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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to______________________
Commission File Number 0-422
MIDDLESEX WATER COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-1114430
(State of incorporation) (IRS employer identification no.)
1500 Ronson Road, Iselin, NJ 08830
(Address of principal executive offices, including zip code)
(732) 634-1500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is large accelerated file, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
The number of shares outstanding of each of the registrant's classes of common
stock, as of August 1, 2006: Common Stock, No Par Value: 11,626,997 shares
outstanding.
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INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements:
Condensed Consolidated Statements of Income 1
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Cash Flows 3
Condensed Consolidated Statements of Capital Stock
and Long-term Debt 4
Notes to Unaudited Condensed Consolidated
Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures of Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 21
SIGNATURE 22
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2006 2005 2006 2005
--------------------------------------------------------------------------------------------------------------
Operating Revenues $ 21,037,055 $ 18,430,751 $ 39,267,201 $ 35,173,654
--------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operations 10,011,895 9,409,108 19,658,026 18,451,104
Maintenance 794,248 979,119 1,533,232 1,877,804
Depreciation 1,712,740 1,620,159 3,381,133 3,168,207
Other Taxes 2,369,072 2,163,520 4,572,525 4,246,654
--------------------------------------------------------------------------------------------------------------
Total Operating Expenses 14,887,955 14,171,906 29,144,916 27,743,769
--------------------------------------------------------------------------------------------------------------
Operating Income 6,149,100 4,258,845 10,122,285 7,429,885
--------------------------------------------------------------------------------------------------------------
Other Income:
Allowance for Funds Used During Construction 115,388 140,456 228,025 350,906
Other Income 40,840 35,943 98,778 91,162
Other Expense (12,519) (16,324) (14,258) (24,469)
--------------------------------------------------------------------------------------------------------------
Total Other Income, net 143,709 160,075 312,545 417,599
--------------------------------------------------------------------------------------------------------------
Interest Charges 1,808,118 1,578,078 3,323,116 2,960,170
--------------------------------------------------------------------------------------------------------------
Income before Income Taxes 4,484,691 2,840,842 7,111,714 4,887,314
--------------------------------------------------------------------------------------------------------------
Income Taxes 1,516,855 894,714 2,331,514 1,561,484
--------------------------------------------------------------------------------------------------------------
Net Income 2,967,836 1,946,128 4,780,200 3,325,830
Preferred Stock Dividend Requirements 61,946 63,696 123,893 127,393
Earnings Applicable to Common Stock $ 2,905,890 $ 1,882,432 $ 4,656,307 $ 3,198,437
--------------------------------------------------------------------------------------------------------------
Earnings per share of Common Stock:
Basic $ 0.25 $ 0.17 $ 0.40 $ 0.28
Diluted $ 0.25 $ 0.16 $ 0.40 $ 0.28
Average Number of
Common Shares Outstanding :
Basic 11,610,579 11,392,964 11,602,149 11,380,290
Diluted 11,941,719 11,736,104 11,933,289 11,723,430
Cash Dividends Paid per Common Share $ 0.1700 $ 0.1675 $ 0.3400 $ 0.3350
See Notes to Condensed Consolidated Financial Statements.
1
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 2006 2005
--------------------------------------------------------------------------------------------------------------------------
UTILITY PLANT: Water Production $ 93,546,338 $ 91,403,549
Transmission and Distribution 225,351,719 217,098,466
General 23,834,601 23,292,087
Construction Work in Progress 8,510,009 6,127,634
--------------------------------------------------------------------------------------------
TOTAL 351,242,667 337,921,736
Less Accumulated Depreciation 57,313,311 54,960,290
--------------------------------------------------------------------------------------------
UTILITY PLANT - NET 293,929,356 282,961,446
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS: Cash and Cash Equivalents 2,301,773 2,983,762
Accounts Receivable, net 7,643,971 8,074,929
Unbilled Revenues 4,933,834 3,737,627
Materials and Supplies (at average cost) 1,454,731 1,259,935
Prepayments 1,722,640 927,254
--------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 18,056,949 16,983,507
--------------------------------------------------------------------------------------------------------------------------
DEFERRED CHARGES Unamortized Debt Expense 3,075,823 3,164,043
AND OTHER ASSETS: Preliminary Survey and Investigation Charges 2,528,896 1,774,817
Regulatory Assets 7,445,843 7,469,190
Restricted Cash 5,695,697 5,782,705
Non-utility Assets - Net 6,106,727 5,727,806
Other 594,159 519,610
--------------------------------------------------------------------------------------------
TOTAL DEFERRED CHARGES AND OTHER ASSETS 25,447,145 24,438,171
--------------------------------------------------------------------------------------------
TOTAL ASSETS $ 337,433,450 $ 324,383,124
--------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
--------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION: Common Stock, No Par Value $ 76,928,255 $ 76,160,949
Retained Earnings 24,351,171 23,638,301
Accumulated Other Comprehensive Loss, net of tax (206,702) (206,925)
--------------------------------------------------------------------------------------------
TOTAL COMMON EQUITY 101,072,724 99,592,325
--------------------------------------------------------------------------------------------
Preferred Stock 3,958,062 3,958,062
Long-term Debt 127,482,314 128,174,944
--------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION 232,513,100 231,725,331
--------------------------------------------------------------------------------------------------------------------------
CURRENT Current Portion of Long-term Debt 2,069,712 1,930,617
LIABILITIES: Notes Payable 12,600,000 4,000,000
Accounts Payable 4,982,701 6,038,060
Accrued Taxes 7,827,889 6,466,531
Accrued Interest 1,896,691 1,868,962
Unearned Revenues and Advanced Service Fees 493,045 473,627
Other 663,716 707,446
--------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 30,533,754 21,485,243
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COMMITMENTS AND CONTINGENT LIABILITIES (Note 6)
--------------------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS Customer Advances for Construction 17,540,434 17,180,962
AND OTHER LIABILITIES: Accumulated Deferred Investment Tax Credits 1,578,641 1,617,949
