for the First
Mortgage Bond Series U due in 2009, principal repayments for the First Mortgage
Bonds extend beyond 2012. The aggregate annual principal repayment
obligations for all other long-term debt are shown below:
|
(Millions
of Dollars)
|
|
|
Year
|
Annual
Maturities
|
|
2008
|
$2.7
|
|
2009
|
$3.1
|
|
2010
|
$3.2
|
|
2011
|
$3.2
|
|
2012
|
$3.3
|
The
weighted average interest rate on all long-term debt at December 31, 2007 and
2006 was 5.20% and 5.28%, respectively. Except for the Amortizing Secured Notes
and Series U First Mortgage Bonds, all of the Company’s outstanding debt has
been issued through the New Jersey Economic Development Authority ($57.5
million), the New Jersey Environmental Infrastructure Trust program ($32.1
million) and the SRF program ($5.4 million).
Restricted
cash includes proceeds from the Series Y, AA, BB, CC, EE, FF, GG, HH, II and
JJ
First Mortgage Bonds and State Revolving Trust Bonds issuances. These funds
are
held in trusts and restricted for specific capital expenditures and debt service
requirements. Series GG and HH proceeds can only be used for the 2007 main
cleaning and cement lining program. Series II and JJ proceeds can only be used
for the 2008 main cleaning and cement lining program. All other bond
issuance balances in restricted cash are for debt service
requirements.
Substantially
all of the Utility Plant of the Company is subject to the lien of its mortgage,
which also includes debt service and capital ratio covenants, certain
restrictions as to cash dividend payments and other distributions on common
stock. The Company is in compliance with all of its mortgage covenants and
restrictions.
Earnings
Per Share
The
following table presents the calculation of basic and diluted earnings per
share
(EPS) for the three years ended December 31, 2007. Basic EPS is
computed on the basis of the weighted average number of shares
outstanding. Diluted EPS assumes the conversion of both the
Convertible Preferred Stock $7.00 Series and $8.00 Series.
|
(In
Thousands, Except per Share Amounts)
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Basic:
|
Income
|
Shares
|
Income
|
Shares
|
Income
|
Shares
|
||||||||||||||||||
|
Net
Income
|
$ | 11,843 | 13,203 | $ | 10,039 | 11,844 | $ | 8,476 | 11,445 | |||||||||||||||
|
Preferred
Dividend
|
(248 | ) | (248 | ) | (251 | ) | ||||||||||||||||||
|
Earnings
Applicable to Common Stock
|
$ | 11,595 | 13,203 | $ | 9,791 | 11,844 | $ | 8,225 | 11,445 | |||||||||||||||
|
Basic
EPS
|
$ | 0.88 | $ | 0.83 | $ | 0.72 | ||||||||||||||||||
|
Diluted:
|
||||||||||||||||||||||||
|
Earnings
Applicable to Common Stock
|
$ | 11,595 | 13,203 | $ | 9,791 | 11,844 | $ | 8,225 | 11,445 | |||||||||||||||
|
$7.00
Series Dividend
|
97 | 167 | 97 | 167 | 101 | 175 | ||||||||||||||||||
|
$8.00
Series Dividend
|
96 | 164 | 96 | 164 | 96 | 164 | ||||||||||||||||||
|
Adjusted
Earnings Applicable to Common Stock
|
$ | 11,788 | 13,534 | $ | 9,984 | 12,175 | $ | 8,422 | 11,784 | |||||||||||||||
|
Diluted
EPS
|
$ | 0.87 | $ | 0.82 | $ | 0.71 | ||||||||||||||||||
Fair
Value of Financial Instruments
The
following methods and assumptions were used by the Company in estimating its
fair value disclosure for financial instruments for which it is practicable
to
estimate that value. The carrying amounts reflected in the consolidated balance
sheets for cash and cash equivalents, marketable securities, and trade
receivables and payables approximate their respective fair values due to the
short-term maturities of these instruments. The fair value of the Company’s
long-term debt relating to first mortgage bonds is based on quoted market prices
for similar issues. The carrying amount and fair market value of the
Company’s bonds were as follows:
|
(Thousands
of Dollars)
|
||||||||||||||||
|
At
December 31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
|
First
Mortgage Bonds
|
$ | 103,322 | $ | 104,681 | $ | 101,124 | $ | 103,083 | ||||||||
|
State
Revolving Bonds
|
$ | 1,233 | $ | 1,272 | $ | 1,307 | $ | 1,340 | ||||||||
For
other
long-term debt for which there was no quoted market price, it was not
practicable to estimate their fair value. The carrying amount of these
instruments at December 31, 2007 and 2006 was $29.8 million and $30.8 million,
respectively. Customer advances for construction have a carrying amount of
$21.8
million and $19.2 million at December 31, 2007 and 2006, respectively. Their
relative fair values cannot be accurately estimated since future refund payments
depend on several variables, including new customer connections, customer
consumption levels and future rate increases.
Note
7 - Employee Benefit Plans
Pension
The
Company has a noncontributory defined benefit pension plan, which covers
substantially all employees with more than 1,000 hours of service. Employees
hired after March 31, 2007 are not eligible to participate in this plan, but
do
participate in a defined contribution plan that provides an annual contribution
at the discretion of the Company based upon a percentage of the participants’
compensation. In order to be eligible for an annual contribution, the eligible
employee must be employed by the Company on December 31
st
of the
year the award pertains to. In addition, the Company maintains an unfunded
supplemental pension plan for its executive officers. The Accumulated
Benefit Obligation for all pension plans at December 31, 2007 and 2006 was
$21.6
million and $22.1 million, respectively.
Postretirement
Benefits Other Than Pensions
The
Company has a postretirement benefit plan other than pensions for substantially
all of its retired employees. Employees hired after March 31, 2007 are not
eligible to participate in this plan. Coverage includes healthcare and life
insurance. Retiree contributions are dependent on credited years of
service. Accrued retirement benefit costs are recorded each
year.
