UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For the Fiscal Year ended December 31, 2003 No. 0-422
MIDDLESEX WATER COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-1114430
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 Ronson Road, Iselin, New Jersey 08830-3020
(Address of principal executive offices) (Zip Code)
(732) 634-1500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X|. NO |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_|
The aggregate market value of the voting stock held by nonaffiliates of the
registrant at June 30, 2003 was $188,144,223 based on the closing market
price of $17.95 per share.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 9, 2004
----- ----------------------------
Common Stock, No par Value 10,588,947
Documents Incorporated by Reference
Proxy Statement to be filed in connection with the Registrant's Annual Meeting
of Shareholders to be held on May 19, 2004 as to Part III.
EXPLANATORY NOTE AND AMENDMENT INDEX
This Annual Report on Form 10K/A ("Form 10-K/A") is filed as
Amendment No. 1 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2003. This Form 10K/A is filed with the Securities and
Exchange Commission for the purpose of amending Part I, Item 3, "Legal
Proceedings" and Note 4 to the Consolidated Financial Statements, "Litigation"
to provide that the outcome of a particular litigation could have a material
adverse effect on the Company's financial statements. In addition, this Form
10-K/A amends Part II, Item 5, "Market for the Registrant's Common Equity,
Related Stockholder Matters and Price Range of Common Stock," by adding a
description of the Middlesex Water Company Restricted Stock Plan. In addition,
the Form 10-K/A includes a revised Part IV Signatures and an updated Exhibit
Index in which seven agreements formerly titled "Employment Agreements" are
retitled "Change in Control Agreement" and a Consulting Agreement with J.
Richard Tompkins is added as Exhibit 10.13(h). The Exhibit Index has also been
revised to specifically identify exhibits which are management contracts or
compensatory plans or arrangements. Note 4 to the Consolidated Financial
Statements has also been updated to disclose the Change in Control Agreements.
These changes can be found at:
Amendment Index Page
--------------- ----
Part I, Item 3 Legal Proceedings 11
Part II, Item 5 Market for the Registrant's Common Equity, 12
Related Stockholder Matters and Price Range of
Common Stock- Restricted Stock Plan
Note 4 Litigation to the Consolidated Financial Statements 34
Part IV Signatures 46
Exhibit Index Identifying management contracts or compensatory 47-51
Plans or arrangements
Exhibit 10.13(h) Consulting Agreement with J. Richard Tompkins Exhibit 10.13(h)
MIDDLESEX WATER COMPANY
FORM 10-K
INDEX
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PAGE
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PART I
Item 1 Business:
Overview 1
Financial Information 3
Water Supplies and Contracts 4
Employees 6
Competition 6
Regulation 6
Management 7
Item 2 Properties 9
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 Market for the Registrant's Common
Equity, Related Stockholder Matters and Price
Range of Common Stock 11
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 7A Qualitative and Quantitative Disclosure About Market Risk 21
Item 8 Financial Statements and Supplementary Data 21
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 43
Item 9A Controls and Procedures 44
PART III
Item 10 Directors and Executive Officers of the Registrant 44
Item 11 Executive Compensation 44
Item 12 Security Ownership of Certain Beneficial Owners
and Management 45
Item 13 Certain Relationships and Related Transactions 45
Item 14 Principal Accountant Fees and Services 45
PART IV
Item 15 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 45
Signatures 46
Exhibit Index 47
FORWARD-LOOKING STATEMENTS
We discuss certain matters in this document which are not historical facts, but
which are "forward-looking statements." We intend these "forward-looking
statements" to qualify for safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These "forward-looking
statements" may include, but are not limited to, statements regarding:
o our expected profitability and results of operations;
o strategic plans for growth;
o the amount and timing of rate increases and other regulatory
matters;
o expectations and events concerning capital expenditures; and
o the availability and quality of our water supply.
The "forward-looking statements" in this document reflect what we currently
anticipate will happen in each case. What actually happens could differ
materially from what we currently anticipate will happen. We are not promising
to make any public announcement when we think "forward-looking statements" in
this document are no longer accurate, whether as a result of new information,
what actually happens in the future or for any other reason.
Important matters that may affect what will actually happen include, but are not
limited to, general stock market risks, government regulation and fluctuating
economic conditions.
The terms "we," "our," and "us" refer to Middlesex Water Company and its
subsidiaries, including Tidewater Utilities, Inc. ("Tidewater") (and Tidewater's
wholly-owned subsidiaries, Southern Shores Water Company, LLC ("Southern
Shores") and White Marsh Environmental Systems, Inc. ("White Marsh"), Pinelands
Water Company ("Pinelands Water") and Pinelands Wastewater Company ("Pinelands
Wastewater") (collectively, "Pinelands"), Utility Service Affiliates, Inc.
("USA"), Utility Service Affiliates (Perth Amboy) Inc., ("USA-PA") and Bayview
Water Company ("Bayview").
PART I
Item 1. Business
Overview
Middlesex Water Company was incorporated as a water utility company in 1897 and
owns and operates regulated water utility systems in central and southern New
Jersey and in Delaware as well as a regulated wastewater utility in southern New
Jersey. We also operate water and wastewater systems on behalf of others in New
Jersey and Delaware.
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).
1
Middlesex System
The Middlesex System provides water services to approximately 58,000 retail
customers, primarily in eastern Middlesex County, New Jersey and provides water
under contract to the Township of Edison, the Boroughs of Highland Park and
Sayreville, and both the Old Bridge and the Marlboro Township Municipal
Utilities Authorities. The Middlesex System treats, stores and distributes water
for residential, commercial, industrial and fire prevention purposes. Under a
special contract, the Middlesex System also provides water treatment and pumping
services to the Township of East Brunswick. The Middlesex System, through its
retail and contract service operations, produced approximately 70% of our 2003
revenue.
The Middlesex System's retail customers are located in an area of approximately
55 square miles in Woodbridge Township, the City of South Amboy, the Boroughs of
Metuchen and Carteret, portions of Edison Township and the Borough of South
Plainfield in Middlesex County and, to a minor extent, a portion of the Township
of Clark in Union County. The retail customers include a mix of residential
customers, large industrial concerns and commercial and light industrial
facilities. These retail customers are located in generally well-developed areas
of central New Jersey. The contract customers of the Middlesex System comprise
an area of approximately 141 square miles with a population of approximately
267,000. Contract sales to Edison, Sayreville, Old Bridge and Marlboro are
supplemental to the existing water systems of these customers. The State of New
Jersey in the mid-1980's approved plans to increase available surface water
supply to the South River Basin area of the state to permit a reduced use of
ground water in this area. The Middlesex System provides treated surface water
under long-term agreements to East Brunswick, Marlboro, Old Bridge and
Sayreville consistent with the state-approved plan.
Tidewater System
Tidewater, together with its wholly-owned subsidiary, Southern
Shores Water Company, LLC, provides water services to approximately 24,000
retail customers for domestic, commercial and fire protection purposes in over
240 separate community water systems in New Castle, Kent and Sussex Counties,
Delaware. The Tidewater System produced approximately 15% of our total revenue
in 2003. Tidewater has another wholly-owned subsidiary, White Marsh
Environmental Systems, Inc., which owns the office building that Tidewater uses
as its business office, and which operates water and wastewater systems under
contract. White Marsh's rates for water and wastewater operations are not
regulated by the Delaware Public Service Commission (PSC).
Utility Service Affiliates (Perth Amboy)
USA-PA operates the City of Perth Amboy's water and wastewater systems under a
20-year agreement, which expires in 2018. Perth Amboy has a population of 40,000
and has approximately 9,300 customers, most of whom are served by both systems.
The agreement was effected under New Jersey's Water Supply Public-Private
Contracting Act and the New Jersey Wastewater Public/Private Contracting Act and
requires USA-PA to lease from Perth Amboy all of its employees who currently
work on the Perth Amboy water and wastewater systems. Under the agreement,
USA-PA receives both fixed and variable fees based on increased system billing.
Fixed fee payments began at $6.4 million in the first year and are to increase
over the term of the 20-year contract to $9.7 million. Variable fees in 2003
were approximately $0.2 million. USA-PA produced approximately 12.5% of our
total revenue in 2003.
In connection with the agreement, we guaranteed a series of bonds in the
principal amount of approximately $26.3 million. In addition to the agreement
with Perth Amboy, USA-PA entered into a 20-year subcontract with a wastewater
operating company for the operation and maintenance of the Perth Amboy
wastewater system. The subcontract provides for the sharing of certain fixed and
variable fees and operating expenses.
2
Pinelands System
Pinelands Water services approximately 2,300 residential customers in Burlington
County, New Jersey. Pinelands produced less than 1% of our total revenue in
2003.
Pinelands Wastewater services approximately 2,300 primarily residential retail
customers. Under contract, it also services one municipal wastewater system in
Burlington County, New Jersey with about 200 residential customers. Pinelands
Wastewater produced approximately 1% of our total revenue in 2003.
Utility Service Affiliates, Inc.
In 1999, we implemented a franchise agreement with the City of South Amboy
("South Amboy") to provide water service and install water system facilities in
South Amboy. The South Amboy franchise was approved by the Board of Public
Utilities (BPU) and its implementation significantly impacted two existing
agreements entered into by the parties. The first agreement was for the sale of
water to South Amboy on a wholesale basis. The second agreement was for the
provision of management services for a fixed fee.
Middlesex and USA have jointly entered into a venture with an entity that offers
meter installation and related services. This venture seeks to obtain
competitively bid service contracts with municipalities in the Mid-Atlantic and
New England regions. The contract work may include any or all of the following:
meter purchases, replacement meter program, new meter program and meter testing.
USA also offers a service line maintenance program to residential customers in
the Middlesex system. These businesses contributed less than 1% of our total
revenue in 2003.
Bayview System
In April 2001, Bayview bought the assets of a 300-customer water utility in
Cumberland County, New Jersey. The Bayview System produced less than 1% of our
total revenue in 2003.
Financial Information
Consolidated operating revenues and operating income are as follows:
(Thousands of Dollars)
Years Ended December 31,
---------------------------------
2003 2002 2001
------- ------- -------
Operating Revenues $64,111 $61,933 $59,638
======= ======= =======
Operating Income $11,500 $12,467 $11,493
======= ======= =======
3
Operating revenues were earned from the following sources:
Years Ended December 31,
-------------------------
2003 2002 2001
----- ----- -----
Residential 39.4% 40.0% 38.4%
Commercial 9.8 9.7 10.2
Industrial 11.1 11.9 12.6
Fire Protection 10.7 10.5 10.4
Contract Sales 13.2 14.1 14.8
Contract Operations 12.6 12.1 12.2
Other 3.2 1.7 1.4
----- ----- -----
TOTAL 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 we have
adequate sources of water supply to meet the current and anticipated future
service requirements of our present customers in New Jersey and Delaware.
Middlesex System
Our Middlesex System, which produced 16,569 million gallons in 2003, obtains
water from surface sources and wells, which we call groundwater sources. In
2003, surface sources of water provided approximately 70% of the Middlesex
System's water supply, groundwater from wells provided approximately 23% and the
balance of 7% was purchased from a nonaffiliated water utility. Middlesex
System's distribution storage facilities are used to supply water to its
customers at times of peak demand, outages and emergencies.
The principal source of surface water supply for the Middlesex System is the
Delaware & Raritan Canal, which is owned by the State of New Jersey and operated
as a water resource by the New Jersey Water Supply Authority. Middlesex has
recently entered into a renewed and modified agreement with the New Jersey Water
Supply Authority, which is effective January 1, 2004 and expires November 30,
2023, and provides an average purchase of 27 million gallons per day of
untreated water from the Delaware & Raritan Canal, augmented by the Round
Valley/Spruce Run Reservoir System. We project that due to the renewed and
modified agreement, expenses resulting from this agreement will increase our
cost of raw water by at least 8.5% annually on a going forward basis. Surface
water is pumped to and treated at the Carl J. Olsen (CJO) Plant. Middlesex also
has an agreement with a nonaffiliated water utility for the purchase of treated
water. This agreement, which expires December 31, 2005, provides for the minimum
purchase of 3 million gallons per day of treated water with provisions for
additional purchases. Purchased water costs are shown below:
(Millions of Dollars)
Years Ended December 31,
-----------------------------
Purchased Water 2003 2002 2001
--------------- ------- ------- -------
Untreated $ 2.0 $ 1.9 $ 2.0
Treated 1.8 1.8 1.7
------- ------- -------
Total Costs $ 3.8 $ 3.7 $ 3.7
======= ======= =======
4
Our Middlesex System also derives water from groundwater sources equipped with
electric motor-driven, deepwell turbine-type pumps. The Middlesex System has 31
wells, which provide an aggregate pump capacity of approximately 27 million
gallons per day.
The Middlesex System's groundwater sources are:
2003
Maximum Use
No.of Per Day Pumpage Pump
Source Wells (millions of gallons) Capacity (mgd) Location
------ ----- --------------------- -------------- --------
Park Avenue 15 8.5 15.2 South Plainfield
Tingley Lane North 4 2.8 2.8 Edison
Tingley Lane South 5 2.6 2.6 Edison
Spring Lake 4 0.7 2.8 South Plainfield
Sprague Avenue #1 1 1.0 1.1 South Plainfield
Sprague Avenue #2 1 1.3 1.3 South Plainfield
Maple Avenue 1 0.8 0.9 South Plainfield
--
Total 31
Tidewater System
Our Tidewater System, which produced 1,295 million gallons in 2003, obtains 100%
of its water from 209 wells. In 2003, we placed eleven new wells in service and
also deactivated, sealed and abandoned fifteen wells. Tidewater continues to
submit applications to Delaware regulatory authorities for the approval of
additional wells as growth, demand and water quality warrants. The Tidewater
System does not have a central treatment facility but has several regional
filter plants. Several of its water systems in New Castle, Kent and Sussex
Counties, Delaware have interconnected transmission systems.