Accumulated Deferred Income Taxes 14,400,056 14,296,620
Employee Benefit Plans 7,570,798 6,650,724
Regulatory Liability - Cost of Utility Plant Removal 5,937,791 5,647,757
Other 764,310 793,857
--------------------------------------------------------------------------------------------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 47,792,030 46,187,869
--------------------------------------------------------------------------------------------------------------------------
CONTRIBUTIONS IN AID OF CONSTRUCTION 26,594,566 24,984,681
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TOTAL CAPITALIZATION AND LIABILITIES $ 337,433,450 $ 324,383,124
--------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
2
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2006 2005
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,780,200 $ 3,325,830
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 3,761,581 3,509,017
Provision for Deferred Income Taxes and ITC (98,096) (159,513)
Allowance for Funds Used During Construction (228,025) (350,906)
Changes in Assets and Liabilities:
Accounts Receivable 430,958 (570,863)
Unbilled Revenues (1,196,207) (897,110)
Materials & Supplies (194,796) (280,398)
Prepayments (795,386) (324,988)
Other Assets (295,364) (155,411)
Accounts Payable (1,055,359) (931,426)
Accrued Taxes 1,361,244 415,736
Accrued Interest 27,729 239,242
Employee Benefit Plans 920,074 893,113
Unearned Revenue & Advanced Service Fees 19,418 76,540
Other Liabilities (73,277) (173,557)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 7,364,694 4,615,306
-------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (11,895,711) (11,592,836)
Cash Surrender Value & Other Investments (104,304) (154,744)
Restricted Cash 97,870 4,313,180
Preliminary Survey & Investigation Charges (754,079) (493,351)
-------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (12,656,224) (7,927,751)
-------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (554,803) (350,109)
Proceeds from Issuance of Long-term Debt 1,268 540,091
Net Short-term Bank Borrowings (Repayments) 8,600,000 3,000,000
Deferred Debt Issuance Expenses -- (7,724)
Restricted Cash (10,862) --
Proceeds from Issuance of Common Stock 767,306 1,207,120
Payment of Common Dividends (3,943,437) (3,809,758)
Payment of Preferred Dividends (123,893) (127,393)
Construction Advances and Contributions-Net (126,038) 601,316
-------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,609,541 1,053,543
-------------------------------------------------------------------------------------------------------
NET CHANGES IN CASH AND CASH EQUIVALENTS (681,989) (2,258,902)
-------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,983,762 4,034,768
-------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,301,773 $ 1,775,866
-------------------------------------------------------------------------------------------------------
*Excludes Allowance for Funds Used During Construction
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Utility Plant received as Construction Advances and Contributions $ 2,095,395 $ 481,150
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Interest $ 3,319,220 $ 2,779,732
Interest Capitalized $ (228,025) $ (350,906)
Income Taxes $ 2,039,550 $ 1,807,000
-------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
3
MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
(Unaudited)
June 30, December 31,
2006 2005
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Common Stock, No Par Value:
Shares Authorized - 20,000,000
Shares Outstanding - 2006 - 11,619,662 $ 76,928,255 $ 76,160,949
2005 - 11,584,499
Retained Earnings 24,351,171 23,638,301
Accumulated Other Comprehensive Loss, net of tax (206,702) (206,925)
------------------------------------------------------------------------------------------------------------
TOTAL COMMON EQUITY $ 101,072,724 $ 99,592,325
------------------------------------------------------------------------------------------------------------
Cumulative Preference Stock, No Par Value:
Shares Authorized - 100,000
Shares Outstanding - None
Cumulative Preferred Stock, No Par Value
Shares Authorized - 139,497
Convertible:
Shares Outstanding, $7.00 Series - 13,881 $ 1,457,505 $ 1,457,505
Shares Outstanding, $8.00 Series - 12,000 1,398,857 1,398,857
Nonredeemable:
Shares Outstanding, $7.00 Series - 1,017 101,700 101,700
Shares Outstanding, $4.75 Series - 10,000 1,000,000 1,000,000
------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK $ 3,958,062 $ 3,958,062
------------------------------------------------------------------------------------------------------------
Long-term Debt:
8.05%, Amortizing Secured Note, due December 20, 2021 $ 2,940,611 $ 2,983,384
6.25%, Amortizing Secured Note, due May 22, 2028 9,205,000 9,415,000
6.44%, Amortizing Secured Note, due August 25, 2030 6,766,667 6,906,667
6.46%, Amortizing Secured Note, due September 19, 2031 7,000,000 7,000,000
4.22%, State Revolving Trust Note, due December 31, 2022 738,772 754,164
3.30% to 3.60%, State Revolving Trust Note, due May 1, 2025 3,019,522 3,018,254
3.49%, State Revolving Trust Note, due January 25, 2027 278,144 278,144
4.00% to 5.00%, State Revolving Trust Bond, due September 1, 2021 760,000 760,000
0.00%, State Revolving Fund Bond, due September 1, 2021 604,038 614,436
First Mortgage Bonds:
5.20%, Series S, due October 1, 2022 12,000,000 12,000,000
5.25%, Series T, due October 1, 2023 6,500,000 6,500,000
6.40%, Series U, due February 1, 2009 15,000,000 15,000,000
5.25%, Series V, due February 1, 2029 10,000,000 10,000,000
5.35%, Series W, due February 1, 2038 23,000,000 23,000,000
0.00%, Series X, due September 1, 2018 688,524 700,280
4.25% to 4.63%, Series Y, due September 1, 2018 870,000 870,000
0.00%, Series Z, due September 1, 2019 1,539,390 1,567,367
5.25% to 5.75%, Series AA, due September 1, 2019 1,990,000 1,990,000
0.00%, Series BB, due September 1, 2021 1,894,335 1,926,956
4.00% to 5.00%, Series CC, due September 1, 2021 2,185,000 2,185,000
5.10%, Series DD, due January 1, 2032 6,000,000 6,000,000
0.00%, Series EE, due September 1, 2024 7,652,023 7,715,909
3.00% to 5.50%, Series FF, due September 1, 2024 8,920,000 8,920,000
------------------------------------------------------------------------------------------------------------
SUBTOTAL LONG-TERM DEBT 129,552,026 130,105,561
------------------------------------------------------------------------------------------------------------
Less: Current Portion of Long-term Debt (2,069,712) (1,930,617)
------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 127,482,314 $ 128,174,944
------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
4
MIDDLESEX WATER COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Organization - Middlesex Water Company (Middlesex or the Company) 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). On January 1, 2006, the Company's
Bayview Water Company subsidiary was merged into Middlesex. Southern Shores
Water Company, LLC (Southern Shores) and White Marsh Environmental Systems, Inc.