The
Company has recognized a deferred regulatory asset relating to the difference
between the accrued retirement benefit costs and actual cash paid for plan
premiums in years prior to 1998. Included in the regulatory asset is a
transition obligation from adopting SFAS No.106, “Employers’ Accounting for
Postretirement Benefits Other than Pensions,” on January 1, 1993. In addition to
the recognition of annual accrued retirement benefit costs in rates, Middlesex
is also recovering the transition obligation over 15 years. The regulatory
assets at December 31, 2007 and 2006 were $0.4 million and $0.5 million,
respectively.
The
Company adopted SFAS 158 on December 31, 2006. Because the Company is
subject to regulation in the states in which it operates, it is required to
maintain its accounts in accordance with the regulatory authority’s rules and
guidelines, which may differ from other authoritative accounting pronouncements.
In those instances, the Company follows the guidance of SFAS No. 71, “Accounting
for the Effects of Certain Types of Regulation,” (SFAS 71). Based on prior
regulatory practice, and in accordance with the guidance provided by SFAS 71,
the Company records underfunded pension and postretirement obligations, which
otherwise would be recognized as Other Comprehensive Income as of under
SFAS 158, as a Regulatory Asset, and expects to recover those costs in rates
charged to customers. The adoption of this standard had no impact on results
of
operations or cash flows.
The
Company uses a December 31 measurement date for all of its employee benefit
plans. The table below sets forth information relating to the Company’s pension
plans and other postretirement benefits for 2007 and 2006.
|
(Thousands
of Dollars)
|
||||||||||||||||
|
December
31,
|
||||||||||||||||
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Reconciliation
of Projected Benefit Obligation
|
||||||||||||||||
|
Beginning
Balance
|
$ | 31,728 | $ | 29,666 | $ | 14,698 | $ | 15,247 | ||||||||
|
Service
Cost
|
1,296 | 1,311 | 821 | 756 | ||||||||||||
|
Interest
Cost
|
1,807 | 1,703 | 895 | 804 | ||||||||||||
|
Actuarial
(Gain)/Loss
|
(3,081 | ) | 544 | (852 | ) | (1,655 | ) | |||||||||
|
Benefits
Paid
|
(1,583 | ) | (1,496 | ) | (495 | ) | (454 | ) | ||||||||
|
Ending
Balance
|
$ | 30,167 | $ | 31,728 | $ | 15,067 | $ | 14,698 | ||||||||
|
Reconciliation
of Plan Assets at Fair Value
|
||||||||||||||||
|
Beginning
Balance
|
$ | 23,028 | $ | 20,338 | $ | 6,701 | $ | 4,666 | ||||||||
|
Actual
Return on Plan Assets
|
1,315 | 2,578 | 324 | 1,045 | ||||||||||||
|
Employer
Contributions
|
1,808 | 1,608 | 495 | 1,444 | ||||||||||||
|
Benefits
Paid
|
(1,583 | ) | (1,496 | ) | (495 | ) | (454 | ) | ||||||||
|
Ending
Balance
|
$ | 24,568 | $ | 23,028 | $ | 7,025 | $ | 6,701 | ||||||||
|
Funded
Status
|
$ | (5,599 | ) | $ | (8,700 | ) | $ | (8,042 | ) | $ | ( 7,997 | ) | ||||
|
Amounts
Recognized in the Consolidated Balance Sheets consist of:
|
||||||||||||||||
|
Current
Liability
|
(308 | ) | (308 | ) | - | - | ||||||||||
|
Noncurrent
Liability
|
(5,291 | ) | (8,392 | ) | (8,042 | ) | (7,997 | ) | ||||||||
|
Net
Liability Recognized
|
$ | (5,599 | ) | $ | (8,700 | ) | $ | (8,042 | ) | $ | (7,997 | ) | ||||
|
(Thousands
of Dollars)
|
||||||||||||||||||||||||
|
Years
Ended December 31,
|
||||||||||||||||||||||||
|
Pension
Benefits
|
Other
B
enefits
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Components
of Net Periodic Benefit Cost
|
||||||||||||||||||||||||
|
Service
Cost
|
$ | 1,296 | $ | 1,311 | $ | 1,126 | $ | 821 | $ | 756 | $ | 622 | ||||||||||||
|
Interest
Cost
|
1,807 | 1,703 | 1,559 | 895 | 804 | 771 | ||||||||||||||||||
|
Expected
Return on Plan Assets
|
(1,819 | ) | (1,608 | ) | (1,547 | ) | (481 | ) | (330 | ) | (275 | ) | ||||||||||||
|
Amortization
of Net Transition Obligation
|
- | - | - | 135 | 135 | 135 | ||||||||||||||||||
|
Amortization
of Net Actuarial (Gain)/Loss
|
75 | 258 | 49 | 337 | 443 | 482 | ||||||||||||||||||
|
Amortization
of Prior Service Cost
|
10 | 11 | 92 | - | - | - | ||||||||||||||||||
|
Net
Periodic Benefit Cost
|
$ | 1,369 | $ | 1,675 | $ | 1,279 | $ | 1,707 | $ | 1,808 | $ | 1,735 | ||||||||||||
Amounts
that are expected to be amortized from Regulatory Assets into Net Periodic
Benefit Cost in 2008 are as follows:
|
(Thousands
of Dollars)
|
||||||||
|
Pension
Benefits
|
Other
Benefits
|
|||||||
|
2008
|
2008
|
|||||||
|
Actuarial
(Gain)/Loss
|
$ | - | $ | 232 | ||||
|
Prior
Service Cost
|
10 | - | ||||||
|
Transition
Obligation
|
- | 135 | ||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Weighted
Average Assumptions:
|
||||||||||||||||||||||||
|
Expected
Return on Plan Assets
|
8.00 | % | 8.00 | % | 8.00 | % | 7.50 | % | 7.50 | % | 7.50 | % | ||||||||||||
|
Discount
Rate for:
|
||||||||||||||||||||||||
|
Benefit
Obligation
|
6.59 | % | 5.89 | % | 5.52 | % | 6.59 | % | 5.89 | % | 5.52 | % | ||||||||||||
|
Benefit
Cost
|
5.89 | % | 5.52 | % | 5.88 | % | 5.89 | % | 5.52 | % | 5.88 | % | ||||||||||||
|
Compensation
Increase for:
|
||||||||||||||||||||||||
|
Benefit
Obligation
|
3.50 | % | 3.50 | % | 3.50 | % | 3.50 | % | 3.50 | % | 3.50 | % | ||||||||||||
|
Benefit
Cost
|
3.50 | % | 3.50 | % | 3.50 | % | 3.50 | % | 3.50 | % | 3.50 | % | ||||||||||||
The
compensation increase assumption for Other Benefits is attributable to life
insurance provided to qualifying employees upon their retirement. The
insurance coverage will be determined based on the employee’s base compensation
as of their retirement date.