Pinelands System
Water supply to our Pinelands System is derived from four wells drilled into the
Mt. Laurel aquifer which provided overall system delivery of 163 million gallons
in 2003. The pump capacity for the four wells is 2.2 million gallons per day.
Bayview System
Water supply to Bayview customers is derived from two wells, which provided an
overall system delivery of 10 million gallons in 2003. Each well has treatment
facilities. Bayview has completed the replacement of its entire distribution
system with approximately 16,000 feet of mains, valves and hydrants.
Pinelands Wastewater System
The Pinelands Wastewater System discharges into the South Branch of the Rancocas
Creek through a tertiary treatment plant that provides clarification,
sedimentation, filtration and disinfection. The total capacity of the plant is
0.5 million gallons per day. Current average flow is 0.3 million gallons per
day. Pinelands has a current valid discharge permit issued by the New Jersey
Department of Environmental Protection ("DEP").
5
Employees
As of December 31, 2003, we had a total of 148 employees in New Jersey, and a
total of 61 employees in Delaware. In addition, we lease 24 employees under the
USA-PA contract with the City of Perth Amboy, New Jersey. No employees are
represented by a union except the leased employees. We believe our employee
relations are good. Wages and benefits, other than for leased employees, are
reviewed annually and are considered competitive within the industry.
Competition
Our business in our franchised service area is substantially free from direct
competition with other public utilities, municipalities and other entities.
However, our ability to provide some contract water supply and wastewater
services and operations and maintenance services is subject to competition from
other public utilities, municipalities and other entities. Although Tidewater
has been granted an exclusive franchise for each of its existing community water
systems, its ability to expand service areas can be affected by the PSC awarding
franchises to other regulated water utilities.
Regulation
We are regulated as to rates charged to customers for water and wastewater
services in New Jersey and for water services in Delaware, as to the quality of
water service we provide and as to certain other matters. Only our USA, USA-PA
and White Marsh subsidiaries are not regulated utilities. We are subject to
environmental and water quality regulation by the United States Environmental
Protection Agency ("EPA"), and the New Jersey Department of Enviromental
Protection ("DEP") with respect to operations in New Jersey and the Delaware
Department of Natural Resources and Environmental Control ("DNREC"), Delaware
Department of Health and Social Services-Division of Public Health ("DPH"), and
the Delaware River Basin Commission ("DRBC") with respect to operations in
Delaware. In addition, our issuances of securities are subject to the prior
approval of the BPU or the PSC.
Regulation of Rates and Services
New Jersey water and wastewater service operations (excluding the operations of
USA-PA) are subject to regulation by the BPU. Similarly, our Delaware water
service operations are subject to regulation by the PSC. These regulatory
authorities have jurisdiction with respect to rates, service, accounting
procedures, the issuance of securities and other matters of utility companies
operating within the States of New Jersey and Delaware, respectively. For
ratemaking purposes, we account separately for operations in New Jersey and
Delaware to facilitate independent ratemaking by the BPU for New Jersey
operations and the PSC for Delaware operations.
In determining our rates, the BPU and the PSC consider the income, expenses,
rate base of property used and useful in providing service to the public and a
fair rate of return on that property each within its separate jurisdiction. Rate
determinations by the BPU do not guarantee particular rates of return to us for
our New Jersey operations or 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.
Middlesex Water Company filed a 17.8% base rate increase petition with the BPU
on November 5, 2003. Increased operating expenses and utility plant investment
necessitated the rate increase request. Tidewater believes it will be necessary
to file for a base rate increase by early spring, 2004. In accordance with the
tariff established for Southern Shores, a rate increase based on the Consumer
Price Index was implemented on January 1, 2004. Other than rates for the
Southern Shores system, there can be no assurance that any rate increases will
be granted or, if granted, that they will be in the amounts we requested.
Further, we filed
6
a base rate increase petition with the BPU for Pinelands on December 30, 2003,
requesting an overall increase for those systems of 19.02%. Tidewater received
PSC approval to increase its Distribution System Improvement Charge to 4.89% of
base rates from 2.49%, effective January 1, 2004.
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 over the past five years
relating to water quality require us to perform expanded types of testing to
insure that our water meets state and federal water quality requirements. In
addition, environmental regulatory agencies are reviewing current regulations
governing the limits of certain organic compounds found in the water as
byproducts of treatment. We participate in industry-related research to identify
the various types of technology that might reduce the level of organic,
inorganic and synthetic compounds found in the water. The cost to water
companies of complying with the proposed water quality standards depends in part
on the limits set in the regulations and on the method selected to implement
such reduction. We believe the CJO Plant capabilities put us in a strong
position to meet any such future standards with regard to our Middlesex System.
We use regular testing of our water to determine compliance with existing
federal, New Jersey and Delaware primary water quality standards, and believe
that expansion will allow us to be in a stronger position to meet any such
future regulations regarding our Middlesex System.
Well treatment in our Tidewater System is by chlorination and, in some cases, pH
correction and filtration. Treatment in the Pinelands System (disinfection only)
is done at individual well sites.
The DEP and the DPH monitor our activities and review the results of water
quality tests that are performed for adherence to applicable regulations. Other
regulations applicable to us include the Lead and Copper Rule, the maximum
contaminant levels established for various volatile organic compounds, the
Federal Surface Water Treatment Rule and the Total Coliform Rule.
Management
This table lists information concerning our senior management team:
Name Age Position(s)
--------------------- --- ------------------------------------------------------
Dennis G. Sullivan 62 President and Chief Executive Officer
A. Bruce O'Connor 45 Vice President, Controller and Chief Financial Officer
Ronald F. Williams 54 Vice President-Operations and Chief Operating Officer
Marion F. Reynolds(1) 64 Vice President, Secretary and Treasurer
Kenneth J. Quinn 56 General Counsel and Assistant Secretary
James P. Garrett 58 Assistant Vice President-Human Resources
Richard M. Risoldi 47 Assistant Vice President of Operations
Gerard L. Esposito 52 President, Tidewater Utilities, Inc.
----------
(1) Ms. Reynolds retired from the Company on March 1, 2004.
7
Dennis G. Sullivan - Mr. Sullivan has been a Director of Middlesex since October
1999. Mr. Sullivan was hired in 1984 as Corporate Attorney, responsible for
general corporate internal legal matters. He was elected Assistant
Secretary-Assistant Treasurer in 1988 and Vice President and General Counsel in
1990. He was elected President and General Counsel in May 2001 and became
President and Chief Executive Officer in January 2003. He is Chairman of the
Board and a Director of Tidewater Utilities, Inc., White Marsh Environmental
Systems, Inc., Pinelands Water Company, Pinelands Wastewater Company, Utility
Service Affiliates, Inc., Utility Service Affiliates (Perth Amboy) Inc. and
Bayview Water Company. He is also a Director of the New Jersey Utilities
Association and the National Association of Water Companies.
A. Bruce O'Connor - Mr. O'Connor, a Certified Public Accountant, joined the
Company in 1990 as Assistant Controller and was elected Controller in 1992 and
Vice President in 1995. He was elected Vice President and Controller and Chief
Financial Officer in May 1996. Upon the retirement of Ms. Reynolds, as noted
above, Mr. O'Connor will assume the additional title and responsibilities of the
Assistant Secretary for all subsidiaries except for Utility Service Affiliates,
Inc. He is responsible for financial reporting, customer service, rate cases,
cash management and financings. He was formerly employed by Deloitte & Touche
LLP, a certified public accounting firm from 1984 to 1990. He is Treasurer and a
Director of Tidewater Utilities, Inc., Bayview Water Company, Utility Service
Affiliates, Inc., and White Marsh Environmental Systems, Inc. He is Vice
President, Treasurer and a Director of Utility Service Affiliates (Perth Amboy)
Inc., Pinelands Water Company and Pinelands Wastewater Company.
Ronald F. Williams - Mr. Williams was hired in March 1995 as Assistant Vice
President-Operations, responsible for the Company's Engineering and Distribution
Departments. He was elected Vice President-Operations in October 1995. Upon the
retirement of Ms. Reynolds, as noted above, Mr. Williams will assume the
additional title and responsibilities of the Assistant Secretary and Assistant
Treasurer for Middlesex. He was formerly employed with the Garden State Water
Company as President and Chief Executive Officer since 1991. He is a Director
and President of Utility Service Affiliates (Perth Amboy) Inc., and Director of
Utility Service Affiliates, Inc., Pinelands Water Company and Pinelands
Wastewater Company.
Marion F. Reynolds - Ms. Reynolds, who had been Secretary-Treasurer since 1987
was elected Vice President, Secretary and Treasurer in 1993. Prior to her
employment at Middlesex she had been employed by Public Service Electric and Gas
Company, Newark, New Jersey since 1958, and was elected Assistant Corporate
Secretary in 1976. She is Secretary of Tidewater Utilities, Inc., White Marsh
Environmental Systems, Inc., Pinelands Water Company, Pinelands Wastewater
Company and Bayview Water Company and Secretary and a Director of Utility
Service Affiliates (Perth Amboy) Inc., and Utility Service Affiliates, Inc.
Kenneth J. Quinn - Mr. Quinn joined the Company in 2002 as General Counsel and
was elected Assistant Secretary in 2003. Upon the retirement of Ms. Reynolds, as
noted above, Mr. Quinn will assume the additional titles and responsibilities of
the Secretary and Treasurer for Middlesex and Secretary for all subsidiaries of
Middlesex. He has been engaged in the practice of law for 29 years and prior to
joining the Company he had been employed by the law firm of Schenck, Price,
Smith and King in Morristown, New Jersey. Prior to that, Mr. Quinn spent 10
years as in-house counsel to two major banking institutions located in New
Jersey. In May 2003, he was elected Assistant Secretary of Tidewater Utilities,
Inc., Pinelands Water Company, Pinelands Wastewater Company, Utility Service
Affiliates (Perth Amboy) Inc., Bayview Water Company and White Marsh
Environmental Systems, Inc. He is a member of the New Jersey State Bar
Association and is also a member of the Public Utility Law Section of the Bar.
8
James P. Garrett - Mr. Garrett joined the Company in May, 2003 as Assistant Vice
President-Human Resources. Prior to his hire, Mr. Garrett was employed by Toys
"R" Us, Inc. from 1980-2003, most recently as Director of Organizational
Development. Mr. Garrett is responsible for all human resource programs and
activities at Middlesex Water Company, Pinelands Water Company; Pinelands
Wastewater Company; Bayview Water Company; Utility Service Affiliates, Inc;
Tidewater Utilities, Inc. and White Marsh Environmental Systems, Inc.
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 January 2003. He was formally employed by the Trenton Water
Utility and the North Jersey District Water Supply Commission. He is a Director
of Tidewater Utilities, Inc. and White Marsh Environmental Systems Inc. He also
serves as Director and President of Pinelands Water Company, Pinelands
Wastewater Company, Bayview Water Company and Utility Service Affiliates, Inc.
Gerard L. Esposito - Mr. Esposito joined Tidewater in 1998 as Executive Vice
President. Prior to joining the Company he worked for 22 years in various
executive positions for Delaware environmental protection and water quality
governmental agencies. In 1989, Mr. Esposito became the Director of the Delaware
Division of Water Resources, responsible for the administration of all of
Delaware's water pollution, water supply, water quality, wetlands and
environmental laboratory programs. He is a Director of Tidewater Utilities, Inc.
and also serves as a Director and President of White Marsh Environmental
Systems, Inc.
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. It is transported through our 54-inch supply main for
treatment and distribution at our CJO Plant in Edison, New Jersey. The design
capacity of our raw water supply main is 55 million gallons per day. Facilities
at the CJO Plant consist of source of supply, pumping, water treatment,
transmission, storage, laboratory and general facilities. In 2000, we
substantially completed the upgrade and expansion of the CJO Plant, which began
in 1997. We monitor water quality at the CJO Plant, at each well field and
throughout the distribution system to determine that federal and state water
quality standards are met.
The design capacity of the intake and pumping station in New Brunswick, New
Jersey, and the raw water supply main located there, is 80 million gallons per
day. The four electric motor-driven, vertical turbine pumps presently installed
have an aggregate design capacity of 82 million gallons per day. Associated
facilities are the 4,900 feet of 54-inch reinforced concrete water main
connecting the intake and pumping station with the CJO Plant, 23,200 feet of
48-inch reinforced concrete transmission main connecting the CJO Plant to our
distribution pipe network, and related storage, pumping, control, laboratory and
other facilities. We also have a 58,600 foot transmission main, a 38,800 foot
transmission main, and a long-term, non-exclusive agreement with the East
Brunswick system, all used to transport water to several of our contract
customers.
9
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. The firm
design capacity of the CJO Plant is now 45 million gallons per day (60 million
gallons per day maximum capacity). The main pumping station at the CJO Plant has
a design capacity of 90 million gallons per day. The four electric motor-driven,
vertical turbine pumps presently installed have an aggregate capacity of 72
million gallons per day.
In addition to the main pumping station at the CJO Plant, there is a 15 mgd
auxiliary pumping station located in a separate building. 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.
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, two story office building and an adjacent 16,500 square foot maintenance
facility.
Tidewater System
The Tidewater System's storage facilities include 36 storage tanks, with an
aggregate capacity of 3.9 million gallons. Our Delaware operations are managed
from Tidewater's leased offices in Dover, Delaware and Millsboro, Delaware.