(White Marsh) are wholly-owned subsidiaries of Tidewater. The financial
statements for Middlesex and its wholly-owned subsidiaries (the Company) are
reported on a consolidated basis. All significant intercompany accounts and
transactions have been eliminated.
The consolidated notes within the 2005 Form 10-K are applicable to these
financial statements and, in the opinion of the Company, the accompanying
unaudited condensed consolidated financial statements contain all adjustments
necessary (including normal recurring accruals) to present fairly the financial
position as of June 30, 2006 and the results of operations for the three and six
month periods ended June 30, 2006 and 2005, and cash flows for the six month
periods ended June 30, 2006 and 2005. Information included in the Balance Sheet
as of December 31, 2005, has been derived from the Company's audited financial
statements for the year ended December 31, 2005.
Certain reclassifications have been made to the prior year financial statements
to conform with the current period presentation.
Recent Accounting Pronouncements - In July 2006, the Financial Accounting
Standards Board (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 Company is in
the process of evaluating the impact of the adoption of this interpretation on
the Company's results of operations and financial condition.
On March 31, 2006, the FASB issued an exposure draft that would require
recognition of the overfunded or underfunded positions of defined benefit
pension and other postretirement plans on the balance sheet. For an underfunded
plan, the incremental liability to be recorded would be equal to the difference
between the projected benefit obligation and the fair value of plan assets.
Statement of Financial Accounting Standard No. 87, "Employers' Accounting for
Pensions" (SFAS 87) and SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (SFAS 106) allow for deferred recognition of this
liability through amortization of this difference over time. Under this exposure
draft, actuarial gains and losses and prior service costs and credits that arise
during the period but, pursuant to SFAS 87 and SFAS 106 are not yet recognized
as components of net periodic benefit cost, would be recognized as a component
of Other Comprehensive Income (net of tax). The exposure draft also would
require an adjustment to the beginning balance of retained earnings (net of tax)
for any transition obligation remaining from the initial application of SFAS 87
and 106. Such amounts would subsequently not be amortized as a component of net
periodic benefit cost.
5
If the exposure draft is adopted as proposed, such amounts not yet recognized
would result in a material reduction of the Company's shareholders' equity, and
thus have an adverse impact on its current rate-making methodology. Accordingly,
the Company would petition the New Jersey Board of Public Utilities (BPU) to
seek to have the amounts recognized as Other Comprehensive Income treated as a
Regulatory Asset and amortize these costs in rates. The Company is unable to
predict the ultimate regulatory treatment that would be applied if a
pronouncement were adopted according to the exposure draft in its present form.
Rate Matters - 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. We cannot predict whether the PSC will
ultimately approve, deny, or reduce the amount of the request. Concurrent with
the rate filing, Tidewater also submitted a request for a 15% interim rate
increase subject to refund as allowed under PSC regulations. The interim rates
went into effect on June 27, 2006.
Effective April 13, 2006, Pinelands Water and Pinelands Wastewater received
approval from the 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, 2006. 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%. The rates are set to expire
on December 31, 2006, and the Company is currently negotiating a new agreement.
Note 2 - Capitalization
Common Stock -During the six months ended June 30, 2006, there were 35,553
common shares (approximately $0.8 million) issued under the Company's Dividend
Reinvestment and Common Stock Purchase Plan.
Long-term Debt - On July 19, 2006, Middlesex received approval from the BPU to
issue up to $4.0 million of first mortgage bonds through the New Jersey
Environmental Infrastructure Trust under the New Jersey State Revolving Fund
(SRF) program. The Company expects to close on the bonds in November 2006.
On April 25, 2006, Tidewater received approval from the PSC to borrow up to $1.0
million under the Delaware SRF program. The Delaware SRF program allows, but
does not obligate, Tidewater to draw against a General Obligation Note for a
specific project over a two-year period ending in April 2008. On May 31, 2006,
the Company closed on the loan with an established interest rate of 4.03%.
6
Note 3 - Earnings Per Share
Basic earnings per share (EPS) are computed on the basis of the weighted average
number of shares outstanding. Diluted EPS assumes the conversion of both the
Convertible Preferred Stock $7.00 Series and the Convertible Preferred Stock
$8.00 Series.