A
9.0%
annual rate of increase in the per capita cost of covered healthcare benefits
was assumed for 2007 and assumed to decline by 1.0% per year through 2010 and
by
0.5% per year to 5% by year 2013. A one-percentage point change in assumed
healthcare cost trend rates would have the following effects:
|
(Thousands
of Dollars)
|
||||||||
|
1
Percentage Point
|
||||||||
|
Increase
|
Decrease
|
|||||||
|
Effect
on Current Year’s Service and Benefit Cost
|
$ | 399 | $ | (301 | ) | |||
|
Effect
on Benefit Obligation
|
2,767 | (2,159 | ) | |||||
The
following benefit payments, which reflect expected future service, are expected
to be paid:
|
Year
|
Pension
Benefits
|
Other
Benefits
|
|||||||
|
2008
|
$ | 1,606 | $ | 565 | |||||
|
2009
|
1,577 | 582 | |||||||
|
2010
|
1,586 | 606 | |||||||
|
2011
|
1,652 | 656 | |||||||
|
2012
|
1,655 | 694 | |||||||
| 2013-2017 | 9,784 | 4,146 | |||||||
|
Totals
|
$ | 17,860 | $ | 7,249 | |||||
Benefit
Plans Assets
The
allocation of plan assets at December 31, 2007 and 2006 by asset category is
as
follows:
|
Pension
Plan
|
Other
Benefits
|
|||||||||||||||||||||||
|
Asset
Category
|
2007
|
2006
|
2007
|
2006
|
Target
|
Range
|
||||||||||||||||||
|
Equity
Securities
|
59.7 | % | 60.0 | % | 47.0 | % | 48.5 | % | 60 | % | 30-65 | % | ||||||||||||
|
Debt
Securities
|
37.8 | 36.9 | 50.6 | 33.0 | 38 | % | 25-70 | % | ||||||||||||||||
|
Cash
|
2.5 | 3.1 | 2.4 | 18.5 | 2 | % | 0-10 | % | ||||||||||||||||
|
Total
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Two
outside investment firms each manage a portion of the pension plan asset
portfolio. One of those investment firms also manages the other postretirement
benefits assets. Quarterly meetings are held between the Company’s Pension
Committee of the Board of Directors and the investment managers to review their
performance and asset allocation. If the actual asset allocation is outside
the
targeted range, the Pension Committee reviews current market conditions and
advice provided by the investment managers to determine the appropriateness
of
rebalancing the portfolio.
The
objective of the Company is to maximize the long-term return on benefit plan
assets, relative to a reasonable level of risk, maintain a diversified
investment portfolio and maintain compliance with the Employee Retirement Income
Security Act of 1974. The expected long-term rate of return is based on the
various asset categories in which plan assets are invested and the current
expectations and historical performance for these categories.
Equity
securities include Middlesex common stock in the amounts of $0.7 million (3.0%
of total plan assets) and $0.7 million (3.2 % of total plan assets) at December
31, 2007 and 2006, respectively.
For
the
pension plan, Middlesex made total cash contributions of $1.8 million in 2007
and expects to make cash contributions of approximately $2.0 million in
2008.
For
the
postretirement health benefit plan, Middlesex made total cash contributions
of
$0.5 million in 2007 and expects to make contributions of approximately
$2.4 million in 2008.
401(k)
Plan
The
Company has a 401(k) defined contribution plan, which covers substantially
all
employees with more than 1,000 hours of service. Under the terms of the Plan,
the Company matches 100% of a participant’s contributions, which do not exceed
1% of a participant’s compensation, plus 50% of a participant’s contributions
exceeding 1%, but not more than 6%. The Company’s matching
contributions were $0.4 million for each of the years ended December 31, 2007,
2006 and 2005.
For
those employees hired after March 31, 2007 and still employed on December 31,
2007, the Company approved a discretionary contribution that was based on 5%
of
eligible compensation. The Company expects to fund the contribution of less
than
$0.1 million in March 2008.
Stock-Based
Compensation
The
Company maintains an escrow account for 71,253 shares of the Company's common
stock which were awarded under the 1997 Restricted Stock Plan, which has
expired. Such stock is subject to an agreement requiring forfeiture by the
employee in the event of termination of employment within five years of the
award other than as a result of retirement, death, disability or change in
control. The Company filed a petition with the
BPU
requesting approval of stock-based compensation plan called the 2008 Restricted
Stock Plan. The Company intends to seek shareholder approval for the
new plan at its May 21, 2008 annual meeting of shareholders. The
maximum number of shares authorized for grant under the proposed plan is 300,000
shares.
The
Company recognizes compensation expense at fair value for the restricted stock
awards in accordance with SFAS No.123(R), “Share-Based Payment.”