Tidewater's Dover, Delaware office property, located on property owned by White
Marsh, consists of a 6,800 square foot office building situated on an
eleven-acre lot. White Marsh also owns another business site for which it is
exploring several options for future use.
Pinelands System
Pinelands Water Company owns well site and storage properties that are located
in Southampton Township, New Jersey. Pinelands Water storage facility is a 1.2
million gallon standpipe.
Pinelands Wastewater System
Pinelands Wastewater Company owns a 12 acre site on which its 0.5 million
gallons per day capacity tertiary treatment plant and connecting pipes are
located.
Bayview System
Bayview owns two wells, which are located in Downe Township, Cumberland County,
New Jersey.
10
USA-PA, USA and White Marsh
Our non-regulated subsidiaries, namely USA-PA, USA and White Marsh, do not own
utility plant property.
Item 3. Legal Proceedings
A lawsuit was filed against the Company for damages involving the break of both
a Company water line and an underground electric power cable containing both
electric lines and petroleum based insulating fluid. The electric utility also
asserted claims against the Company. The lawsuit was settled by agreement to
submit plaintiff's claim for approximately $1.1 million damages to binding
arbitration, in which the agreed maximum exposure of the Company is $0.3
million. While we are unable to predict the outcome of the arbitration, we
believe that we have substantial defenses. We have not recorded any liability
for the claim.
Another claim is pending involving a construction subcontractor, the Company's
general contractor and the Company concerning a major construction project. The
dispute relates to work required to be performed under a construction contract
and related subcontracts and includes payment issues and timing/delay issues.
The matter was instituted in 2001 and is pending in Superior Court, Middlesex
County, New Jersey. We have estimated our maximum exposure in this litigation to
be $4.3 million. We believe that we have substantial defenses to a number of the
asserted claims. It is reasonably possible that we may be responsible for some
portion of the amount claimed, but significantly less than the maximum. We are
unable, however, to determine this amount. Any amount in this matter which is
determined to be due from us, will be recorded as an addition to utility plant
in service, subject to recovery in rates charged to our customers. However, the
outcome could have a material adverse effect on the Company's financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Price Range of Common Stock
The following table shows the range of closing prices for the Common Stock on
the Nasdaq Stock Market for the calendar quarter indicated and the dividend paid
to shareholders in such quarter.
2003 High Low Dividend
---- ---- --- --------
First Quarter $ 18.00 $ 15.77 $0.1613
Second Quarter 18.49 16.32 0.1613
Third Quarter 21.23 17.72 0.1613
Fourth Quarter 21.12 18.19 0.1650
2002 High Low Dividend
---- ---- --- --------
First Quarter $ 17.74 $ 16.70 $0.1575
Second Quarter 20.04 15.53 0.1575
Third Quarter 19.43 13.73 0.1575
Fourth Quarter 17.36 15.38 0.1613
11
Approximate Number of Equity Security Holders as of December 31, 2003
Number of
Title of Class Record Holders
-------------- --------------
Common Stock, No Par Value 2,106
Cumulative Preferred Stock, No Par Value:
$7.00 Series 14
$4.75 Series 1
Cumulative Convertible Preferred Stock, No Par Value:
$7.00 Series 4
$8.00 Series 3
Dividends
The Company has paid dividends on its Common Stock each year since 1912.
Although it is the present intention of the Board of Directors of the Company to
continue to pay regular quarterly cash dividends on its Common Stock, the
payment of future dividends is contingent upon the future earnings of the
Company, its financial condition and other factors deemed relevant by the Board
of Directors at its discretion.
If four or more quarterly dividends are in arrears, the preferred shareholders,
as a class, are entitled to elect two members to the Board of Directors in
addition to Directors elected by holders of the common stock. In the event
dividends on the preferred stock are in arrears, no dividends may be declared or
paid on the common stock of the Company. Substantially all of the Utility Plant
of the Company is subject to the lien of its mortgage, which also includes
certain restrictions as to cash dividend payments and other distributions on
common stock.
The Common Stock of the Company is traded on the Nasdaq Stock Market under the
symbol MSEX.
Restricted Stock Plan
The Company maintains a shareholder approved Restricted Stock Plan, under which
69,400 shares of the Company's common stock are held in escrow by the Company
for key employees. Such stock is subject to an agreement requiring forfeiture by
the employee in the event of termination of employment within five years of the
grant other than as a result of retirement, death or disability. The maximum
number of shares authorized for grant under this plan is 240,000 shares.
12
Item 6. Selected Financial Data
CONSOLIDATED SELECTED FINANCIAL DATA
(Thousands of Dollars Except per Share Data)
2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 64,111 $ 61,933 $ 59,638 $ 54,477 $ 53,497
-------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operations and Maintenance 36,195 32,767 31,740 30,269 28,887
Depreciation 5,363 4,963 5,051 4,701 3,885
Other Taxes 7,816 7,737 7,594 6,916 6,740
Income Taxes 3,237 3,999 3,760 2,653 3,320
-------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 52,611 49,466 48,145 44,539 42,832
-------------------------------------------------------------------------------------------------------------------------------
Operating Income 11,500 12,467 11,493 9,938 10,665
Other Income 358 442 502 364 1,911
Interest Charges 5,227 5,144 5,042 4,997 4,695
-------------------------------------------------------------------------------------------------------------------------------
Net Income 6,631 7,765 6,953 5,305 7,881
Preferred Stock Dividend 255 255 255 255 301
-------------------------------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 6,376 $ 7,510 $ 6,698 $ 5,050 $ 7,580
-------------------------------------------------------------------------------------------------------------------------------
Earnings per Share:*
Basic $ 0.61 $ 0.73 $ 0.66 $ 0.50 $ 0.77
Diluted $ 0.61 $ 0.73 $ 0.66 $ 0.50 $ 0.76
Average Shares Outstanding:*
Basic 10,475 10,280 10,131 10,044 9,854
Diluted 10,818 10,623 10,474 10,387 10,296
Dividends Declared and Paid* $ 0.649 $ 0.634 $ 0.623 $ 0.613 $ 0.593
Total Assets $ 263,192 $ 248,962 $ 240,312 $ 222,815 $ 218,062
Convertible Preferred Stock $ 2,961 $ 2,961 $ 2,961 $ 2,961 $ 2,961
Long-term Debt $ 97,377 $ 87,483 $ 88,140 $ 82,109 $ 82,330
-------------------------------------------------------------------------------------------------------------------------------
*All share and per share amounts reflect the three-for-two common stock split
effective January 2, 2002 and the four-for-three common stock split, effective
November 14, 2003.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As discussed in Note 10 to the consolidated financial statements, in Restatement
of Consolidated Financial Statements, the financial statements as of December
31, 2002 and for the years ended December 31, 2002 and 2001 have been restated.
The restatement had no effect on reported total assets, net income, earnings
applicable to common stock, cash flows from operations or liquidity.
Overview
Middlesex Water Company has operated as a water utility in New Jersey since
1897, and in Delaware, through our wholly-owned subsidiary, Tidewater, since
1992. We are in the business of collecting, treating, distributing and selling
water for domestic, commercial, municipal, industrial and fire protection
purposes. We also operate a New Jersey municipal water and wastewater system
under contract and provide wastewater services in New Jersey and Delaware
through our subsidiaries. We are regulated as to rates charged to customers for
water and wastewater services in New Jersey and for water services in Delaware,
as to the quality of water service we provide and as to certain other matters.
Only our USA, USA-PA and White Marsh subsidiaries are not regulated utilities.
Our New Jersey water utility system (the "Middlesex System") provides water
services to approximately 58,000 retail customers, primarily in central New
Jersey. The Middlesex System also provides water service under contract to
municipalities in central New Jersey with a total population of approximately
267,000. In partnership with our subsidiary, USA-PA, we operate the water supply
system and wastewater system for the City of Perth Amboy, New Jersey. Our other
New Jersey subsidiaries, Pinelands Water and Pinelands Wastewater, provide water
and wastewater services to residents in Southampton Township, New Jersey.
Our Delaware subsidiaries, Tidewater and Southern Shores, provide water services
to approximately 24,000 retail customers in New Castle, Kent and Sussex
Counties, Delaware. Our other Delaware subsidiary, White Marsh, services an
additional 1,900 customers in Kent and Sussex Counties.
The majority of our revenue is generated from retail and contract water services
to customers in our service areas. We record water service revenue as such
service is rendered and include estimates for amounts unbilled at the end of the
period for services provided after the last billing cycle. Fixed service charges
are billed in advance by our subsidiary, Tidewater, and are recognized in
revenue as the service is provided.
Our ability to increase operating income and net income is based significantly
on three factors: weather, adequate and timely rate increases, and customer
growth. These factors are evident in the discussions below which compare our
results of operations from prior years. Cool, wet weather led to lower revenues
and earnings in 2003. Rate increases for Middlesex and many of our subsidiaries
increased revenues and net income in 2002 and 2001. Customer growth in our
Delaware service territories has increased revenues greater than the cost to
serve these new customers.
Results of Operations in 2003 Compared to 2002
Operating revenues for the year rose $2.2 million or 3.5% over the same period
in 2002. Customer growth of 10.9% in Delaware provided additional facility
charges and connection fees of $1.4 million. Higher base rates in our Delaware
service territories provided $0.6 million of the increase. Though we anticipate
continued growth in the number of customers and increased water consumption
among our Delaware systems, such growth and increased consumption cannot be
guaranteed. Additionally, weather conditions may adversely impact future
consumption despite anticipated growth in the number of customers. For example,
for the year ended December 31, 2003, cool wet weather in the Mid-Atlantic
region pushed
14
Tidewater's consumption revenue down by $0.3 million and Middlesex consumption
revenue down by $0.5 million. Despite such adverse weather conditions, revenues
from our operations and maintenance contracts rose $0.5 million due to scheduled
increases in fixed fees under the City of Perth Amboy contract.
New wastewater operations in Delaware provided $0.1 million in additional
revenues. Our new meter services venture provided $0.3 million in additional
revenues. All other operations accounted for $0.1 million of the higher
revenues.
Operating expenses increased by $3.1 million or 6.4%. Costs related to main
breaks resulting from severe winter weather conditions in the first quarter of
2003 contributed to additional expenses of $0.4 million. There were also higher
sewer disposal fees and security costs for USA-PA that helped increase costs by
$0.6 million. An increase in our Delaware employee base, general wage increases
and higher costs associated with employee medical and retirement benefits pushed
up costs by $0.7 million. In New Jersey, payroll costs, employee benefits and
legal fees pushed up costs by $0.9 million. Non-regulated operations of meter
installations and wastewater, which began in 2003, contributed $0.3 million of
the overall expense increase.
Water treatment, source of supply and pumping costs increased by $0.5 million
combined. Going forward we anticipate an increase in New Jersey's electric
generation costs due to deregulation of electricity and an increase of at least
8.5% in the cost of untreated water purchased under a new contract with the New
Jersey Water Supply Authority. These increasing costs, in addition to higher
business insurance and security costs prompted us to file for a 17.8% base rate
increase with the BPU for Middlesex and a 19.02% base rate increase for
Pinelands. We cannot predict whether the BPU will approve, deny or reduce the
amount of our requests; however, despite the outcome, we will continue to seek
rate increases in the future where increased operating costs and capital
investment necessitate such action.
Depreciation expense for 2003 increased by $0.4 million, or 8.1%, due to a
higher level of utility plant in service. Allowance for funds used during
construction rose 17% for the year as Tidewater's capital program now includes
larger projects with longer construction schedules. As our investment in utility
plant increases, we continue to seek timely rate relief either through base rate
filings as discussed above or through other means such as the Distribution
System Improvement Charge (DSIC) in Delaware. The DSIC is a separate rate
mechanism that allows for cost recovery of certain capital improvement costs
incurred in between base rate filings. Delaware regulated water utilities are
allowed to apply for a DSIC every six months with the maximum increase limited
to 5.0% in any twelve month period and a 7.5% overall limitation. The PSC
approved an increase in Tidewater's DSIC to 4.89% of base rates from 2.49%,
effective January 1, 2004. In addition, because Tidewater continues to make
significant capital additions and improvements to its new and existing systems,
it believes it will be necessary to file for a base rate increase by early
spring 2004. That increase request, which is expected to be in excess of 20%, is
due to the $20.0 million of additional utility plant placed in service or to be
placed in service since the last rate case.
Other taxes increased by $0.1 million generally due to higher payroll related
taxes and real estate taxes in both New Jersey and Delaware. Lower federal
income taxes of $0.8 million over last year are attributable to the reduced
operating results for 2003 as compared to 2002.
Other income decreased by $0.1 million as interest rates fell on short-term cash
balance investments. Interest expense increased by $0.1 million due to a higher
level of overall debt outstanding as compared to last year.
Net income decreased to $6.6 million from $7.8 million and basic and diluted
earnings per share decreased by $0.12 to $0.61 due to lower earnings.
15
Results of Operations in 2002 Compared to 2001
Operating revenues increased $2.3 million or 3.9% over the prior year. Higher
base rates in New Jersey and Delaware provided $1.9 million of the increase. A
full year of ownership of the Bayview and Southern Shores systems generated
additional revenue of $0.4 million. Service fees from our operation and
maintenance contracts rose $0.2 million due to an increase in fixed fees for
sewer disposal under the City of Perth Amboy contract.
Consumption revenues decreased by $0.2 million. Drought restrictions in New
Jersey caused decreased usage in the amount of $1.3 million. The continued
double-digit growth of our Tidewater customer base offset $1.1 million of the
lower consumption revenues.