(In Thousands Except for per Share Amounts)
Three Months Ended
June 30,
Weighted Weighted
2006 Average 2005 Average
Basic: Income Shares Income Shares
-----------------------------------------------------------------------------------------------------------
Net Income $ 2,968 11,611 $ 1,946 11,393
Preferred Dividend (62) (64)
--------- -------- ---------- --------
Earnings Applicable to Common Stock $ 2,906 11,611 $ 1,882 11,393
Basic EPS $ 0.25 $ 0.17
-----------------------------------------------------------------------------------------------------------
Diluted:
-----------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 2,906 11,611 $ 1,882 11,393
$7.00 Series Preferred Dividend 24 167 26 179
$8.00 Series Preferred Dividend 24 164 24 164
--------- -------- ---------- --------
Adjusted Earnings Applicable to
Common Stock $ 2,954 11,942 $ 1,932 11,736
Diluted EPS $ 0.25 $ 0.16
Six Months Ended
June 30,
Weighted Weighted
2006 Average 2005 Average
Basic: Income Shares Income Shares
----------------------------------------------------------------------------------------------------------
Net Income $ 4,780 11,602 $ 3,326 11,380
Preferred Dividend (124) (127)
--------- -------- --------- --------
Earnings Applicable to Common Stock $ 4,656 11,602 $ 3,199 11,380
Basic EPS $ 0.40 $ 0.28
----------------------------------------------------------------------------------------------------------
Diluted:
----------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 4,656 11,602 $ 3,199 11,380
$7.00 Series Dividend 49 167 52 179
$8.00 Series Dividend 48 164 48 164
--------- -------- --------- --------
Adjusted Earnings Applicable to
Common Stock $ 4,753 11,933 $ 3,299 11,723
Diluted EPS $ 0.40 $ 0.28
7
Note 4 - Business Segment Data
The Company has identified two reportable segments. One is the regulated
business of collecting, treating and distributing water on a retail and
wholesale basis to residential, commercial, industrial and fire protection
customers in parts of New Jersey and Delaware. This segment also includes the
operations of a regulated wastewater system in New Jersey. The Company is
subject to regulations as to its rates, services and other matters by the States
of New Jersey and Delaware with respect to utility services within these States.
The other segment primarily includes non-regulated contract services for the
operation and maintenance of municipal and private water and wastewater systems
in New Jersey and Delaware. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies in the
Consolidated Notes to the Financial Statements in the Company's Annual Report
for the period ended December 31, 2005 filed on Form 10-K. Inter-segment
transactions relating to operational costs are treated as pass-through expenses.
Finance charges on inter-segment loan activities are based on interest rates
that are below what would normally be charged by a third party lender. These
inter-segment transactions are eliminated in the Company's consolidated
financial statements.
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30 June 30,
Operations by Segments: 2006 2005 2006 2005
----------------------------------------------------------------------------
Revenues:
Regulated $ 18,663 $ 16,393 $ 34,663 $ 31,152
Non - Regulated 2,404 2,068 4,664 4,082
Inter-segment Elimination (30) (30) (60) (60)
--------------------------------------------
Consolidated Revenues $ 21,037 $ 18,431 $ 39,267 $ 35,174
--------------------------------------------
Operating Income:
Regulated $ 5,746 $ 4,104 $ 9,449 $ 7,067
Non - Regulated 403 155 673 363
--------------------------------------------
Consolidated Operating Income $ 6,149 $ 4,259 $ 10,122 $ 7,430
--------------------------------------------
Net Income:
Regulated $ 2,741 $ 1,867 $ 4,407 $ 3,140
Non - Regulated 227 79 373 186
--------------------------------------------
Consolidated Net Income $ 2,968 $ 1,946 $ 4,780 $ 3,326
--------------------------------------------
Capital Expenditures:
Regulated $ 7,148 $ 7,313 $ 11,679 $ 11,446
Non - Regulated 199 88 217 147
--------------------------------------------
Total Capital Expenditures $ 7,347 $ 7,401 $ 11,896 $ 11,593
--------------------------------------------
As of As of
June 30, December 31,
2006 2005
---- ----
Assets:
Regulated $334,018 $320,889
Non - Regulated 6,207 5,912
Inter-segment Elimination (2,792) (2,418)
--------------------
Consolidated Assets $337,433 $324,383
--------------------
8
Note 5 - Short-term Borrowings
As of June 30, 2006, the Company has established lines of credit aggregating
$38.0 million. At June 30, 2006, the outstanding borrowings under these credit
lines were $12.6 million at a weighted average interest rate of 5.80%. As of
that date, the Company had borrowing capacity of $25.4 million under its credit
lines.
The weighted average daily amounts of borrowings outstanding under the Company's
credit lines and the weighted average interest rates on those amounts were $9.2
million and $12.0 million at 5.91% and 4.36% for the three months ended June 30,
2006 and 2005, respectively. The weighted average daily amounts of borrowings
outstanding under the Company's credit lines and the weighted average interest
rates on those amounts were $7.6 million and $11.1 million at 5.82% and 4.11%
for the six months ended June 30, 2006 and 2005, respectively.
Note 6 - Commitments and Contingent Liabilities
Guarantees - USA-PA operates the City of Perth Amboy's (Perth Amboy) water and
wastewater systems under a service contract agreement through June 30, 2018. The
agreement was effected under New Jersey's Water Supply Public/Private
Contracting Act and the New Jersey Wastewater Public/Private Contracting Act.
Under the agreement, USA-PA receives a fixed fee and in addition, a variable fee
based on increased system billing. Scheduled fixed fee payments for 2006 are
$7.6 million. The fixed fees will increase over the term of the contract to
$10.2 million.
In connection with the agreement, Perth Amboy, through the Middlesex County
Improvement Authority, issued approximately $68.0 million in three series of
bonds. Middlesex guaranteed one of those series of bonds, designated the Series
C Serial Bonds, in the principal amount of approximately $26.3 million. Perth
Amboy guaranteed the two other series of bonds. The Series C Serial Bonds have
various maturity dates with the final maturity date on September 1, 2015. As of
June 30, 2006, approximately $23.9 million of the Series C Serial Bonds remained
outstanding.
Middlesex is 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 that may
be implemented by Perth Amboy 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 per 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.
9
Purchased water costs are shown below:
(Dollars in Millions)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
-------------------------------------
Purchased Water
Treated $ 0.5 $ 0.5 $ 1.1 $ 1.1
Untreated 0.4 0.5 0.9 0.9
-------------------------------------
Total Costs $ 0.9 $ 1.0 $ 2.0 $ 2.0
-------------------------------------
Construction - The Company expects to spend approximately $37.8 million on its
construction program in 2006.