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
following table presents information on the Restricted Stock Plan:
|
(In
Thousands Except Grant Price)
|
||||||||||||
|
Shares
|
Unearned
Compensation
|
Weighted
Average
Grant
Price
|
||||||||||
|
Balance,
January 1, 2005
|
65 | $ | 606 | |||||||||
|
Granted
|
19 | 436 | $ | 22.95 | ||||||||
|
Vested
|
(28 | ) | ||||||||||
|
Amortization
of Compensation Expense
|
(342 | ) | ||||||||||
|
Balance,
December 31, 2005
|
56 | $ | 700 | |||||||||
|
Granted
|
21 | 405 | $ | 19.24 | ||||||||
|
Vested
|
(11 | ) | ||||||||||
|
Forfeited
|
(2 | ) | (38 | ) | ||||||||
|
Amortization
of Compensation Expense
|
(271 | ) | ||||||||||
|
Balance,
December 31, 2006
|
64 | $ | 796 | |||||||||
|
Granted
|
18 | 344 | $ | 19.10 | ||||||||
|
Vested
|
(10 | ) | ||||||||||
|
Forfeited
|
(1 | ) | (3 | ) | ||||||||
|
Amortization
of Compensation Expense
|
(276 | ) | ||||||||||
|
Balance,
December 31, 2007
|
71 | $ | 861 | |||||||||
Note
8 – Business Segment Data
The
Company has identified two reportable segments. One is the regulated business
of
collecting, treating and distributing water on a retail and wholesale basis
to
residential, commercial, industrial and fire protection customers in parts
of
New Jersey and Delaware. This segment also includes regulated wastewater systems
in New Jersey and Delaware. The Company is subject to regulations as to its
rates, services and other matters by the states of New Jersey and Delaware
with
respect to utility service within these states. The other segment is primarily
comprised of non-regulated contract services for the operation and maintenance
of municipal and private water and wastewater systems in New Jersey and
Delaware. Inter-segment transactions relating to operational costs are treated
as pass-through expenses. Finance charges on inter-segment loan activities
are
based on interest rates that are below what would normally be charged by a
third
party lender.
|
(Thousands
of Dollars)
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
Operations
by Segments:
|
2007
|
2006
|
2005
|
|||||||||
|
Revenues:
|
||||||||||||
|
Regulated
|
$ | 77,113 | $ | 71,948 | $ | 66,317 | ||||||
|
Non
– Regulated
|
9,392 | 9,317 | 8,416 | |||||||||
|
Inter-segment
Elimination
|
(391 | ) | (204 | ) | (120 | ) | ||||||
|
Consolidated
Revenues
|
$ | 86,114 | $ | 81,061 | $ | 74,613 | ||||||
|
Operating
Income:
|
||||||||||||
|
Regulated
|
$ | 21,351 | $ | 20,062 | $ | 16,390 | ||||||
|
Non
– Regulated
|
1,320 | 1,256 | 828 | |||||||||
|
Consolidated
Operating Income
|
$ | 22,671 | $ | 21,318 | $ | 17,218 | ||||||
|
Depreciation:
|
||||||||||||
|
Regulated
|
$ | 7,408 | $ | 6,936 | $ | 6,357 | ||||||
|
Non
– Regulated
|
131 | 124 | 103 | |||||||||
|
Consolidated
Depreciation
|
$ | 7,539 | $ | 7,060 | $ | 6,460 | ||||||
|
Other
Income, Net:
|
||||||||||||
|
Regulated
|
$ | 1,643 | $ | 951 | $ | 836 | ||||||
|
Non
– Regulated
|
--- | (78 | ) | --- | ||||||||
|
Inter-segment
Elimination
|
(116 | ) | (99 | ) | (96 | ) | ||||||
|
Consolidated
Other Income, Net
|
$ | 1,527 | $ | 774 | $ | 740 | ||||||
|
Interest
Expense:
|
||||||||||||
|
Regulated
|
$ | 6,619 | $ | 7,012 | $ | 6,245 | ||||||
|
Non
– Regulated
|
116 | 99 | 96 | |||||||||
|
Inter-segment
Elimination
|
(116 | ) | (99 | ) | (96 | ) | ||||||
|
Consolidated
Interest Charges
|
$ | 6,619 | $ | 7,012 | $ | 6,245 | ||||||
|
Net
Income:
|
||||||||||||
|
Regulated
|
$ | 11,120 | $ | 9,417 | $ | 8,037 | ||||||
|
Non
– Regulated
|
723 | 622 | 439 | |||||||||
|
Consolidated
Net Income
|
$ | 11,843 | $ | 10,039 | $ | 8,476 | ||||||
|
Capital
Expenditures:
|
||||||||||||
|
Regulated
|
$ | 21,586 | $ | 30,492 | $ | 25,016 | ||||||
|
Non
– Regulated
|
344 | 242 | 272 | |||||||||
|
Total
Capital Expenditures
|
$ | 21,930 | $ | 30,734 | $ | 25,288 | ||||||
|
As
of
December 31,
|
As
of
December 31,
|
|||||||||||
|
2007
|
2006
|
|||||||||||
|
Assets:
|
||||||||||||
|
Regulated
|
$ | 387,931 | $ | 366,149 | ||||||||
|
Non
– Regulated
|
8,157 | 6,808 | ||||||||||
|
Inter-segment
Elimination
|
(3,413 | ) | (2,690 | ) | ||||||||
|
Consolidated
Assets
|
$ | 392,675 | $ | 370,267 | ||||||||
Note
9 - Quarterly Operating Results - Unaudited
Operating
results for each quarter of 2007 and 2006 are as follows:
|
(Thousands
of Dollars, Except per Share Data)
|
||||||||||||||||||||
|
1
st
|
2
nd
|
3
rd
|
4
th
|
Total
|
||||||||||||||||
|
2007
|
||||||||||||||||||||
|
Operating
Revenues
|
$ | 18,988 | $ | 21,745 | $ | 24,135 | $ | 21,246 | $ | 86,114 | ||||||||||
|
Operating
Income
|
3,722 | 6,279 | 7,729 | 4,941 | 22,671 | |||||||||||||||
|
Net
Income
|
1,769 | 3,313 | 4,158 | 2,603 | 11,843 | |||||||||||||||
|
Basic
Earnings per Share
|
$ | 0.13 | $ | 0.25 | $ | 0.31 | $ | 0.19 | $ | 0.88 | ||||||||||
|
Diluted
Earnings per Share
|
$ | 0.13 | $ | 0.24 | $ | 0.31 | $ | 0.19 | $ | 0.87 | ||||||||||
|
2006
|
||||||||||||||||||||
|
Operating
Revenues
|
$ | 18,230 | $ | 21,037 | $ | 22,632 | $ | 19,162 | $ | 81,061 | ||||||||||
|
Operating
Income
|
3,973 | 6,149 | 6,858 | 4,338 | 21,318 | |||||||||||||||
|
Net
Income
|
1,812 | 2,968 | 3,377 | 1,882 | 10,039 | |||||||||||||||
|
Basic
Earnings per Share
|
$ | 0.15 | $ | 0.25 | $ | 0.29 | $ | 0.14 | $ | 0.83 | ||||||||||
|
Diluted
Earnings per Share
|
$ | 0.15 | $ | 0.25 | $ | 0.28 | $ | 0.14 | $ | 0.82 | ||||||||||
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.