Operating expenses increased $1.3 million for the year. Operation and
maintenance expenses accounted for $1.0 million of the increase. There were
higher sewer costs of $0.2 million for USA-PA. General wage increases, higher
costs associated with employee medical and retirement benefits and an increase
in our Delaware employee base, pushed up operation and maintenance costs by $0.7
million. Approximately $0.2 million was due to the inclusion of expenses of
Southern Shores for the entire year. Increases in business insurances, audit
fees and stock exchange filing fees amounted to $0.2 million. A favorable
decrease in water production and treatment costs of $0.3 million was due to
drought related consumption decreases in our New Jersey operations.
Other taxes increased by $0.1 million due to higher revenue related taxes in New
Jersey, increased real estate taxes and payroll taxes in both New Jersey and
Delaware. Higher federal income taxes of $0.2 million over 2001 were
attributable to favorable operating results over that year.
Depreciation expense decreased by $0.1 million, or 1.7%, due to the full
recovery of our investment in transportation equipment, which we depreciate at a
higher rate than our mains and appurtenances.
Allowance for funds used during construction rose $0.1 million for the year as
the capital programs of Middlesex Water Company and Tidewater now include larger
projects with longer construction periods. Other income was lower by $0.3
million due mostly to the recognition of a one time gain reported in 2001 by a
small investor-owned water utility in southern Delaware, in which we own a 23%
interest.
Even though there was a higher level of long-term and short-term debt
outstanding compared to 2001, lower interest rates on short-term debt and the
$6.0 million refinancing of long-term debt at a lower rate helped to keep the
interest expense increase to 2.0% or $0.1 million.
Net income rose to $7.8 million from $7.0 million and basic and diluted earnings
per share rose $0.07 from $0.66 to $0.73 per share due to higher earnings.
Outlook
Our revenues should continue to increase in 2004 as we expect customer growth in
Delaware and our pursuit of non-regulated opportunities in Delaware and
elsewhere to continue. The level of revenues and earnings will be impacted by
the ultimate outcome of the New Jersey base rate cases currently under review by
the BPU and the anticipated base rate filing in Delaware for Tidewater. Revenues
and earnings will also be influenced by weather. Changes in these factors as
well as our projected capital program are the primary factors that will
determine the need for future rate increase filings.
We continue to explore viable plans to streamline operations and reduce costs,
particularly in Delaware, where customer growth continues to exceed industry
averages. Part of the challenge is that our Delaware operations are a
combination of over 70 stand-alone production and distribution systems serving
240 communities.
16
Our strategy is for continued growth through acquisitions, internal expansion,
public/private partnerships and 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 2003, net cash flow from
operations of $14.2 million, which increased over 2002 due to lower working
capital requirements, and proceeds from prior year financings allowed us to fund
approximately 85% of our 2003 utility plant expenditures. Net proceeds from
issuing long-term debt were used to fund the balance of those expenditures.
As shown in the following table, we expect our capital expenditures in 2004 and
2005 to increase over 2003. These increases are attributable to a major pipeline
installation in the Middlesex system and continued customer growth and service
improvement requirements in our Tidewater systems in Delaware, where we spent
$11.9 million on utility plant in 2003.
(Millions of Dollars)
2004 2005 2006
---- ---- ----
Delaware Systems $ 14.1 $ 12.8 $ 7.6
Raw Water Line 6.0 4.0 0.0
RENEW Program 3.8 3.0 3.0
Scheduled Upgrades to Existing Systems 4.8 4.6 3.5
------- ------- -------
Total $ 28.7 $ 24.4 $ 14.1
======= ======= =======
Under our capital program for 2004, we plan to expend $14.1 million for water
system additions and improvements for our Delaware systems, which include the
construction of two elevated tanks, a sludge removal plant and the creation of
several new wells and interconnections. The two-year, $10.0 million project to
construct the second raw water line to Middlesex primary water treatment plant
is expected to begin in 2004. We expect to spend $3.8 million for the RENEW
program, which is our program to clean and cement line unlined mains in the
Middlesex System. There remains a total of approximately 138 miles of unlined
mains in the 730-mile Middlesex System. In 2003, 5.3 miles of unlined mains were
cleaned and cement lined. The capital program also includes $4.8 million for
scheduled upgrades to our existing systems in New Jersey. The scheduled upgrades
consist of $0.8 million for mains, $0.8 million for service lines, $0.4 million
for meters, $0.3 million for hydrants, $0.2 million for computer systems and
$2.3 million for various other items.
To pay for our capital program in 2004, we will utilize internally generated
funds and funds available under existing New Jersey Environmental Infrastructure
Trust loans (currently, $3.8 million) and Delaware State Revolving Fund loans
(currently, $3.0 million), which provide low cost financing for projects that
meet certain water quality and system improvement benchmarks. If necessary, we
will also utilize short-term borrowings through $25.0 million of available lines
of credit with three commercial banks. As of December 31, 2003, we had $12.5
million outstanding against the lines of credit. We have filed with the United
States Securities and Exchange Commission ("SEC") a registration statement on
Form S-3 covering the offering of 700,000 shares of our common stock. We
anticipate the registration statement will be declared effective in March 2004,
after the filing with the SEC of this Annual Report on Form 10-K for the year
ended December 31, 2003. There can be no assurance that the registration
statement will be declared effective in March 2004 or at any later time. If the
offering is completed, we expect to use the net proceeds to repay our
outstanding short-term borrowings.
17
Going forward into 2005 through 2006, we currently project that we will be
required to expend approximately $38.5 million for capital projects. Plans to
finance those projects are underway as we expect to receive approval to borrow
up to $17.0 million under the New Jersey Environmental Infrastructure Trust
program in November of 2004. We anticipate that some of the capital projects in
Delaware will be eligible for the Delaware State Revolving Fund program in that
state and we are pursuing those opportunities. 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.
Increases in certain operating costs will impact our liquidity and capital
resources. As described in our results of operations discussion, we have filed
for rate relief for Middlesex and the Pinelands Companies. There is no
certainty, however, that the BPU will approve any or all of the requested
increase. We also plan to file for a base rate increase for Tidewater by early
spring.
Contractual Obligations
The table below presents our known contractual obligations for the periods
specified. The purchased water amounts include the effect of the new agreement
with the New Jersey Water Supply Authority effective January 1, 2004.
Payment Due by Period
(Millions of Dollars)
Less than 1-3 4-5 More than
Total 1 Year Years Years 5 Years
----- ------ ----- ----- -------
Long-Term Debt $ 98.4 $ 1.1 $ 2.2 $ 2.3 $ 92.8
Purchased Water Contracts 25.6 3.9 6.2 4.5 11.0
Wastewater Operations 64.4 3.7 11.6 12.6 36.5
------ ------ ------ ------ ------
Total $188.4 $ 8.7 $ 20.0 $ 19.4 $140.3
====== ====== ====== ====== ======
Guarantees
USA-PA operates the City of Perth Amboy's (Perth Amboy) water and wastewater
systems under a service contract agreement through June 30, 2018. The agreement
was effected under New Jersey's Water Supply Public/Private Contracting Act and
the New Jersey Wastewater Public/Private Contracting Act. Under the agreement,
USA-PA receives a fixed fee and a variable fee based on increased system
billing. Scheduled fixed fee payments began at $6.4 million in the first year
and will increase over the term of the contract to $9.7 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, which are 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, 2003, approximately $24.4 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.
18
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 87% of Operating Revenues and 99% of Total
Assets, are subject to regulation in the state in which they operate. Those
companies are required to maintain their accounts in accordance with regulatory
authorities' rules and guidelines, which may differ from other authoritative
accounting pronouncements. In those instances, the Company follows the guidance
provided in the Financial Accounting Standards Board (FASB), Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting For the Effects of
Certain Types of Regulation."
In accordance with SFAS No. 71, we defer costs and obligations 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 do not believe any of the deferred items we have recorded will
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 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 based on
billings and other factors and are not significant, are recorded upon approval
of the amount by the City.
Pension Plan
We maintain a noncontributory defined benefit pension plan which covers
substantially all employees with more than 1,000 hours of service.
The discount rate utilized for determining future pension obligations has
decreased from 7.25% at December 31, 2001 to 6.75% at December 31, 2002 to 6.00%
at December 31, 2003. Lowering the discount rate by 0.5% would have increased
the net periodic pension cost by $0.1 million in 2003. 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 2003 by approximately $0.1
million.
Future actual pension income will depend on future investment performance,
changes in future discount rates and various other factors related to the
population participating in the pension plans.
19
Accounting Standards
FASB issued SFAS No. 149, Amendments of Statement 133 on Derivative Instruments
and Hedging Activities ("SFAS 149"), which amends and clarifies financial
accounting and reporting for derivative instruments and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 149 is generally effective after June 30, 2003. The adoption of
SFAS 149 did not have any effect on our financial statements.
FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities And Equity ("SFAS 150"), which establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have any effect
on our financial statements.
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements ("FIN 46"). The adoption of FIN 46 (as
amended) is not expected to have any effect on our financial statements.
In December 2003, FASB issued SFAS No. 132 (Revised) Employees Disclosure about
Pension and Other Postretirement Benefits, which expands the disclosure
requirements of these employee benefits. The adoption of SFAS No. 132 (Revised)
had no effect on our financial position or results of operations.
SFAS No. 143, "Accounting for Asset Retirement Obligations" became effective
January 1, 2003. Upon adoption of SFAS No. 143, the fair value of a liability
for an asset retirement obligation is required to be recorded. The Company
collects the estimated removal costs of utility plant in rates through
depreciation in accordance with regulatory treatment. At December 31, 2003, the
Company reclassified the estimated removal costs of $4.8 million from
accumulated depreciation to a regulatory liability. At December 31, 2002, $4.4
million was reclassified from accumulated depreciation to removal costs for
utility plant retirement obligations. This reclassification had no impact on the
Company's results of operations.
Qualitative and Quantitative Disclosures About Market Risk
The Company is subject to the risk of fluctuating interest rates in the normal
course of business. Our policy is to manage interest rates through the use of
fixed rate long-term debt and, to a lesser extent, short-term debt. The
Company's interest rate risk related to existing fixed rate, long-term debt is
not material due to the term of the majority of our First Mortgage Bonds, which
have final maturity dates ranging from 2009 to 2038. Over the next twelve
months, approximately $1.1 million of the current portion of ten existing
long-term debt instruments will mature. Combining this amount with the $12.5
million in short-term debt outstanding at December 31, 2003, and applying a
hypothetical change in the rate of interest charged by 10% on those borrowings,
would not have a material effect on our earnings.
Report of Management
The consolidated financial statements and other financial information included
in this annual report have been prepared by and are the responsibility of
management. The statements have been prepared in conformity with accounting
principles generally accepted in the United States of America considered
appropriate under the circumstances and include amounts based on necessary
judgment and estimates deemed appropriate.
20
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are protected from improper use and
loss and to provide reliable financial information.
The consolidated financial statements of the Company have been audited by its
independent auditors, Deloitte & Touche LLP, and their report is included
herein.
The Board of Directors, through its Audit Committee consisting solely of
independent outside Directors, is responsible for overseeing and reviewing the
Company's financial reporting and accounting practices. The Audit Committee
meets periodically with the independent auditors to review the scope of their
work and discuss any changes and developments that may impact the Company.