Litigation - A lawsuit was filed in 1998 against the Company by an electric
utility for damages involving the break of both a Company water line and an
underground electric power cable containing both electric lines and petroleum
based insulating fluid. The electric utility also asserted claims against the
Company. The lawsuit was settled in 2003, and by agreement, the electric
utility's counterclaim for approximately $1.1 million in damages was submitted
to binding arbitration, in which the agreed maximum exposure of the Company is
$0.3 million, for which the Company has accrued a liability.
During 2005, the Office of State Fire Marshal in Delaware issued a Notice of
Violation (NOV) to Tidewater regarding a plan of correction to provide fire
protection services to one of Tidewater's community water systems, based upon a
recent interpretation by the Fire Marshal of regulations that have been
effective since 1989. Tidewater has appealed this NOV in the Superior Court of
the State of Delaware on the grounds that the water system was grandfathered
under the 1989 regulations and that due process had not been served in the
application of the recent interpretation. It is the Company's position that
Tidewater is not required to provide fire protection service to that water
system. If Tidewater is not successful in its appeal, it would be required to
install a fire protection system in this community at an estimated capital cost
of $0.9 million to $1.6 million. If the Company is unsuccessful in its appeal,
we cannot predict what further actions, if any, or the costs or timing thereof,
may be taken by the Fire Marshal regarding over 60 of Tidewater's other
community water systems. However, such amounts could be material. The Company
believes that any required capital investments resulting from an unfavorable
outcome would be a component of Tidewater's rate base and therefore, included in
future rates. While we are unable to predict the outcome of our appeal, we
believe that we have substantial defenses.
The Company is a defendant in various lawsuits in the normal course of business.
We believe the resolution of pending claims and legal proceedings will not have
a material adverse effect on the Company's consolidated financial statements.
Change in Control Agreements - The Company has Change in Control Agreements with
certain of its Officers that provide compensation and benefits in the event of
termination of employment in connection with a change in control of the Company.
10
Note 7 - Employee Retirement Benefit Plans
Pension - The Company has a noncontributory defined benefit pension plan, which
covers all employees with more than 1,000 hours of service. The Company
contributed $1.3 million of cash to the plan in July 2006. In addition, the
Company maintains an unfunded supplemental pension plan for seven company
officers.
Postretirement Benefits Other Than Pensions - The Company maintains a
postretirement benefit plan other than pensions for substantially all of its
retired employees. Coverage includes healthcare and life insurance. Retiree
contributions are dependent on credited years of service. The Company expects to
make total cash contributions of $1.0 million during the current year. These
contributions are expected to be made in the fourth quarter of 2006.
The following table sets forth information relating to the Company's periodic
costs for its retirement plans.
(Dollars in Thousands)
Pension Benefits Other Benefits
---------------- --------------
Three Months Ended June 30,
2006 2005 2006 2005
-----------------------------------
Service Cost $ 334 $ 283 $ 189 $ 153
Interest Cost 425 381 201 193
Expected Return on Assets (402) (384) (83) (69)
Amortization of Unrecognized Losses 62 3 111 120
Amortization of Unrecognized Prior Service Cost 3 23 -- --
Amortization of Transition Obligation -- -- 34 34
-----------------------------------
Net Periodic Benefit Cost $ 422 $ 306 $ 452 $ 431
-----------------------------------
Pension Benefits Other Benefits
---------------- --------------
Six Months Ended June 30,
2006 2005 2006 2005
-----------------------------------
Service Cost $ 644 $ 565 $ 366 $ 306
Interest Cost 855 762 419 385
Expected Return on Assets (816) (768) (174) (137)
Amortization of Unrecognized Losses 119 7 240 240
Amortization of Unrecognized Prior Service Cost 3 46 -- --
Amortization of Transition Obligation -- -- 68 68
-----------------------------------
Net Periodic Benefit Cost $ 805 $ 612 $ 919 $ 862
-----------------------------------
Note 8 - Stock Based Compensation
The Company recognizes compensation expense at fair value for its restricted
stock awards in accordance with SFAS 123(R). The adoption of this standard on
January 1, 2006 did not have a material impact on the Company's financial
position, results of operations, or cash flows.
The Company maintains a Restricted Stock Plan, under which 56,067 shares of the
Company's common stock are held in escrow by the Company as of June 30, 2006 for
key employees. Such stock is subject to an
11
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 maximum number of shares authorized
for grant under this plan is 240,000 shares. There were no grants, vesting or
forfeitures of restricted stock during the six months ended June 30, 2006.
Compensation expense is determined by the market value of the stock on the date
of the award and is being amortized over a five-year period. Compensation
expense for the three months ended June 30, 2006 and 2005 was $0.1 million.
Compensation expense for the six months ended June 30, 2006 and 2005 was $0.1
million. Total unearned compensation related to restricted stock was $0.6
million at June 30, 2006.
Note 9 - Other Comprehensive Income
Comprehensive income was as follows:
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
-------------------------------------------------
Net Income $2,967,836 $1,946,128 $4,780,200 $3,325,830
Other Comprehensive Income:
Change in Value of Equity Investments,
Net of Income Tax -- 9,660 223 9,047
-------------------------------------------------
Other Comprehensive Income -- 9,660 223 9,047
-------------------------------------------------
Comprehensive Income $2,967,836 $1,955,788 $4,780,423 $3,334,877
-------------------------------------------------
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements of the Company included
elsewhere herein and with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.
Forward-Looking Statements
Certain statements contained in this quarterly report are "forward-looking
statements" within the meaning of federal securities laws. The Company intends
that these statements be covered by the safe harbors created under those laws.