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
Deloitte
& Touche LLP (D&T) was previously the independent registered public
accounting firm for Middlesex Water Company (the Company). On March 31, 2006,
the Audit Committee of the Registrant’s Board of Directors agreed to engage
Beard Miller Company LLP (BMC) as its independent registered public accounting
firm to replace D&T, effective for fiscal year 2006, including the Company’s
audit for the year ended December 31, 2006. The change was made after
the Audit Committee reviewed proposals from three independent accounting firms,
including D&T.
D&T’s
audit reports on the Company's consolidated financial statements for each of
the
two fiscal years ended December 31, 2005 and December 31, 2004 did not contain
any adverse opinions or disclaimers of opinion, nor were such reports qualified
or modified as to uncertainty, audit scope or accounting principles. The audit
report
of
D&T on management's assessment of internal control over financial reporting
and the effectiveness of internal control over financial reporting as of
December 31, 2005 did not contain an adverse opinion or disclaimer of opinion,
and was not qualified or modified as to uncertainty, audit scope or accounting
principles.
During
the two most recent fiscal years ended December 31, 2005 and 2004, and through
April 5, 2006, there were no disagreements with D&T on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements, if not resolved to D&T’s
satisfaction would have caused them to make reference to the subject matter
of
the disagreement in connection with the audit reports of the financial
statements for such years. During the two fiscal years ended December 31, 2005
and 2004, and through April 5, 2006, there was one reportable
event. On November 9, 2005, the Company informed D&T of an
identified material weakness in internal controls related to recording and
reporting construction advances and contributions for utility
plant. Subsequent to the notification, the Company filed an amended
Form 10-K for the year ended December 31, 2004 and Form 10-Q’s for the quarters
ended March 31, 2005 and June 30, 2005. The material weakness
identified is discussed in Item 9A of the Company’s Form 10-K/A for the year
ended December 31, 2004.
We
provided D&T with a copy of the foregoing disclosures and requested from
them a letter indicating whether they agree with these disclosures. A
copy of their letter dated April 5, 2006 is included as Exhibit 16 to this
Form
10-K.
During
the Company’s two fiscal years
ended December 31, 2005 and 2004, and through March 31, 2006, the Company did
not consult with BMC regarding either (1) the application of accounting
principles to a specified transaction, either completed or proposed, or the
type
of audit opinion that might be rendered on the Company’s financial statements,
or (2) any matter that was either the subject of disagreement or reportable
events
.
|
Item
9A.
|
Controls
and Procedures
|
(1)
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.
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 for the quarter ended December 31, 2007.
Based upon that evaluation the Company’s Chief Executive Officer and the
Company’s Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were effective as of the end of the period covered
by
this report. Accordingly, management believes the consolidated financial
statements included in this report fairly present in all material respects
our
financial condition, results of operations and cash flows for the periods
presented.
(2)
Management’s Report on Internal
Control Over Financial Reporting
The
management of Middlesex Water Company (Middlesex or the Company) is responsible
for establishing and maintaining adequate internal control over financial
reporting as defined in Exchange Act Rule 13A-15(f) and 15d-15(f). Middlesex’s
internal control system was designed to provide reasonable assurance to the
Company’s
management
and Board of Directors of adequate preparation and fair presentation of the
published financial statements.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to the adequacy of financial
statement preparation and presentation. Middlesex’s management assessed the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007. In making this assessment, management used the criteria
set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in
Internal Control-
Integrated Framework
. Based on our assessment, we believe that as of
December 31, 2007, the Company’s internal control over financial reporting is
operating as designed and is effective based on those criteria.
Middlesex’s
independent registered public accounting firm has audited the effectiveness
of
our internal control over financial reporting as of December 31, 2007 as stated
in their report which is included herein.
|
/s/
Dennis W. Doll
|
/s/
A. Bruce O’Connor
|
|||
|
Dennis
W. Doll
|
A.
Bruce O’Connor
|
|||
|
President
and Chief
|
Vice
President and Chief
|
|||
|
Executive
Officer
|
Financial
Officer
|
Iselin,
New Jersey
March
10,
2008
(3)
Report
of Independent Registered
Public Accounting Firm
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and
Stockholders
of Middlesex Water Company
We
have
audited Middlesex Water Company’s (the Company) internal control over financial
reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for maintaining effective internal control over financial reporting and for
its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on
the Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing
and
evaluating the design and operating effectiveness of internal control based
on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that
our
audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1)
pertain to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on criteria
established in
Internal
Control—Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and
consolidated statements of capital stock and long-term debt of the Company
as of
December 31, 2007 and 2006 and the related
consolidated
statements of income, stockholders' equity and comprehensive income, and
cash
flows for the years then ended. Our report dated March 10, 2008
expressed an unqualified opinion on these consolidated financial
statements.
/s/
Beard
Miller Company LLP
Beard
Miller Company LLP
Reading,
Pennsylvania
March
10,
2008
|
Item
9B.
|
Other
Information.
|
None.