/s/ Dennis G. Sullivan /s/ A. Bruce O'Connor
----------------------- -----------------------
Dennis G. Sullivan A. Bruce O'Connor
President Vice President and
Controller
March 4, 2004
Item 7A. Qualitative and Quantitative Disclosure About Market Risk
This information is incorporated herein by reference to Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Middlesex Water Company
We have audited the accompanying consolidated balance sheets and statements of
capital stock and long-term debt of Middlesex Water Company and subsidiaries
(the "Company") as of December 31, 2003 and 2002, and the related consolidated
statements of income, common stockholders' equity and comprehensive income, and
of cash flows for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2003
and 2002, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 10, the accompanying 2002 and 2001 financial statements
have been restated.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 4, 2004
21
MIDDLESEX WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
Restated
Note 10
December 31, 2003 2002
================================================================================================
UTILITY PLANT: Water Production $ 77,265,782 $ 72,212,878
Transmission and Distribution 174,455,437 158,412,075
General 19,776,293 18,618,211
Construction Work in Progress 2,798,070 6,619,767
----------------------------------------------------------------------------
TOTAL 274,295,582 255,862,931
Less Accumulated Depreciation 47,510,797 43,561,265
----------------------------------------------------------------------------
UTILITY PLANT - NET 226,784,785 212,301,666
----------------------------------------------------------------------------
NONUTILITY ASSETS - NET 4,147,685 3,424,492
================================================================================================
CURRENT ASSETS: Cash and Cash Equivalents 3,005,610 2,937,894
Accounts Receivable 5,682,608 6,028,302
Unbilled Revenues 3,234,788 3,181,091
Materials and Supplies (at average cost) 1,419,142 1,190,337
Prepayments 1,009,304 815,392
----------------------------------------------------------------------------
TOTAL CURRENT ASSETS 14,351,452 14,153,016
================================================================================================
DEFERRED CHARGES Unamortized Debt Expense 3,272,783 3,239,364
AND OTHER ASSETS: Preliminary Survey and Investigation Charges 1,380,771 1,098,468
Regulatory Assets 8,216,117 7,962,328
Operations Contracts Fees Receivable 699,806 --
Restricted Cash 3,825,420 6,146,699
Other 513,116 636,461
----------------------------------------------------------------------------
TOTAL DEFERRED CHARGES AND OTHER ASSETS 17,908,013 19,083,320
----------------------------------------------------------------------------
TOTAL ASSETS $263,191,935 $248,962,494
----------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
22
CAPITALIZATION AND LIABILITIES
December 31, 2003 2002
========================================================================================================
CAPITALIZATION: Common Stock, No Par Value $ 56,924,028 $ 53,314,169
Retained Earnings 22,668,348 23,187,076
Accumulated Other Comprehensive Income, net of tax 50,808 --
====================================================================================
TOTAL COMMON EQUITY 79,643,184 76,501,245
====================================================================================
Preferred Stock 4,063,062 4,063,062
Long-term Debt 97,376,847 87,483,382
------------------------------------------------------------------------------------
TOTAL CAPITALIZATION 181,083,093 168,047,689
========================================================================================================
CURRENT Current Portion of Long-term Debt 1,067,258 639,427
LIABILITIES: Notes Payable 12,500,000 17,650,000
Accounts Payable 4,777,400 2,516,969
Taxes Accrued 6,258,739 5,898,751
Interest Accrued 1,810,639 1,614,278
Unearned Revenues and Advanced Service Fees 602,854 416,589
Other 678,596 842,589
------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 27,695,486 29,578,603
========================================================================================================
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4)
========================================================================================================
DEFERRED CREDITS: Customer Advances for Construction 11,711,846 10,881,815
Accumulated Deferred Investment Tax Credits 1,775,183 1,853,799
Accumulated Deferred Income Taxes 14,125,970 13,241,901
Employee Benefit Plans 5,086,988 5,279,737
Regulatory Liability - Cost of Utility Plant Removal 4,830,308 --
Utility Plant Retirement Obligations -- 4,358,262
Other 909,498 814,897
------------------------------------------------------------------------------------
TOTAL DEFERRED CREDITS 38,439,793 36,430,411
========================================================================================================
CONTRIBUTIONS IN AID OF CONSTRUCTION 15,973,563 14,905,791
------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $263,191,935 $248,962,494
------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
23
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2003 2002 2001
====================================================================================================
OPERATING REVENUES $ 64,111,214 $ 61,932,786 $ 59,638,145
----------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Operations 32,666,099 29,918,921 29,020,790
Maintenance 3,529,113 2,847,209 2,718,589
Depreciation 5,362,727 4,963,268 5,051,399
Other Taxes 7,815,918 7,737,155 7,594,427
Income Taxes 3,237,218 3,999,295 3,759,624
----------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 52,611,075 49,465,848 48,144,829
----------------------------------------------------------------------------------------------------
OPERATING INCOME 11,500,139 12,466,938 11,493,316
====================================================================================================
OTHER INCOME (EXPENSE):
Allowance for Funds Used During Construction 315,919 269,668 139,609
Other Income 131,499 249,324 520,165
Other Expense (89,931) (77,114) (157,814)
----------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 357,487 441,878 501,960
----------------------------------------------------------------------------------------------------
INTEREST CHARGES:
Interest on Long-term Debt 4,816,764 4,627,819 4,521,084
Amortization of Debt Expense 161,065 156,869 140,604
Other Interest Expense 249,201 358,775 380,604
----------------------------------------------------------------------------------------------------
TOTAL INTEREST CHARGES 5,227,030 5,143,463 5,042,292
----------------------------------------------------------------------------------------------------
NET INCOME 6,630,596 7,765,353 6,952,984
----------------------------------------------------------------------------------------------------
PREFERRED STOCK DIVIDEND REQUIREMENTS 254,786 254,786 254,786
----------------------------------------------------------------------------------------------------
EARNINGS APPLICABLE TO COMMON STOCK $ 6,375,810 $ 7,510,567 $ 6,698,198
----------------------------------------------------------------------------------------------------
EARNINGS AND DIVIDENDS PER SHARE OF COMMON STOCK:*
Earnings per Share:
Basic $ 0.61 $ 0.73 $ 0.66
Diluted $ 0.61 $ 0.73 $ 0.66
Average Number of Shares Outstanding :
Basic 10,475,295 10,280,302 10,130,908
Diluted 10,818,435 10,623,442 10,474,048
Dividends Paid per Share $ 0.649 $ 0.634 $ 0.623
----------------------------------------------------------------------------------------------------
*All share and per share amounts reflect the three-for-two common stock split,
effective January 2, 2002 and the four-for-three common stock split effective
November 14, 2003.
See Notes to Consolidated Financials Statements.
24
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
Restated Restated
Note 10 Note 10
2003 2002 2001
==============================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,630,596 $ 7,765,353 $ 6,952,984
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 5,633,863 5,436,525 5,303,536
Provision for Deferred Income Taxes 306,919 197,714 318,972
Allowance for Funds Used During Construction (315,919) (269,668) (139,609)
Changes in Assets and Liabilities:
Accounts Receivable 345,694 637,418 (1,274,456)
Unbilled Revenues (53,697) (380,076) 168,028
Materials & Supplies (228,805) (162,417) (17,964)
Prepayments (193,912) 54,301 (175,582)
Other Assets 275,802 (256,683) 42,724
Operations Contracts Receivable (699,806) -- --
Accounts Payable 2,260,431 (476,148) 373,023
Accrued Taxes 333,815 (432,126) 280,555
Accrued Interest 196,361 (199,618) 16,376
Employee Benefit Plans (192,749) 17,061 604,312
Unearned Revenue & Advanced Service Fees 186,265 71,316 56,507
Other Liabilities (236,431) (803,949) (198,954)
-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,248,427 11,199,003 12,310,452
-----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (19,574,205) (16,489,095) (12,747,032)
Cash Surrender Value & Other Investments (466,290) (4,438) (107,319)
Restricted Cash 2,321,158 2,843,996 (6,390,000)
Investment in Associated Companies -- (20,618) 704,997
Proceeds from Real Estate Dispositions 532,922 -- 111,843
Notes Receivable -- -- 97,500
Preliminary Survey & Investigation Charges (282,303) (154,846) (370,494)
Other Assets (47,264) (47,561) (183,488)
-----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (17,515,982) (13,872,562) (18,883,993)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (884,427) (6,443,836) (215,859)
Proceeds from Issuance of Long-term Debt 11,205,723 6,067,350 6,390,000
Short-term Bank Borrowings (5,150,000) 4,425,000 7,175,000
Deferred Debt Issuance Expenses (194,484) (510,818) (11,440)
Common Stock Issuance Expense (103,284) (3,688) --
Restricted Cash 121 219,588 (622)
Proceeds from Issuance of Common Stock 3,609,859 3,214,548 1,261,135
Payment of Common Dividends (6,791,254) (6,510,494) (6,304,214)
Payment of Preferred Dividends (254,786) (254,786) (254,786)
Construction Advances and Contributions-Net 1,897,803 874,205 571,557
-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,335,271 1,077,069 8,610,771
-----------------------------------------------------------------------------------------------------------
NET CHANGES IN CASH AND CASH EQUIVALENTS 67,716 (1,596,490) 2,037,230
-----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,937,894 4,534,384 2,497,154
-----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,005,610 $ 2,937,894 $ 4,534,384
-----------------------------------------------------------------------------------------------------------
*Excludes Allowance for Funds Used During Construction
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Cash Paid for Interest $ 5,061,878 $ 5,103,787 $ 4,919,818
Interest Capitalized $ (315,919) $ (269,668) $ (139,609)
Income Taxes $ 2,472,000 $ 4,237,000 $ 3,674,792
-----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
25
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
December 31, 2003 2002
============================================================================================
Common Stock, No Par Value
Shares Authorized - 20,000,000
Shares Outstanding* - 2003 - 10,566,937 $ 56,924,028
2002 - 10,356,489 $ 53,314,169
Retained Earnings 22,668,348 23,187,076
Accumulated Other Comprehensive Income, net of tax 50,808 --
--------------------------------------------------------------------------------------------
TOTAL COMMON EQUITY 79,643,184 76,501,245
--------------------------------------------------------------------------------------------
Cumulative Preference Stock, No Par Value:
Shares Authorized - 100,000
Shares Outstanding - None
Cumulative Preferred Stock, No Par Value
Shares Authorized - 140,497
Convertible:
Shares Outstanding, $7.00 Series - 14,881 1,562,505 1,562,505
Shares Outstanding, $8.00 Series - 12,000 1,398,857 1,398,857
Nonredeemable:
Shares Outstanding, $7.00 Series - 1,017 101,700 101,700
Shares Outstanding, $4.75 Series - 10,000 1,000,000 1,000,000
--------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK 4,063,062 4,063,062
--------------------------------------------------------------------------------------------
Long-term Debt
8.05%, Amortizing Secured Note, due December 20, 2021 3,136,531 3,203,401
6.25%, Amortizing Secured Note, due May 22, 2028 10,255,000 --
4.22%, State Revolving Trust Note, due December 31, 2022 192,281 67,350
3.60%, State Revolving Trust Note, due May 1, 2025 580,792 --
4.00%, State Revolving Trust Bond, due September 1, 2021 820,000 850,000
0.00%, State Revolving Fund Bond, due September 1, 2021 690,833 730,017
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 807,956 862,088
4.25%, Series Y, due September 1, 2018 965,000 1,010,000
0.00%, Series Z, due September 1, 2019 1,792,435 1,907,568
5.25%, Series AA, due September 1, 2019 2,175,000 2,265,000
0.00%, Series BB, due September 1, 2021 2,168,277 2,287,385
4.00%, Series CC, due September 1, 2021 2,360,000 2,440,000
5.10%, Series DD, due January 1, 2032 6,000,000 6,000,000
--------------------------------------------------------------------------------------------
SUBTOTAL LONG-TERM DEBT 98,444,105 88,122,809
--------------------------------------------------------------------------------------------
Less: Current Portion of Long-term Debt (1,067,258) (639,427)
--------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 97,376,847 $ 87,483,382
--------------------------------------------------------------------------------------------
*All share amounts reflect the three-for-two common stock split, effective
January 2, 2002 and the four-for-three common stock split, effective November
14, 2003.
See Notes to Consolidated Financial Statements.
26
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Common Common
Stock Stock Retained
Shares* Amount Earnings
----------- ----------- ------------
Balance at Januuary 1, 2001 10,097,067 $48,838,486 $ 21,796,707
Net Income 6,952,984
Dividend Reinvestment & Common Stock Purchase Plan 66,435 1,170,619
Restricted Stock Award - Net 4,500 90,516
Cash Dividends on Common Stock (6,304,214)
Cash Dividends on Preferred Stock (254,786)
----------- ----------- ------------
Balance at December 31, 2001 10,168,002 50,099,621 22,190,691
Net Income 7,765,353
Dividend Reinvestment & Common Stock Purchase Plan 176,320 2,990,712
Restricted Stock Award - Net 12,167 223,836
Cash Dividends on Common Stock (6,510,494)
Cash Dividends on Preferred Stock (254,786)
Common Stock Expenses (3,688)
----------- ----------- ------------
Balance at December 31, 2002 10,356,489 53,314,169 23,187,076
Net Income 6,630,596
Change in Value of Equity Investments, Net of $26,000 Income Tax
Comprehensive Income
Dividend Reinvestment & Common Stock Purchase Plan 192,515 3,263,569
Restricted Stock Award - Net 17,933 346,290
Cash Dividends on Common Stock (6,791,254)
Cash Dividends on Preferred Stock (254,786)
Common Stock Expenses (103,284)
----------- ----------- ------------
Balance at December 31, 2003 10,566,937 $56,924,028 $ 22,668,348
=========== =========== ============
Accumulated
Other
Comprehensive
Income Total
------------- ------------
Balance at January 1, 2001 $ -- $ 70,635,193
Net Income 6,952,984
Dividend Reinvestment & Common Stock Purchase Plan 1,170,619
Restricted Stock Award - Net 90,516
Cash Dividends on Common Stock (6,304,214)
Cash Dividends on Preferred Stock (254,786)
----------- ------------
Balance at December 31, 2001 -- 72,290,312
Net Income 7,765,353
Dividend Reinvestment & Common Stock Purchase Plan 2,990,712
Restricted Stock Award - Net 223,836
Cash Dividends on Common Stock (6,510,494)
Cash Dividends on Preferred Stock (254,786)
Common Stock Expenses (3,688)
----------- ------------
Balance at December 31, 2002 -- 76,501,245
Net Income 6,630,596
Change in Value of Equity Investments, Net of $26,000 Income Tax 50,808 50,808
-----------
Comprehensive Income 6,681,404
-----------
Dividend Reinvestment & Common Stock Purchase Plan 3,263,569
Restricted Stock Award - Net 346,290
Cash Dividends on Common Stock (6,791,254)
Cash Dividends on Preferred Stock (254,786)
Common Stock Expenses (103,284)
----------- ------------
Balance at December 31, 2003 $ 50,808 $ 79,643,184
=========== ============
* All share amounts reflect the three-for-two common stock split, effective
January 2, 2002 and the four-for-three common stock split, effective November
14, 2003.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
(a) Organization - Middlesex Water Company (Middlesex) is the parent company and
sole shareholder of Tidewater Utilities, Inc. (Tidewater), Pinelands Water
Company (Pinelands Water), Pinelands Wastewater Company (Pinelands Wastewater),
Utility Service Affiliates, Inc. (USA), Utility Service Affiliates (Perth Amboy)
Inc. (USA-PA) and Bayview Water Company (Bayview). Southern Shores Water
Company, LLC (Southern Shores) and White Marsh Environmental Systems, Inc.
(White Marsh), are wholly-owned subsidiaries of Tidewater. The financial
statements for Middlesex and its wholly-owned subsidiaries (the Company) are
reported on a consolidated basis. All significant intercompany accounts and
transactions have been eliminated.