These statements include, but are not limited to:
- statements as to expected financial condition, performance, prospects
and earnings of the Company;
- statements regarding strategic plans for growth;
- statements regarding the amount and timing of rate increases and other
regulatory matters;
- statements regarding expectations and events concerning capital
expenditures;
- statements as to the Company's expected liquidity needs during fiscal
2006 and beyond and statements as to the sources and availability of
funds to meet its liquidity needs;
- statements as to expected rates, consumption volumes, service fees,
revenues, margins, expenses and operating results;
- statements as to the Company's compliance with environmental laws and
regulations and estimations of the materiality of any related costs;
- statements as to the safety and reliability of the Company's equipment,
facilities and operations; - statements as to financial projections;
- statements as to the ability of the Company to pay dividends;
- statements as to the Company's plans to renew municipal franchises and
consents in the territories it serves;
- expectations as to the amount of cash contributions to fund the
Company's pension plan, including statements as to anticipated discount
rates and rates of return on plan assets;
- statements as to trends; and
- statements regarding the availability and quality of our water supply.
These forward-looking statements are subject to risks, uncertainties and other
factors that could cause actual results to differ materially from future results
expressed or implied by the forward-looking statements. Important factors that
could cause actual results to differ materially from anticipated results and
outcomes include, but are not limited to:
- the effects of general economic conditions;
- increases in competition in the markets served by the Company;
- the ability of the Company to control operating expenses and to achieve
efficiencies in its operations;
- the availability of adequate supplies of water;
- actions taken by government regulators, including decisions on base
rate increase requests;
- new or additional water quality standards;
- weather variations and other natural phenomena;
- acts of war or terrorism; and
- other factors discussed elsewhere in this quarterly report.
Many of these factors are beyond the Company's ability to control or predict.
Given these uncertainties, readers are cautioned not to place undue reliance on
any forward-looking statements, which only speak to the
13
Company's understanding as of the date of this quarterly report. The Company
does not undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this quarterly report or to reflect the occurrence of unanticipated events,
except as may be required under applicable securities laws.
For an additional discussion of factors that may affect the Company's business
and results of operations, see Item 1A. - Risk Factors in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2005.
Overview
The Company has operated as a water utility in New Jersey since 1897, and in
Delaware, through our wholly-owned subsidiary, Tidewater, since 1992. We are in
the business of collecting, treating, distributing and selling water for
residential, irrigation, 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
water service we provide and as to certain other matters. Our USA, USA-PA and
White Marsh subsidiaries are not regulated utilities.
Our New Jersey water utility system (the Middlesex System) provides water
services to approximately 58,500 retail customers, primarily in central New
Jersey. The Middlesex System also provides water service under contract to
municipalities in central New Jersey with a total population of approximately
267,000. Through our subsidiary, USA-PA, we operate the water supply system and
wastewater collection system for the City of Perth Amboy, New Jersey. Pinelands
Water and Pinelands Wastewater provide water and wastewater services to
residents in Southampton Township, New Jersey.
Tidewater and Southern Shores provide water services to approximately 29,100
retail customers in New Castle, Kent, and Sussex Counties, Delaware. Our TESI
subsidiary provides regulated wastewater service to approximately 30 residential
retail customers. White Marsh serves 4,000 customers under unregulated operating
contracts with various owners of small water and wastewater systems in Kent and
Sussex Counties.
Our USA subsidiary provides customers within the Middlesex System a service line
maintenance program called LineCareSM.
The majority of our revenue is generated from regulated water services to
customers in our franchise 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 since the end of the last billing cycle. Fixed
service charges are billed in advance by our subsidiary, Tidewater, and are
recognized in revenue as the service is provided.
Our ability to increase operating income and net income is based significantly
on 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 with prior periods.
14
Recent Developments
Rate Increases
Tidewater filed for a $5.5 million, or 38.6%, base rate increase with the
Delaware Public Service Commission (PSC) on April 28, 2006. The requested
increase 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. We cannot predict whether the PSC will
ultimately approve, deny, or reduce the amount of the request. Concurrent with
the rate filing, Tidewater also submitted a request for a 15% interim rate
increase subject to refund, as allowed under PSC regulations. The interim rates
went into effect on June 27, 2006.
Effective April 13, 2006, Pinelands Water and Pinelands Wastewater received
approval from the 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, 2006. Under the terms of a contract
with the Southern Shores Homeowners Association, the increase cannot exceed the
lesser of the regional Consumer Price Index or 3%. The rates are set to expire
on December 31, 2006, and the Company is currently negotiating a new agreement.
Merger of Bayview Water Company into Middlesex Water Company
In December 2005, the BPU approved a merger of Bayview into the Middlesex system
effective January 1, 2006. As part of the BPU's stipulation approving the
merger, the water service rates for the customers of Bayview are to remain at
their current levels until the water service rates for Middlesex customers
exceed the current Bayview rates.
Operating Results by Segment
The Company has two operating segments, Regulated and Non-Regulated. Our
Regulated segment contributed 88% of total revenues and 92% of net income for
the six months ended June 30, 2006 and 2005. 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.
15
Results of Operations - Three Months Ended June 30, 2006
(Thousands of Dollars)
Three Months Ended June 30,
---------------------------
2006 2005
---- ----
Non- | Non-
Regulated Regulated Total | Regulated Regulated Total
--------- --------- ----- | --------- --------- -----
Revenues $ 18,663 $ 2,374 $ 21,037 | $ 16,393 $ 2,038 $ 18,431
Operations and maintenance expenses 8,921 1,885 10,806 | 8,593 1,795 10,388
Depreciation expense 1,683 30 1,713 | 1,594 26 1,620
Other taxes 2,313 56 2,369 | 2,102 62 2,164
-----------------------------------------------------------------------
Operating income 5,746 403 6,149 | 4,104 155 4,259
-----------------------------------------------------------------------
|
Other income 144 -- 144 | 160 -- 160
Interest expense 1,784 24 1,808 | 1,555 23 1,578
Income taxes 1,365 152 1,517 | 842 53 895
-----------------------------------------------------------------------
Net income $ 2,741 $ 227 $ 2,968 | $ 1,867 $ 79 $ 1,946
-----------------------------------------------------------------------
Operating revenues for the three months ended June 30, 2006 increased $2.6
million, or 14.1%, from the same period in 2005. Water sales improved by $1.4
million in our New Jersey systems, of which $1.1 million was a result of a base
rate increase that was granted to Middlesex on December 8, 2005, and $0.3
million was due to additional consumption as a result of favorable weather.