PART
III
|
Item
10.
|
Directors,
Executive Officers and Corporate
Governance.
|
Information
with respect to Directors of Middlesex Water Company is included in Middlesex
Water Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders and
is incorporated herein by reference.
Information
regarding the Executive Officers of Middlesex Water Company is included under
Item 1. in Part I of this Annual Report.
|
Item
11.
|
Executive
Compensation.
|
This
Information for Middlesex Water Company is included in Middlesex Water Company’s
Proxy Statement for the 2008 Annual Meeting of Stockholders and is incorporated
herein by reference.
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
This
information for Middlesex Water Company is included in Middlesex Water Company’s
Proxy Statement for the 2008 Annual Meeting of Stockholders and is incorporated
herein by reference.
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
This
information for Middlesex Water Company is included in Middlesex Water Company’s
Proxy Statement for the 2008 Annual Meeting of Stockholders and is incorporated
herein by reference.
|
Item
14.
|
Principal
Accounting Fees and Services.
|
This
information for Middlesex Water Company is included in Middlesex Water Company’s
Proxy Statement for the 2008 Annual Meeting of Stockholders and is incorporated
herein by reference.
PART
IV
|
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
|
10.
|
The
following Financial Statements and Supplementary Data are included
in Part
II- Item 8. of this annual report:
|
Consolidated
Balance Sheets at December 31, 2007 and 2006.
Consolidated
Statements of Income for each of the three years in the period
ended
December
31, 2007, 2006 and 2005.
Consolidated
Statements of Cash Flows for each of the three years in the period
ended
December
31, 2007, 2006 and 2005.
Consolidated
Statements of Capital Stock and Long-term Debt at December 31, 2007
and
2006.
Consolidated
Statements of Common Stockholders Equity and Comprehensive Income
for
each
of
the three years in the period ended December 31, 2007, 2006 and
2005.
Notes
to
Consolidated Financial Statements.
|
2.
|
Financial
Statement
Schedules
|
All
Schedules are omitted because of the absence of the conditions under which
they
are required or because the required information is shown in the financial
statements or notes thereto.
|
10.
|
Exhibits
|
See
Exhibit listing immediately
following the signature page.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act
of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
MIDDLESEX
WATER COMPANY
|
By:
|
/s/
Dennis W. Doll
|
||
|
Dennis
W. Doll
|
|||
|
President,
Chief Executive Officer and Director
|
|||
|
Date:
|
March
10, 2008
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report
has
been signed below by the following persons, on behalf of the registrant and
in
the capacities on March 13, 2007.
|
By:
|
/s/
A. Bruce O’Connor
|
||
|
A.Bruce
O’Connor
|
|||
|
Vice
President and Chief Financial Officer
|
|||
|
By:
|
/s/
Dennis W. Doll
|
||
|
Dennis
W. Doll
|
|||
|
President,
Chief Executive Officer and Director
|
|||
|
By:
|
/s/
J. Richard Tompkins
|
||
|
J.
Richard Tompkins
|
|||
|
Chairman
of the Board and Director
|
|||
|
By:
|
/s/
Annette Catino
|
||
|
Annette
Catino
|
|||
|
Director
|
|||
|
By:
|
/s/
John C. Cutting
|
||
|
John
C. Cutting
|
|||
|
Director
|
|||
|
By:
|
/s/
John R. Middleton
|
||
|
John
R. Middleton
|
|||
|
Director
|
|||
|
By:
|
/s/
John P. Mulkerin
|
||
|
John
P. Mulkerin
|
|||
|
Director
|
|||
|
By:
|
/s/
Walter G. Reinhard
|
||
|
Walter
G. Reinhard
|
|||
|
Director
|
|||
|
By:
|
/s/
Jeffries Shein
|
||
|
Jeffries
Shein
|
|||
|
Director
|
EXHIBIT
INDEX
Exhibits
designated with an asterisk (*) are filed herewith. The exhibits not so
designated have heretofore been filed with the Commission and are incorporated
herein by reference to the documents indicated in the previous filing columns
following the description of such exhibits. Exhibits designated with a dagger
(t) are management contracts or compensatory plans.
|
Exhibit
No.
|
Document
Description
|
Previous
Registration
No.
|
Filing’s
Exhibit
No.
|
|||
|
3.1
|
Certificate
of Incorporation of the Company, as amended, filed as Exhibit 3.1
of 1998
Form 10-K.
|
|||||
|
3.2
|
Bylaws
of the Company, as amended, filed as Exhibit 3.2 of 2005 Form
10-K.
|
|||||
|
3.3
|
Certificate
of Correction of Middlesex Water Company filed with the State of
New
Jersey on April 30, 1999, filed as Exhibit 3.3 of 2003 Form
10-K/A-2.
|
|||||
|
3.4
|
Certificate
of Amendment to the Restated Certificate of Incorporation Middlesex
Water
Company, filed with the State of New Jersey on February 17, 2000,
filed as
Exhibit 3.4 of 2003 Form 10-K/A-2.
|
|||||
|
3.5
|
Certificate
of Amendment to the Restated Certificate of Incorporation Middlesex
Water
Company, filed with the State of New Jersey on June 5, 2002, filed
as
Exhibit 3.5 of 2003 Form 10-K/A-2.
|
|||||
|
4.1
|
Form
of Common Stock Certificate.
|
2-55058
|
2(a)
|
|||
|
4.2
|
Registration
Statement, Form S-3, under Securities Act of 1933 filed February
3, 1987,
relating to the Dividend Reinvestment and Common Stock Purchase
Plan.
|
33-11717
|
||||
|
4.3
|
Revised
Prospectus relating to the Dividend Reinvestment and Common Stock
Purchase
Plan, Submitted to the Securities and Exchange Commission, January
20,
2000.
|
33-11717
|
||||
|
4.4
|
Post
Effective Amendments No. 7, Form S-3, under Securities Act of 1933
filed
February 1, 2002, relating to the Dividend Reinvestment and Common
Stock
Purchase Plan.