Middlesex Water Company has operated as a water utility in New Jersey since
1897, and in Delaware, through our wholly-owned subsidiary, Tidewater, since
1992. We are in the business of collecting, treating, distributing and selling
water for domestic, commercial, municipal, industrial and fire protection
purposes. We also operate a New Jersey municipal water and wastewater system
under contract and provide wastewater services in New Jersey and Delaware
through our subsidiaries. We are regulated as to rates charged to customers for
water and wastewater services in New Jersey and for water services in Delaware,
as to the quality of water service we provide and as to certain other matters.
Only our USA, USA-PA and White Marsh subsidiaries are not regulated utilities.
(b) System of Accounts - Middlesex, Pinelands Water, Pinelands Wastewater and
Bayview maintain their accounts in accordance with the Uniform System of
Accounts prescribed by the Board of Public Utilities of the State of New Jersey
(BPU). Tidewater and Southern Shores maintain their accounts in accordance with
the Public Service Commission of Delaware (PSC) requirements.
(c) Utility Plant is stated at original cost as defined for regulatory purposes.
Property accounts are charged with the cost of betterments and major
replacements of property. Cost includes direct material, labor and indirect
charges for pension benefits and payroll taxes. The cost of labor, materials,
supervision and other expenses incurred in making repairs and minor replacements
and in maintaining the properties is charged to the appropriate expense
accounts. At December 31, 2003, 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,
2003, 2002 and 2001. 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%
(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
28
to and take service from the utility plant. After all refunds are made, any
remaining balance is transferred to Contributions in Aid of Construction.
Contributions in Aid of Construction - Contributions in Aid of Construction
include direct non-refundable contributions of water utility plant and/or cash
and the portion of Customers' Advances for Construction that become
non-refundable.
(f) Allowance for Funds Used During Construction (AFUDC) - Middlesex, Tidewater,
Pinelands Water, Pinelands Wastewater and Bayview capitalize AFUDC, which
represents the cost of financing projects during construction. AFUDC is added to
the construction costs of individual projects exceeding specific cost and
construction period thresholds established for each company and then depreciated
along with the rest of the utility plant's costs over its estimated useful life.
For the years ended December 31, 2003, 2002 and 2001 approximately $0.3 million,
$0.3 million and $0.1 million of AFUDC was added to the cost of construction
projects. AFUDC is calculated using each company's weighted cost of debt and
equity as approved in their most recent respective regulatory rate order. The
average AFUDC rate for Middlesex, Tidewater and Bayview for the years ended
December 31, 2003, 2002 and 2001 were 7.34%, 8.95% and 3.11%, respectively.
Pinelands Water and Pinelands Wastewater did not incur AFUDC during the periods
covered by this report.
(g) Accounts Receivable - The allowance for doubtful accounts at December 31,
2003, 2002 and 2001 was $0.2 million, $0.1 million and $0.1 million,
respectively. The corresponding expense for the year ended December 31, 2003,
2002 and 2001 was $0.1 million, $0.1 million and $0.2 million, respectively.
(h) Revenues - General metered customer's bills typically are broken down into
two components; a fixed service charge and a volumetric or consumption charge.
Revenues from general metered service customers, except Tidewater, include
amounts billed in arrears on a cycle basis and unbilled amounts estimated from
the last meter reading date to the end of the accounting period. The estimated
unbilled amounts are determined by utilizing factors which include historical
consumption usage and current climate conditions. Actual billings may differ
from our estimates. Revenues are adjusted in the period that the difference is
identified. Tidewater customers are billed in advance for their fixed service
charge and these revenues are recognized as the service is provided to the
customer.
Bayview and Southern Shores are unmetered systems. Customers are billed a fixed
service charge in accordance with the approved tariff. Southern Shore service
charges are billed in advance at the beginning of each month. Bayview service
charges are billed in advance at the beginning of each calendar quarter and are
recognized in revenue ratably over the quarter. Revenues from the City of Perth
Amboy management contract are comprised of fixed and variable fees. Fixed fees,
which have been set for the life of the contract, are billed monthly and
recorded as earned. Variable fees, which are not significant, are recorded upon
approval of the amount by the City of Perth Amboy.
(i) Deferred Charges and Other Assets - Unamortized Debt Expense is amortized
over the lives of the related issues. Restricted Cash represents proceeds from
loans entered into through state financing programs and is held in trusts. The
proceeds are restricted for specific capital expenditures and debt service
requirements.
(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
29
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) The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 149, Amendments of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"), which amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 149 is generally effective after June 30, 2003. The
adoption of SFAS 149 did not have any effect on our financial statements.
FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities And Equity ("SFAS 150"), which establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have any effect
on our financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements ("FIN 46"). The adoption of FIN 46 (as
amended) did not have any effect on our financial statements.
In December 2003, the FASB issued SFAS No. 132 (Revised) Employees Disclosure
about Pension and Other Postretirement Benefits, which expands the disclosure
requirements of these employee benefits. The adoption of SFAS No. 132 (Revised)
had no effect on our financial position or results of operations.
SFAS No. 143, "Accounting for Asset Retirement Obligations" became effective
January 1, 2003. Upon adoption of SFAS No. 143, the fair value of a liability
for an asset retirement obligation is required to be recorded. The Company
collects the estimated removal costs of utility plant in rates through
depreciation in accordance with regulatory treatment. At December 31, 2003, the
Company reclassified the estimated removal costs of $4.8 million from
accumulated depreciation to a regulatory liability. At December 31, 2002, $4.4
million was reclassified from accumulated depreciation to removal costs for
utility plant retirement obligations. This reclassification had no impact on the
Company's results of operations.
(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 87% of Operating
Revenues and 99% of Total Assets, are subject to regulation in the state in
which they operate. Those companies are required to maintain their accounts in
accordance with regulatory authorities' rules and guidelines, which may differ
from other authoritative accounting pronouncements. In those instances, the
Company follows the guidance provided SFAS No. 71, "Accounting For the Effects
of Certain Types of Regulation."
(p) Pension Plan - We maintain a noncontributory defined benefit pension plan
which covers substantially all employees with more than 1,000 hours of service.
The discount rate utilized for determining pension
30
costs decreased from 7.75% for the year ended December 31, 2001 to 7.25% for the
year ended December 31, 2002 to 6.75% for the year ended December 31, 2003.
Future actual pension income will depend on future investment performance,
changes in future discount rates and various other factors related to the
population participating in the pension plans.
(q) Certain prior year amounts have been reclassified to conform to the current
year reporting.
Note 2 - Rate and Regulatory Matters
Middlesex filed a 17.8% base rate increase petition with the BPU on November 5,
2003. Increased operating expenses and utility plant investment necessitated the
rate increase request. Further, we filed a base rate increase petition with the
BPU for both Pinelands companies on December 30, 2003, requesting an overall
increase for those systems of 19.02%.
In accordance with the tariff established for Southern Shores, an annual rate
increase of 2.8% was implemented on January 1, 2004. The increase cannot exceed
the lesser of the regional Consumer Price Index or 3%. Other than rates for the
Southern Shores system, there can be no assurance that any rate increases will
be granted or, if granted, that they will be in the amounts we requested.
Tidewater received approval for a 2.49% Distribution System Improvement Charge
(DSIC) from the PSC, effective for services rendered on or after July 1, 2003.
The DSIC is a separate rate mechanism that allows for cost recovery of certain
capital improvement costs incurred in between base rate filings. Delaware
regulated water utilities are allowed to apply for a DSIC every six months with
the maximum increase limited to 5.0% in any six month period and a 7.5% overall
limitation. The PSC approved an increase in Tidewater's DSIC to 4.89% of base
rates from 2.49%, effective January 1, 2004.
Tidewater filed for a 24% base rate increase with the PSC in January 2002. The
primary reasons driving the need for rate relief was the increase in the
calculated rate base since the last rate case of $11.3 million or 88.8%, and
higher operations and maintenance expenses, particularly for water treatment and
production. In accordance with PSC rules, an 8% interim rate increase was
implemented in April 2002. The PSC determined that Tidewater was entitled to an
additional 8.4% increase effective February 1, 2003 on top of the 8% interim
increase for a total of 16.4% or $1.1 million.
In the fall of 2002, the BPU approved a 76.7% base rate increase for the Bayview
Water Company. This translates into additional revenues of less than $0.1
million. Two-thirds of the increase was implemented on January 1, 2003 and the
balance became effective July 1, 2003. The new rates are designed to allow for
the recovery of operating costs and capital costs incurred to replace the entire
water distribution system on Fortescue Island in Southern New Jersey. Middlesex
had operated this 300-customer system as an interim custodial receiver from
September 1997, until it was purchased on April 9, 2001.
We have recorded certain costs as regulatory assets because we believe we will
be allowed full recovery of or are currently recovering these costs in the rates
that we charge customers. These deferred costs have been excluded from rate base
and, therefore, we are not earning a return on the unamortized balances.
31
Years Ended December 31,
(Thousands of Dollars)
Remaining
Recovery
Regulatory Assets 2003 2002 Periods
----------------- ---- ---- -------
Income Taxes $6,786 $6,288 Various
Postretirement Benefits 783 869 9 years
Tank Painting 198 249 4 years
Rate Cases and Other 449 556 Up to 3 years
------ ------
Total $8,216 $7,962
====== ======
The recovery period for income taxes is dependent upon when the temporary
differences between tax and book will reverse.
Bayview, Pinelands Water and Pinelands Wastewater are recovering the acquisition
premium of $0.9 million over the remaining life of their Utility Plants. These
deferred costs have been included in their rate bases as utility plant and are
earning a return on the unamortized costs during the recovery periods.
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)
2003 2002 2001
--------------------------------------------------------------------------------
Income Tax at Statutory Rate of 34% $ 3,355 $ 4,000 $ 3,642
Tax Effect of:
Utility Plant Related (171) (123) 64
State Income Taxes - Net 106 80 30
Employee Benefits (67) 25 (25)
Other 14 17 49
--------------------------------------------------------------------------------
Total Income Tax Expense $ 3,237 $ 3,999 $ 3,760
--------------------------------------------------------------------------------
Income tax expense is comprised of the following:
Current:
Federal $ 2,835 $ 3,730 $ 3,499
State 95 82 20
Deferred:
Federal 321 227 294
State 65 39 26
Investment Tax Credits (79) (79) (79)
--------------------------------------------------------------------------------
Total Income Tax Expense $ 3,237 $ 3,999 $ 3,760
--------------------------------------------------------------------------------
The statutory review period for income tax returns for the years prior to 2000
has been closed.
Certain reclassifications of an immaterial nature were made between other taxes
and income taxes in the consolidated statements of income for the years ended
December 31, 2002 and 2001.
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:
32
Years Ended December 31,
(Thousands of Dollars)
2003 2002
--------------------------------------------------------------------------------
Utility Plant Related $ 20,522 $ 19,611
Customer Advances (4,218) (4,330)
Employee Benefits (2,209) (1,995)
Other 31 (44)
--------------------------------------------------------------------------------
Total Deferred Tax Liability $ 14,126 $ 13,242
--------------------------------------------------------------------------------
The Company is required to set up deferred income taxes for all temporary
differences regardless of the regulatory ratemaking treatment. Because
management believes that it is probable that these additional taxes will be
passed on to ratepayers, an offsetting regulatory asset of $6.8 million and $6.3
million has been recorded at December 31, 2003 and 2002 respectively.
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 2003, 2002 and 2001
were $7.2 million, $6.9 million and $6.7 million, respectively. The fixed fees
will increase over the term of the contract to $9.7 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, which are 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, 2003, approximately $24.4 million of the
Series C Serial Bonds remained outstanding.
We are obligated to perform under the guarantee in the event notice is received
from the Series C Serial Bonds trustee of an impending debt service deficiency.
If Middlesex funds any debt service obligations as guarantor, there is a
provision in the agreement that requires Perth Amboy to reimburse us. There are
other provisions in the agreement that we believe make it unlikely that we will
be required to perform under the guarantee, such as scheduled annual rate
increases for water and wastewater services as well as rate increases due to
unforeseen circumstances. In the event revenues from customers could not satisfy
the reimbursement requirements, Perth Amboy has Ad Valorem taxing powers, which
could be used to raise the needed amount.
Franchise Agreement/Service Agreement - In 1999, Middlesex implemented a
franchise agreement with the City of South Amboy (South Amboy) to provide water
service and install water system facilities in South Amboy. The agreement
between Middlesex and South Amboy was approved by the BPU. The implementation of
the franchise agreement had significantly impacted two existing agreements
entered into by the parties.
The first agreement was for the sale of water to South Amboy on a wholesale
basis. The second agreement, which included Middlesex's wholly-owned subsidiary
USA, was a contract to provide management services for a fixed fee. In
conjunction with the franchise agreement, the water sales contract was
eliminated. In addition, the management services contract was extended through
May 2045 and significantly modified to correspond with the terms and conditions
of the franchise agreement.
33
Fixed fee revenues recognized under the original contract have been
eliminated in lieu of revenues earned from providing water to South Amboy's
2,600 customers.
Water Supply - Middlesex has revised and extended its agreement with the New
Jersey Water Supply Authority (NJWSA) for the purchase of untreated water,
effective January 1, 2004. The agreement now expires November 30, 2023 and
provides an average purchase of 27 million gallons a day (mgd) up from 20 mgd.
Pricing has been modified to include a two tier pricing schedule for the
original 20 mgd and the additional 7 mgd. In addition, the agreement has
provisions for additional pricing in the event the Company overdrafts or exceeds
certain monthly and annual thresholds.
Middlesex also has an agreement with a nonaffiliated water utility for the
purchase of treated water. This agreement, which expires December 31, 2005,
provides for the minimum purchase of 3 mgd of treated water with provisions for
additional purchases.