Revenues rose in our Delaware service territories by $0.9 million. Higher water
consumption sales by our existing customers contributed $0.3 million in revenue,
customer growth contributed $0.2 million of water sales, and base rate increases
provided an additional $0.1 million. Connection fee revenues contributed an
additional $0.3 million in Delaware. USA-PA contributed an additional $0.2
million related to additional services provided to the City of Perth Amboy. New
unregulated wastewater contracts in Delaware provided $0.1 million of additional
revenues. Revenues for all other operations were comparable to the prior year
period.
While we anticipate continued organic customer and consumption growth in our
Delaware systems, such growth and increased consumption cannot be guaranteed.
Revenues from our water systems are highly dependent on the effects of weather,
which may adversely impact future consumption despite customer growth. Customer
growth in both the regulated water and wastewater businesses are dependent upon
economic conditions surrounding new housing as well as developer construction
timetables. 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.
Operation and maintenance expenses increased $0.4 million or 4.0%. In New
Jersey, payroll and benefits costs increased $0.1 million. The continued growth
of our Delaware systems resulted in $0.1 million of increases for the cost of
water treatment, insurance and additional employees and related benefit costs.
Wastewater treatment costs for White Marsh increased by $0.1 million. All other
operating expenses increased $0.1 million.
We are experiencing increases in electric generation costs in Delaware due to
deregulation of electricity. We expect our pension and postretirement costs to
increase in 2006. Payroll and related employee benefit costs (excluding pension
and postretirement expenses previously discussed) are also expected to be higher
in 2006.
Depreciation expense increased $0.1 million, or 5.7%, primarily as a result of a
higher level of utility plant in service since June 30, 2005.
16
Other taxes increased by $0.2 million, reflecting taxes on increased taxable
gross revenues in New Jersey.
Interest expense increased by $0.2 million, primarily due to higher average
long-term borrowings as compared to the prior year period.
Income taxes increased by $0.6 million as a result of increased operating income
as compared to the prior year period.
Net income increased by 52.5% from $1.9 million to $3.0 million. Basic earnings
per share increased from $0.17 to $0.25 due to the increase in earnings. Diluted
earnings per share increased from $0.16 to $0.25.
Results of Operations - Six Months Ended June 30, 2006
(Thousands of Dollars)
Six Months Ended June 30,
-------------------------
2006 2005
---- ----
Non- | Non-
Regulated Regulated Total | Regulated Regulated Total
--------- --------- ----- --------- --------- -----
Revenues $ 34,663 $ 4,604 $ 39,267 | $ 31,152 $ 4,022 $ 35,174
Operations and maintenance expenses 17,432 3,759 21,191 | 16,841 3,488 20,329
Depreciation expense 3,324 57 3,381 | 3,121 47 3,168
Other taxes 4,458 115 4,573 | 4,123 124 4,247
---------------------------------------------------------------------------
Operating income 9,449 673 10,122 | 7,067 363 7,430
---------------------------------------------------------------------------
|
Other income 313 -- 313 | 417 -- 417
Interest expense 3,273 50 3,323 | 2,914 46 2,960
Income taxes 2,082 250 2,332 | 1,430 131 1,561
---------------------------------------------------------------------------
Net income $ 4,407 $ 373 $ 4,780 | $ 3,140 $ 186 $ 3,326
---------------------------------------------------------------------------
Operating revenues for the six months ended June 30, 2006 increased $4.1
million, or 11.6%, from the same period in 2005. Water sales improved by $2.4
million in our New Jersey systems, of which $2.1 million was a result of a base
rate increase that was granted to Middlesex on December 8, 2005, and $0.3
million was due to additional consumption as a result of favorable weather.
Revenues rose in our Delaware service territories by $1.1 million. Higher water
consumption sales by our existing customers contributed $0.3 million in revenue,
customer growth contributed $0.4 million of water sales, and base rate increases
provided an additional $0.2 million. Connection fee revenues contributed an
additional $0.2 million in Delaware. USA-PA contributed an additional $0.3
million related to additional services provided to the City of Perth Amboy. New
unregulated wastewater contracts in Delaware provided $0.2 million of additional
revenues. All other operations accounted for $0.1 million of additional
revenues.
Operation and maintenance expenses increased $0.9 million, or 4.2%. Pumping and
water treatment costs for our Middlesex system increased a combined $0.3 million
due to higher costs for electricity, chemicals and disposal of residuals. This
increase was partially offset by $0.1 million of reduced cost of repairs to the
Middlesex system. In New Jersey, corporate governance related fees and bill
production costs increased $0.1 million. As previously discussed, the continuing
growth of our Delaware systems resulted in higher costs of water treatment,
additional employees and related benefit expenses, and corporate governance
related fees of $0.3 million. Costs related to providing services by our
non-regulated wastewater operation in Delaware increased by $0.2 million. All
other operating costs increased by $0.1 million.
17
Depreciation expense increased $0.2 million, or 6.7%, due to the higher level of
utility plant in service, as discussed for the three-month results.
Other taxes increased by $0.3 million, reflecting taxes on higher taxable gross
revenues in New Jersey.
Other income decreased $0.1 million, primarily due to reduced Allowance for
Funds Used During Construction as a result of the timing of spending for capital
projects in New Jersey and Delaware as compared to the prior year. Also, while
overall capital spending increased from $11.6 million to $11.9 million, our TESI
subsidiary acquired a $1.4 million wastewater system during 2006 rather than
construct it.
Interest expense increased by $0.4 million, primarily due to higher average
long-term borrowings as compared to the prior year.
Income taxes increased by $0.8 million as a result of increased operating income
as compared to the prior year.