|
33-11717
|
||||
|
10.1
|
Copy
of Purchased Water Agreement between the Company and Elizabethtown
Water
Company, filed as Exhibit 10 of 2006 First Quarter Form
10-Q.
|
|||||
|
10.2
|
Copy
of Mortgage, dated April 1, 1927, between the Company and Union County
Trust Company, as Trustee, as supplemented by Supplemental Indentures,
dated as of October 1, 1939 and April 1, 1949.
|
2-15795
|
4(a)-4(f)
|
|||
|
10.3
|
Copy
of Supplemental Indenture, dated as of July 1, 1964 and June 15,
1991,
between the Company and Union County Trust Company, as
Trustee.
|
33-54922
|
10.4-10.9
|
|||
|
10.4
|
Copy
of Supply Agreement, dated as of November 17, 1986, between the Company
and the Old Bridge Municipal Utilities Authority.
|
33-31476
|
10.12
|
|||
|
10.5
|
Copy
of Supply Agreement, dated as of July 14, 1987, between the Company
and
the Marlboro Township Municipal Utilities Authority, as
amended.
|
33-31476
|
10.13
|
EXHIBIT
INDEX
|
Exhibit
No.
|
Document
Description
|
Previous
Registration
No.
|
Filing’s
Exhibit
No.
|
|||
|
10.6
|
Copy
of Supply Agreement, dated as of February 11, 1988, with modifications
dated February 25, 1992, and April 20, 1994, between the Company
and the
Borough of Sayreville filed as Exhibit No. 10.11 of 1994 First Quarter
Form 10-Q.
|
|||||
|
10.7
|
Copy
of Water Purchase Contract, dated as of
September
25, 2003, between the Company and the New Jersey Water Supply Authority,
filed as Exhibit No. 10.7 of 2003 Form 10-K.
|
|||||
|
10.8
|
Copy
of Treating and Pumping Agreement, dated April 9, 1984, between the
Company and the Township of East Brunswick.
|
33-31476
|
10.17
|
|||
|
10.9
|
Copy
of Supply Agreement, dated June 4, 1990, between the Company and
Edison
Township.
|
33-54922
|
10.24
|
|||
|
10.10
|
Copy
of amended Supply Agreement, between the Company and the Borough
of
Highland Park, filed as Exhibit No. 10.1 of 2006 First Quarter Form
10-Q.
|
|||||
|
(t)10.11
|
Copy
of Supplemental Executive Retirement Plan, filed as Exhibit 10.13
of 1999
Third Quarter Form 10-Q.
|
|||||
|
(t)10.12
|
Copy
of 1989 Restricted Stock Plan, filed as Appendix B to the Company’s
Definitive Proxy Statement, dated and filed
April
25, 1997.
|
33-31476
|
10.22
|
|||
|
(t)10.13(a)
|
Employment
Agreement between Middlesex Water Company and Dennis W. Doll, filed
as
Exhibit 10.13(i) of 2004 Form 10-K.
|
|||||
|
(t)10.13(b)
|
Employment
Agreement between Middlesex Water Company and A. Bruce O’Connor, filed as
Exhibit 10.15© of 1999 Third Quarter Form 10-Q.
|
|||||
|
(t)10.13©
|
Employment
Agreement between Middlesex Water Company and Ronald F. Williams,
as filed
as Exhibit 10.15(g) of 1999 Third Quarter Form 10-Q.
|
|||||
|
(t)10.13(d)
|
Employment
Agreement between Middlesex Water Company and Richard M. Risoldi,
filed as
Exhibit 10.13(d) of 2003 Form 10-K.
|
|||||
|
(t)10.13(e)
|
Employment
Agreement between Middlesex Water Company and Kenneth J. Quinn, filed
as
Exhibit 10.13(e) of 2003 Form 10-K.
|
|||||
|
(t)10.13(f)
|
Employment
Agreement between Middlesex Water Company and James P. Garrett, filed
as
Exhibit 10.13(f) of 2003 Form 10-K.
|
|||||
|
(t)10.13(g)
|
Employment
Agreement between Tidewater Utilities, Inc. and Gerard L. Esposito,
filed
as Exhibit 10.13(g) of 2003 Form 10-K.
|
|||||
|
(t)10.13(h)
|
Consulting
Agreement between Middlesex Water Company and J. Richard Tompkins,
filed
as Exhibit 10.13(h) of 2005 Form 10-K.
|
|||||
EXHIBIT
INDEX
|
Exhibit
No.
|
Document
Description
|
Previous
Registration
No.
|
Filing’s
Exhibit
No.
|
|||
|
10.14
|
Copy
of Transmission Agreement, dated October 16, 1992, between the Company
and
the Township of East Brunswick.
|
33-54922
|
10.23
|
|||
|
10.15
|
Copy
of Supplemental Indentures, dated September 1, 1993, (Series S & T)
and January 1, 1994, (Series U & V), between the Company and United
Counties Trust Company, as Trustee, filed as Exhibit No. 10.22 of
1993
Form 10-K.
|
|||||
|
10.16
|
Copy
of Trust Indentures, dated September 1, 1993, (Series S & T) and
January 1, 1994, (Series V), between the New Jersey Economic Development
Authority and First Fidelity Bank (Series S & T), as Trustee, and
Midlantic National Bank (Series V), as Trustee, filed as Exhibit
No. 10.23
of 1993 Form 10-K.
|
|||||
|
10.17
|
Copy
of Supplemental Indenture dated October 15, 1998 between Middlesex
Water
Company and First Union National Bank, as Trustee. Copy of Loan
Agreement dated November 1, 1998 between the New Jersey and Middlesex
Water Company (Series X), filed as Exhibit No. 10.22 of the 1998
Third
Quarter Form 10-Q.
|
|||||
|
10.18
|
Copy
of Supplemental Indenture dated October 15, 1998 between Middlesex
Water
Company and First Union National Bank, as Trustee. Copy of Loan
Agreement dated November 1, 1998 between the State of New Jersey
Environmental Infrastructure Trust and Middlesex Water Company (Series
Y),
filed as Exhibit No. 10.23 of the 1998 Third Quarter Form
10-Q.