Purchased water costs are shown below:
(Millions of Dollars)
Years Ended December 31,
Purchased Water 2003 2002 2001
--------------- ---- ---- ----
Untreated $2.0 $1.9 $2.0
Treated 1.8 1.8 1.7
---- ---- ----
Total Costs $3.8 $3.7 $3.7
==== ==== ====
Construction - Based on its capital budget, the Company plans to spend
approximately $28.7 million in 2004, $24.4 million in 2005 and $14.1 million in
2006 on its construction program.
Litigation - A lawsuit was filed against the Company for damages involving the
break of both a Company water line and an underground electric power cable
containing both electric lines and petroleum based insulating fluid. The
electric utility also asserted claims against the Company. The lawsuit was
settled by agreement to submit plaintiff's claim for approximately $1.1 million
damages to binding arbitration, in which the agreed maximum exposure of the
Company is $0.3 million. While we are unable to predict the outcome of the
arbitration, we believe that we have substantial defenses. We have not recorded
any liability for the claim.
Another claim is pending involving a construction subcontractor, the Company's
general contractor and the Company concerning a major construction project. The
dispute relates to work required to be performed under a construction contract
and related subcontracts and includes payment issues and timing/delay issues.
The matter was instituted in 2001 and is pending in Superior Court, Middlesex
County, New Jersey. We have estimated our maximum exposure in this litigation to
be $4.3 million. We believe that we have substantial defenses to a number of the
asserted claims. It is reasonably possible that we may be responsible for some
portion of the amount claimed, but significantly less than the maximum. We are
unable, however, to determine this amount. Any amount in this matter which is
determined to be due from us, will be recorded as an addition to utility plant
in service, subject to recovery in rates charged to our customers. However, the
outcome could have a material adverse effect on the Company's 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.
34
Note 5 - Short-term Borrowings
(Millions of Dollars)
2003 2002
-------------------------------------------------------------------
Established Lines at Year-End $25.0 $30.0
Maximum Amount Outstanding 18.5 17.7
Average Outstanding 15.3 14.4
Notes Payable at Year-End 12.5 17.7
Weighted Average Interest Rate 1.89% 2.59%
Weighted Average Interest Rate at Year End 1.64% 2.22%
Year end interest rates on short-term borrowings outstanding ranged from 1.56%
to 1.67% and 1.90% to 3.24% as of December 31, 2003 and 2002, respectively. The
maturity dates for borrowings outstanding as of December 31, 2003 are: January
5, 2004; $3.5 million and January 16, 2004: $9.0 million.
The Board of Directors has authorized lines of credit for up to $30.0 million.
Short-term borrowings are below the prime rate with some requirements for
compensating balances not exceeding 1% of the line.
Restricted cash includes proceeds from the Series Z, AA, BB, and CC First
Mortgage Bonds and State Revolving Trust and Fund Bonds issuances. These funds
are held in trusts and restricted for specific capital expenditures and debt
service requirements. Series BB and CC proceeds can only be used for the 2004
main cleaning and cement lining programs.
Note 6 - Capitalization
All the transactions discussed below related to the issuance of securities were
approved by the BPU, except where noted.
Common Stock
In August 2003, the Board of Directors approved a four-for-three stock split of
its common stock, effective November 14, 2003 for shareholders of record on
November 1, 2003. In October 2001, the Board of Directors approved a
three-for-two common stock split effective January 2, 2002, for shareholders of
record on December 14, 2001. All share, average number of shares and per share
amounts of no par common stock on the financial statements have been restated to
reflect the effect of both stock splits.
The number of shares authorized under the Dividend Reinvestment and Common Stock
Purchase Plan (DRP) is 1,700,000 shares. The cumulative number of shares issued
under the DRP at December 31, 2003, is 1,239,790. In each of 2003 and 2002 for
specific six month periods, DRP participants had the opportunity to purchase the
Company's common stock at a 5% discount with reinvested dividends and optional
cash payments. The Company also has a restricted stock plan, which is described
in Note 7 - Employee Benefit Plans.
In the event dividends on the preferred stock are in arrears, no dividends may
be declared or paid on the common stock of the Company. At December 31, 2003, 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,
2003 and 2002, 37,898 shares of preferred stock presently authorized were
outstanding. 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
35
calendar year at a price equal to the fair market value of twelve shares of the
Company's common stock for each share of convertible stock redeemed.
The conversion feature of the no par $8.00 Series Cumulative and Convertible
Preferred Stock allows the security holders to exchange one convertible
preferred share for 13.714 shares of the Company's common stock. The preferred
shares are convertible at the election of the security holder until 2004. After
that date Middlesex also has the right to elect the conversion feature.
Long-term Debt
Tidewater received approval from the PSC to borrow $13.8 million to fund a
portion of its multi-year capital program and refinance some of its short-term
debt. Subsequent to the PSC approval, Tidewater closed on a Delaware State
Revolving Fund (SRF) loan of $3.3 million in April 2003. The SRF program evolved
from the Federal Environmental Protection Agency's (EPA) regulations issued
under the Safe Drinking Water Act. Under this program, investor-owned public
water utilities can apply for construction loans, which are funded by the
participating state and the EPA through a state agency. The Delaware SRF program
will allow, but does not obligate, Tidewater to draw down against a General
Obligation Note for six specific projects. Tidewater will be charged an annual
fee, which is a combination of interest charges and administrative fees, of
3.60% on the outstanding principal amount. All unpaid principal and fees must be
paid on or before May 1, 2025.
In May 2003, Tidewater completed a loan transaction of $10.5 million with
CoBank, a financial institution specializing in loans to rural utilities. Terms
of the loan include an interest rate of 6.25% and a maximum loan life of
twenty-five years with monthly principal payments. The proceeds were used to
retire short-term debt.
First Mortgage Bonds Series S through W and Series DD are term bonds with single
maturity dates. The aggregate annual principal repayment obligations for all
other long-term debt are shown below:
(Millions of Dollars)
Annual Annual
Year Maturities Year Maturities
---- ---------- ---- ----------
2004 $ 1.1 2007 $ 1.1
2005 $ 1.1 2008 $ 1.1
2006 $ 1.1
The weighted average interest rate on all long-term debt at December 31, 2003
and 2002 was 6.03% and 5.77%, respectively. Except for the Amortizing Secured
Note and Series U First Mortgage Bonds, all of the Company's outstanding debt
has been issued through the New Jersey Economic Development Authority ($57.5
million), the New Jersey Enviromental Infrastructure Trust program ($11.8
million) and the SRF program ($0.7 million).
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, 2003. Basic EPS are computed
on the basis of the weighted average number of shares outstanding. Diluted EPS
assumes the conversion of both the Convertible Preferred Stock $7.00 Series and
$8.00 Series. All share and per share amounts reflect the three-for-two common
stock split, effective January 2, 2002 and the four-for-three common stock
split, effective November 14, 2003.
36
(In Thousands of Dollars Except per Share Amounts)
2003 2002 2001
Basic: Income Shares Income Shares Income Shares
-----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 6,631 10,475 $ 7,765 10,280 $ 6,953 10,131
Preferred Dividend (255) (255) (255)
-------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 6,376 10,475 $ 7,510 10,280 $ 6,698 10,131
Basic EPS $ 0.61 $ 0.73 $ 0.66
Diluted:
-----------------------------------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 6,376 10,475 $ 7,510 10,280 $ 6,698 10,131
$7.00 Series Dividend 104 178 104 178 104 178
$8.00 Series Dividend 96 165 96 165 96 165
-------------------------------------------------------------------------------------
Adjusted Earnings Applicable to Common Stock
$ 6,576 10,818 $ 7,710 10,623 $ 6,898 10,474
Diluted EPS $ 0.61 $ 0.73 $ 0.66
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,
2003 2002
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------------------------------------------------
First Mortgage Bonds $84,280 $87,273 $84,852 $87,308
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, 2003 and 2002 was $14.2 million and $3.3 million,
respectively. Customer advances for construction have a carrying amount of $11.7
million and $10.9 million at December 31, 2003 and 2002, respectively. Their
relative fair values cannot be accurately estimated since future refund payments
depend on several variables, including new customer connections, customer
consumption levels and future rate increases.
Note 7 - Employee Benefit Plans
Pension
The Company has a noncontributory defined benefit pension plan, which covers
substantially all employees with more than 1,000 hours of service. In addition,
the Company maintains an unfunded supplemental pension plan for its executives.
The Accumulated Benefit Obligation for all pension plans at December 31, 2003
was $19.8 million.
37
Postretirement Benefits Other Than Pensions
The Company has a postretirement benefit plan other than pensions for
substantially all of its retired employees. Coverage includes healthcare and
life insurance. Retiree contributions are dependent on credited years of
service. Accrued retirement benefit costs are recorded each year.
The Company has recognized a deferred regulatory asset relating to the
difference between the accrued retirement benefit costs and actual cash paid for
plan premiums in years prior to 1998. Included in the regulatory asset is a
transition obligation from adopting SFAS No.106 on January 1, 1993. In addition
to the recognition of annual accrued retirement benefit costs in rates,
Middlesex is also recovering the transition obligation over 15 years. The
regulatory assets at December 31, 2003 and 2002, respectively were $0.8 million
and $0.9 million.
The Company uses a December 31 measurement date for all of its employee benefit
plans. The following table sets forth information relating to the Company's
pension plans and other postretirement benefits:
(Thousands of Dollars)
Years Ended December 31,
Pension Benefits Other Benefits
2003 2002 2003 2002
-----------------------------------------------------------------------------------------------------------------
Reconciliation of Projected Benefit Obligation
Beginning Balance $ 19,677 $ 18,471 $ 7,437 $ 6,415
Service Cost 684 724 263 222
Interest Cost 1,356 1,300 485 463
Actuarial (Gain)/Loss 3,039 23 1,645 657
Benefits Paid (1,085) (841) (332) (320)
-----------------------------------------------------------------------------------------------------------------
Ending Balance $ 23,671 $ 19,677 $ 9,498 $ 7,437
-----------------------------------------------------------------------------------------------------------------
Reconciliation of Plan Assets at Fair Value
Beginning Balance $ 15,846 $ 17,796 $ 2,065 $ 1,442
Actual Return on Plan Assets 2,768 (1,671) 15 25
Employer Contributions 1,058 562 834 918
Benefits Paid (1,085) (841) (332) (320)
-----------------------------------------------------------------------------------------------------------------
Ending Balance $ 18,587 $ 15,846 $ 2,582 $ 2,065
-----------------------------------------------------------------------------------------------------------------
Funded Status $ (5,084) $ (3,831) $ (6,916) $ (5,372)
Unrecognized Net Transition Obligation -- -- 1,217 1,353
Unrecognized Net Actuarial (Gain)/Loss 1,144 521 4,076 2,415
Unrecognized Prior Service Cost 264 356 (3) (4)
-----------------------------------------------------------------------------------------------------------------
Accrued Benefit Cost $ (3,676) $ (2,954) $ (1,626) $ (1,608)
-----------------------------------------------------------------------------------------------------------------
38
(Thousands of Dollars)
Years Ended December 31,
Pension Benefits Other Benefits
2003 2002 2001 2003 2002 2001
------------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost
Service Cost $ 684 $ 724 $ 720 $ 263 $ 222 $ 173
Interest Cost 1,356 1,300 1,324 485 463 426
Expected Return on Plan Assets (1,272) (1,281) (1,448) (175) (125) (90)
Amortization of Net Transition Obligation -- 2 14 135 135 135
Amortization of Net Actuarial (Gain)/Loss -- -- (148) 143 111 76
Amortization of Prior Service Cost 92 92 111 -- -- --
------------------------------------------------------------------------------------------------------------------
Net Periodic Benefit Cost $ 860 $ 837 $ 573 $ 851 $ 806 $ 720
------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Actual Return on Plan Assets 17.48% (9.47%) 0.54% 0.77% 1.38% 3.73%
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 6.00% 6.75% 7.25% 6.00% 6.75% 7.25%
Benefit Cost 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
Compensation Increase for:
Benefit Obligation 3.50% 3.50% 4.25% 3.50% 3.50% 4.25%
Benefit Cost 3.50% 4.25% 5.00% 3.50% 4.25% 5.00%
For measurement purposes, a 7.50% annual rate of increase in the per capita cost
of covered healthcare benefits was assumed for 2003 and declining by 0.5% per
year to 5% by year 2008. Assumed healthcare cost trend rates have a significant
effect on the amounts reported for the healthcare plan. A one-percentage point
change in assumed healthcare cost trend rates would have the following effects:
(Thousands of Dollars)
1 Percentage Point
Increase Decrease
--------------------------------------------------------------------------------
Effect on Current Year's Benefit Expense $ 150 $ (115)
Effect on Benefit Obligation 1,130 (899)
Benefit Plans Assets
The pension plan asset allocations at December 31, 2003, and 2002, by asset
category are as follows:
As of December 31,
Asset Category 2003 2002
---- ----
Equity Securities 63.1% 55.7%
Debt Securities 33.4 40.6
Cash 3.5 3.7
----- -----
Total 100.0% 100.0%
===== =====
Asset Category Target Range
------ -----
Equity Securities 60% 30-65%
Debt Securities 38 25-70%
Cash 2 0-10%
39
Middlesex utilizes two investment firms to manage its pension plan asset
portfolio. Quarterly meetings are held between the Company's Pension Committee
and the investment managers to review their performance and asset allocation. If
the current asset allocation is outside the targeted range, the Pension
Committee reviews current market conditions and advice provided by the
investment managers to determine the appropriateness of rebalancing the
portfolio.