Net income increased by $1.5 million, or 43.7%, and basic and diluted earnings
per share increased from $0.28 to $0.40 per share. The earnings per share
increase was due to the higher net income.
Liquidity and Capital Resources
Cash flows from operations are largely dependent on three factors: the impact of
weather on water sales, adequate and timely rate increases, and customer growth.
The effect of those factors on net income is discussed in results of operations.
For the six months ended June 30, 2006, cash flows from operating activities
were $7.4 million, an increase of $2.7 million from the prior year. This
increase was attributable to increased earnings, the timing of collection of
customer receivables and payments for taxes. These increases were partially
offset by the timing of payments to vendors and payments of interest. The $7.4
million of net cash flow from operations allowed us to fund 62% of our utility
plant expenditures internally for the period, with the remainder funded with
proceeds from equity issued under our Dividend Reinvestment Plan and short-term
borrowings.
The Company's capital program for 2006 is estimated to be $37.8 million and
includes $20.2 million for additions and improvements to our Delaware water
systems, including the construction of several storage tanks and the creation of
new wells and interconnections. We expect to spend approximately $7.2 million
for system additions and acquisitions for our Delaware wastewater systems. We
expect to spend $3.3 million for the RENEW program, to clean and cement line
approximately nine miles of unlined mains in the Middlesex system. There remains
a total of approximately 120 miles of unlined mains in the 730-mile Middlesex
system. The capital program also includes $7.1 million for scheduled upgrades to
facilities in New Jersey. These upgrades consist of $1.4 million for
improvements to existing plant, $1.0 million for mains, $0.8 million for service
lines, $0.4 million for meters, $0.3 million for hydrants, and $3.2 million for
other infrastructure needs.
To fund our capital program in 2006, we will utilize internally generated funds
and funds available under existing New Jersey Environmental Infrastructure Trust
(NJEIT) loans (currently, $4.1 million) and Delaware State Revolving Fund (SRF)
loans (currently, $3.9 million), which provide low cost financing for projects
that meet certain water quality and system improvement benchmarks. We also
expect to utilize short-term borrowings through $38.0 million of available lines
of credit with several financial institutions. As of June 30, 2006, $12.6
million was outstanding against the lines of credit.
18
On July 19, 2006, Middlesex received approval from the BPU to issue up to $4.0
million of first mortgage bonds through the NJEIT. The Company expects to close
on the bonds in November 2006. The proceeds from this financing will be used to
fund the 2007 RENEW program.
On April 25, 2006, Tidewater received approval from the PSC to borrow up to $1.0
million under the Delaware SRF program. The Delaware SRF program allows, but
does not obligate, Tidewater to draw against a General Obligation Note for a
specific project over a two-year period ending in April 2008. On May 31, 2006,
the Company closed on the loan with an established interest rate of 4.03%.
The Company periodically issues shares of common stock in connection with our
dividend reinvestment and stock purchase plan (DRP). From time to time, the
Company may issue additional equity to reduce short-term indebtedness, fund our
capital program, and for other general corporate purposes. Middlesex has filed
an application with the BPU seeking approval to issue up to 1.5 million shares
of common stock before the end of 2006.
Going forward into 2007 through 2008, we currently project that we will expend
between $85.9 million and $112.2 million for capital projects. To the extent
possible and because of the favorable interest rates available to regulated
water utilities, we will finance our capital expenditures under SRF loan
programs. We also expect to use internally generated funds, proceeds from the
DRP, and the proceeds from the 1.5 million share common stock offering to pay
for our capital program.
In addition to the effect of weather conditions on revenues, increases in
certain operating costs will impact our liquidity and capital resources. As
described in our overview section, we have recently received rate relief for
Middlesex and Pinelands. Changes in operating costs and timing of capital
projects will have an impact on revenues, earnings, and cash flows and will also
impact the timing of filings for future rate increases.
Recent Accounting Pronouncements - See Note 1 of the Notes to Unaudited
Condensed Consolidated Financial Statements for a discussion of recent
accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures of Market Risk
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. Our capital program is partially financed with fixed rate,
long-term debt and, to a lesser extent, short-term debt. The Company's interest
rate risk related to existing fixed rate, long-term debt is not material due to
the term of the majority of our Amortizing Secured Notes and First Mortgage
Bonds, which have maturity dates ranging from 2009 to 2038. Over the next twelve
months, approximately $2.1 million of the current portion of fifteen existing
long-term debt instruments will mature. Applying a hypothetical change in the
rate of interest of 10% on those borrowings would not have a material effect on
earnings.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was conducted by the Company's Chief Executive Officer along with
the Company's Chief Financial Officer. Based upon that evaluation, the Company's
Chief Executive Officer and the Company's Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective as of the end of
the period covered by this Report. There have been no changes in the Company's
internal controls or in other factors, which materially affected internal
controls during the quarter ended June 30, 2006.
19
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the Company's Annual Report on Form 10-K for the year ended
December 31, 2005 and Quarterly Report on Form 10-Q filed for the period ended
March 31, 2006.
Item 1A. Risk Factors
Information about risk factors for the three months ended June 30, 2006 does not
differ materially from those set forth in Part I, Item 1A. of the Company's
Annual Report on Form 10-K for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The following matter was submitted to a vote of the security holders during the
Company's Annual Meeting of Shareholders held on May 24, 2006:
Election of Directors. Nominees for Class I, term expiring 2009:
FOR WITHHELD
--- --------
John C. Cutting 9,559,257 261,143
Dennis W. Doll 9,656,190 164,210
John P. Mulkerin 9,557,523 262,877
Item 5. Other Information
None.
20
Item 6. Exhibits
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.
ss.1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Section 906 Certification by A. Bruce O'Connor pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MIDDLESEX WATER COMPANY
By: /s/ A. Bruce O'Connor
---------------------
A. Bruce O'Connor
Vice President and
Chief Financial Officer
Date: August 4, 2006
22