|
|||||
|
10.19
|
Copy
of Operation, Maintenance and Management Services Agreement dated
January
1, 1999 between the Company City of Perth Amboy, Middlesex County
Improvement Authority and Utility Service Affiliates, Inc.
|
333-66727
|
10.24
|
|||
|
10.20
|
Copy
of Supplemental Indenture dated October 15, 1999 between
Middlesex Water Company and First Union National Bank, as Trustee
and copy
of Loan Agreement dated November 1, 1999 between the State of New
Jersey
and Middlesex Water Company (Series Z), filed as Exhibit No. 10.25
of the
1999 Form 10-K.
|
|||||
|
10.21
|
Copy
of Supplemental Indenture dated October 15, 1999 between Middlesex
Water
Company and First Union National Bank, as Trustee and copy of Loan
Agreement dated November 1, 1999 between the New Jersey Environmental
Infrastructure Trust and Middlesex Water Company (Series AA), filed
as
Exhibit No. 10.26 of the 1999 Form 10-K.
|
EXHIBIT
INDEX
|
Exhibit
No.
|
Document
Description
|
Previous
Registration
No.
|
Filing’s
Exhibit
No.
|
|||
|
10.22
|
Copy
of Supplemental Indenture dated October 15, 2001 between Middlesex
Water
Company and First Union National Bank, as Trustee and copy of Loan
Agreement dated November 1, 2001 between the State of New Jersey
and
Middlesex Water Company (Series BB). Filed as Exhibit No. 10.22
of the 2001 Form 10-K.
|
|||||
|
10.23
|
Copy
of Supplemental Indenture dated October 15, 2001 between Middlesex
Water
Company and First Union National Bank, as Trustee and copy of Loan
Agreement dated November 1, 2001 between the New Jersey Environmental
Infrastructure Trust and Middlesex Water Company (Series
CC). Filed as Exhibit No. 10.22 of the 2001 Form
10-K.
|
|||||
|
10.24
|
Copy
of Supplemental Indenture dated January 15, 2002 between Middlesex
Water
Company and First Union National Bank, as Trustee and copy of Loan
Agreement dated January 1, 2002 between the New Jersey Economic
Development Authority and Middlesex Water Company (Series DD), filed
as
Exhibit No. 10.24 of the 2001 Form 10-K.
|
|||||
|
10.25
|
Copy
of Supplemental Indenture dated March 1, 1998 between Middlesex Water
Company and First Union National Bank, as Trustee. Copy of
Trust Indenture dated March 1, 1998 between the New Jersey Economic
Development Authority and PNC Bank, National Association, as Trustee
(Series W), filed as Exhibit No. 10.21 of the 1998 Third Quarter
Form
10-Q.
|
|||||
|
10.26
|
Copy
of Supplemental Indenture dated October 15, 2004 between Middlesex
Water
Company and Wachovia Bank, as Trustee and copy of Loan Agreement
dated
November 1, 2004 between the State of New Jersey and Middlesex Water
Company (Series EE), filed as Exhibit No. 10.26 of the 2004 Form
10-K.
|
|||||
|
10.27
|
Copy
of Supplemental Indenture dated October 15, 2004 between Middlesex
Water
Company and Wachovia Bank, as Trustee and copy of Loan Agreement
dated
November 1, 2004 between the New Jersey Environmental Infrastructure
Trust
and Middlesex Water Company (Series FF), filed as Exhibit No. 10.27
of the
2004 Form 10-K.
|
|||||
|
10.29
|
Copy
of Supply Agreement, between the Company and the City of Rahway,
filed as
Exhibit No. 10.2 of 2006 First Quarter Form 10-Q.
|
|||||
EXHIBIT
INDEX
|
Exhibit
No.
|
Document
Description
|
Previous
Registration
No.
|
Filing’s
Exhibit
No.
|
|||
|
10.30
|
Copy
of Supplemental Indenture dated October 15, 2006 between Middlesex
Water
Company and U.S. Bank National Association, as Trustee and copy of
Loan
Agreement dated November 1, 2006 between the State of New Jersey
and
Middlesex Water Company (Series GG), filed as Exhibit No. 10.30of
the 2006
Form 10-K.
|
|||||
|
10.31
|
Copy
of Supplemental Indenture dated October 15, 2006 between Middlesex
Water
Company and U.S. Bank National Association, as Trustee and copy of
Loan
Agreement dated November 1, 2006 between the New Jersey Environmental
Infrastructure Trust and Middlesex Water Company (Series HH), filed
as
Exhibit No. 10.31 of the 2006 Form 10-K.
|
|||||
|
*10.32
|
Copy
of Loan Agreement By and Between New Jersey Environmental Infrastructure
Trust and Middlesex Water Company dated as of November 1, 2007 (Series
II).
|
|||||
|
*10.33
|
Copy
of Loan Agreement By and Between The State of New Jersey, Acting
By and
Through The New Jersey Department of Environmental Protection, and
Middlesex Water Company dated as of November 1, 2007 (Series
JJ).
|
|||||
|
16
|
Letter
of Deloitte & Touche LLP regarding change in certifying accountant
filed as Exhibit No. 16 of Form 8-K filed on April 5,
2006.
|
|||||
|
*21
|
Middlesex
Water Company Subsidiaries.
|
|||||
|
*23.1
|
Consent
of Independent Registered Public Accounting Firm, Beard Miller Company
LLP.
|
|||||
|
*23.2
|
Consent
of Independent Registered Public Accounting Firm, Deloitte & Touche,
LLP.
|
|||||
|
*31
|
Section
302 Certification by Dennis W. Doll 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 W. Doll pursuant to 18
U.S.C.§1350.
|
|||||
|
*32.1
|
Section
906 Certification by A. Bruce O’Connor pursuant to 18
U.S.C.§1350.
|
61