The investment objective of the Company is to maximize its long-term return on
pension plan assets, relative to a reasonable level of risk, maintain a
diversified investment portfolio and invest in compliance with the Employee
Retirement Income Security Act of 1974. The expected long-term rate of return is
based on the various asset categories in which it invests and the current
expectations and historical performance for these categories.
Middlesex expects to make cash contributions of approximately $1.0 million in
2004.
Equity securities include Middlesex common stock in the amounts of $0.8 million
(4.2 percent of total plan assets) and $0.7 million (4.1 percent of total plan
assets) at December 31, 2003, and 2002, respectively.
The other postretirement benefits assets are invested primarily in short-term
fixed government mutual funds. The Company is currently reviewing the funding
and investment objectives for these benefits and anticipates changes will be
implemented during the first quarter of 2004. The Company expects to make cash
contributions of approximately $1.0 million in 2004.
On December 8, 2003, the President of the United States signed into law the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
"Act"). The Act introduces a prescription drug benefit under Medicare as well as
a federal subsidy to sponsors of retirees health care benefit plans that provide
a benefit that is at least actuarially equivalent to Medicare Part D. Under a
Financial Accounting Standards Board Staff Position FSP FAS 106-1, issued on
January 12, 2004, the Company has elected to defer accounting for the effects of
the Act. Therefore, the measures of the postretirement benefit obligation and
the net periodic postretirement benefit cost herein do not reflect the effects
of the Act on the plan. Specific authoritative guidance on the accounting for
the federal subsidy is pending, and that guidance, when issued, could require
the Company to change previously reported information.
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 in 2003, 2002 and 2001 amounted to $0.2 million for each year.
Stock Based Compensation
The Company maintains a Restricted Stock Plan, under which 69,400 shares of the
Company's common stock are held in escrow by the Company for key employees. Such
stock is subject to an agreement requiring forfeiture by the employee in the
event of termination of employment within five years of the grant other than as
a result of retirement, death or disability.
The maximum number of shares authorized for grant under this plan is 240,000
shares. Compensation expense is determined by the market value of the stock on
the date of the award and is being amortized over a five-year period.
Compensation expense for each of the years ended December 31, 2003, 2002 and
2001 was $0.3 million, $0.2 million and $0.2 million, respectively.
40
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS
No. 123) the Company elected to account for its stock-based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Had compensation costs for the Company's restricted stock plan been
determined based on the methodology prescribed in SFAS No. 123, there would have
been no effect on its results of operations or cash flows.
Note 8 - Business Segment Data
The Company has identified two reportable segments. One is the regulated
business of collecting, treating and distributing water on a retail and
wholesale basis to residential, commercial, industrial and fire protection
customers in parts of New Jersey and Delaware. It also operates a regulated
wastewater system in New Jersey. The Company is subject to regulations as to its
rates, services and other matters by the states of New Jersey and Delaware with
respect to utility service within these states. The other segment is
nonregulated contract services for the operation and maintenance of municipal
and private water and wastewater systems in New Jersey and Delaware.
Inter-segment transactions relating to operational costs are treated as
pass-through expenses. Finance charges on inter-segment loan activities are
based on interest rates that are below what would normally be charged by a third
party lender.
(Thousands of Dollars)
Twelve Months Ended December 31,
Operations by Segments: 2003 2002 2001
--------------------------------------------------------------------------------
Revenues:
Regulated $ 55,707 $ 54,398 $ 52,295
Non - Regulated 8,500 7,576 7,379
Inter-segment Elimination (96) (41) (36)
--------------------------------------------------------------------------------
Consolidated Revenues $ 64,111 $ 61,933 $ 59,638
--------------------------------------------------------------------------------
Operating Income:
Regulated $ 11,013 $ 12,032 $ 11,090
Non - Regulated 487 435 403
--------------------------------------------------------------------------------
Consolidated Operating Income $ 11,500 $ 12,467 $ 11,493
--------------------------------------------------------------------------------
Depreciation:
Regulated $ 5,308 $ 4,925 $ 4,995
Non - Regulated 55 38 56
--------------------------------------------------------------------------------
Consolidated Depreciation $ 5,363 $ 4,963 $ 5,051
--------------------------------------------------------------------------------
Other Income:
Regulated $ 506 $ 474 $ 496
Non - Regulated (33) 22 62
Inter-segment Elimination (116) (54) (56)
--------------------------------------------------------------------------------
Consolidated Other Income $ 357 $ 442 $ 502
--------------------------------------------------------------------------------
Interest Expense:
Regulated $ 5,227 $ 5,143 $ 5,042
Non - Regulated 116 54 56
Inter-segment Elimination (116) (54) (56)
--------------------------------------------------------------------------------
Consolidated Interest Charges $ 5,227 $ 5,143 $ 5,042
--------------------------------------------------------------------------------
Net Income:
Regulated $ 6,292 $ 7,361 $ 6,544
Non - Regulated 339 404 409
--------------------------------------------------------------------------------
Consolidated Net Income $ 6,631 $ 7,765 $ 6,953
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Capital Expenditures:
Regulated $ 19,002 $ 16,060 $ 12,649
Non - Regulated 572 429 98
--------------------------------------------------------------------------------
Total Capital Expenditures $ 19,574 $ 16,489 $ 12,747
--------------------------------------------------------------------------------
41
As of As of
December 31, December 31,
2003 2002
--------------------------------------------------------------------------------
Assets:
Regulated $ 259,689 $ 246,612
Non - Regulated 5,223 4,093
Inter-segment Elimination (1,720) (1,743)
--------------------------------------------------------------------------------
Consolidated Assets $ 263,192 $ 248,962
--------------------------------------------------------------------------------
Note 9 - Quarterly Operating Results - Unaudited
Quarterly operating results for 2003 and 2002 are as follows:
(Thousands of Dollars Except per Share Data)
1st 2nd 3rd 4th Total
2003
--------------------------------------------------------------------------------
Operating Revenues $14,981 $15,998 $17,586 $15,546 $64,111
Operating Income 2,376 3,108 3,500 2,516 11,500
Net Income 1,225 1,804 2,393 1,209 6,631
Basic Earnings per Share* $ 0.11 $ 0.17 $ 0.22 $ 0.11 $ 0.61
Diluted Earnings per Share* $ 0.11 $ 0.17 $ 0.22 $ 0.11 $ 0.61
2002
--------------------------------------------------------------------------------
Operating Revenues $14,299 $15,525 $16,983 $15,126 $61,933
Operating Income 2,511 3,051 3,752 3,153 12,467
Net Income 1,277 1,889 2,572 2,027 7,765
Basic Earnings per Share* $ 0.12 $ 0.18 $ 0.24 $ 0.19 $ 0.73
Diluted Earnings per Share* $ 0.12 $ 0.18 $ 0.24 $ 0.19 $ 0.73
*All per share amounts reflect the three-for-two common stock split, effective
January 2, 2002 and the four-for-three common stock split effective November 14,
2003.
The information above, in the opinion of the Company, includes all adjustments
consisting only of normal recurring accruals necessary for a fair presentation
of such amounts. The business of the Company is subject to seasonal fluctuation
with the peak period usually occurring during the summer months.
Note 10 - Restatement of Consolidated Financial Statements
The consolidated financial statements as of December 31, 2002 and for the years
ended December 31, 2002 and 2001 have been restated to correct the
classification of certain amounts. The reclassifications were made to present
the amount of Restricted Cash as a non current asset rather than a current asset
in the consolidated balance sheet at December 31, 2002, and to present changes
in Restricted Cash related to capital expenditures as an investing activity
rather than a financing activity in the consolidated statement of cash flows for
the years ended December 31, 2002 and 2001. Previously, such amounts and changes
in amounts therein were presented as Temporary Cash Investments - Restricted.
Those amounts and changes in those amounts are currently described as Restricted
Cash. The restatement had no effect on reported total assets, net income,
earnings applicable to common stock, cash flows from operations or liquidity.
42
A summary of the effects of the restatement is as follows:
December 31, December 31,
CONSOLIDATED BALANCE SHEET 2002 2002
--------------------------------------------------------------------------------
Current Assets As
Previously As
Reported Restated
--------------------------------------------------------------------------------
Temporary Cash Investments - Restricted $ 6,146,699 $ --
--------------------------------------------------------------------------------
Total Current Assets $20,299,715 $14,153,016
--------------------------------------------------------------------------------
Deferred Charges and Other Assets
--------------------------------------------------------------------------------
Restricted Cash $ -- $ 6,146,699
--------------------------------------------------------------------------------
Total Deferred Charges and Other Assets $12,936,621 $19,083,320
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS, December 31, 2002 2002 2001 2001
---------------------------------------------------------------------------------------------------------------------------------
As As
Previously As Previously As
Cash Flows From Investing Activities: Reported Restated Reported Restated
---------------------------------------------------------------------------------------------------------------------------------
Restricted Cash $ -- $ 2,843,996 $ -- $ (6,390,000)
---------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities: $(16,614,999) $(13,872,562) $(12,517,023) $(18,883,993)
---------------------------------------------------------------------------------------------------------------------------------
2002 2002 2001 2001
As As
Previously As Previously As
Cash Flows From Financing Activities: Reported Restated Reported Restated
---------------------------------------------------------------------------------------------------------------------------------
Temporary Cash Investments - Restricted $ 3,063,584 $ -- $ (6,390,622) $ --
Restricted Cash $ -- $ 219,588 $ -- $ (622)
---------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities: $ 3,921,065 $ 1,077,069 $ 2,220,771 $ 8,610,771
---------------------------------------------------------------------------------------------------------------------------------
Certain other reclassifications of an immaterial nature for the years ended
December 31, 2002 and 2001 were made between cash flows used in investing
activities and cash flows provided by operating activities. As compared to
amounts previously reported for the years ended December 31, 2002 and 2001, the
aggregate amount of such reclassifications resulted in a net increase in net
cash used in investing activities of $101,559 (2002) and a net decrease in net
cash used in investing activities of $23,030 (2001).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
43
Item 9A. 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 significant changes in the
Company's internal controls or in other factors, which could significantly
affect internal controls during the quarter ended December 31, 2003, except for
the following change in internal controls over financial reporting.
Management has identified a significant deficiency in the operation of internal
controls over financial reporting relating to the classification of cash
restricted for construction projects on the Consolidated Balance Sheet and the
change in cash restricted for construction projects on the Consolidated
Statements of Cash Flows. As a result thereof, management has expanded its
periodic review process of asset classification and the appropriate presentation
of changes in such assets to enhance the reliability and effectiveness of the
financial reporting process.
Based upon the foregoing, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's internal controls over
financial reporting are effective in meeting the objectives as described below
based on the aforementioned changes in internal controls.
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 III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to Directors of Middlesex Water Company is included in
Middlesex Water Company's Proxy Statement for the 2004 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 2004 Annual Meeting of Stockholders and is
incorporated herein by reference.
44
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information for Middlesex Water Company is included in Middlesex Water
Company's Proxy Statement for the 2004 Annual Meeting of Stockholders and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
This information for Middlesex Water Company is included in Middlesex Water
Company's Proxy Statement for the 2004 Annual Meeting of Stockholders and is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
This information for Middlesex Water Company is included in Middlesex Water
Company's Proxy Statement for the 2004 Annual Meeting of Stockholders and is
incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. The following Financial Statements and Supplementary Data are
included in Part II, Item 8 of this annual report:
Consolidated Balance Sheets at December 31, 2003 and 2002
(Restated).
Consolidated Statements of Income for each of the three years in the
period ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2003, 2002(Restated) and
2001(Restated).
Consolidated Statements of Capital Stock and Long-term Debt at
December 31, 2003, and 2002.
Consolidated Statements of Common Stockholders Equity and
Comprehensive Income for each of the three years in the period ended
December 31, 2003, 2002 and 2001.
Notes to Consolidated Financial Statements.
(a) 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.
(a) 3. Exhibits
See Exhibit listing immediately following the signature page.
(b) Reports on Form 8-K
Filed: February 2, 2004 - Earnings Release
February 10, 2004 - Postponement of Common Stock Offering
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MIDDLESEX WATER COMPANY
By: /s/ Dennis G. Sullivan/
-----------------------
Dennis G. Sullivan
President, Chief Executive Officer and Director
By: /s/ A. Bruce O'Connor/
----------------------
A. Bruce O'Connor
Vice-President, Controller and Chief Financial Officer
Date: April 14, 2004
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 April 14, 2004.
By: /s/ J. Richard Tompkins/
------------------------
J. Richard Tompkins
Chairman of the Board and Director
By: /s/ Dennis G. Sullivan/
-----------------------
Dennis G. Sullivan
President, Chief Executive Officer and Director
By: /s/ Annette Catino/
-------------------
Annette Catino
Director
By: /s/ John C. Cutting/
--------------------
John C. Cutting
Director
By: /s/ John R. Middleton/
----------------------
John R. Middleton
Director
By: /s/ John P. Mulkerin/
---------------------
John P. Mulkerin
Director
By: /s/ Stephen H. Mundy/
---------------------
Stephen H. Mundy
Director
By: /s/ Walter G. Reinhard/
-----------------------
Walter G. Reinhard
Director
By: /s/ Jeffries Shein/
-------------------
Jeffries Shein
Director
46
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 designed with a dagger (t)
are management contracts or compensatory plans.
Previous Filing's
Exhibit Registration Exhibit
No. Document Description No. No.
------- -------------------- --------- ---------
3.1 Certificate of Incorporation of the Company, as amended, filed as
Exhibit 3.1 of 1998 Form 10-K.
3.2 Bylaws of the Company, as amended. 33-54922 3.2
*3.3 Certificate of Correction of Middlesex Water Company filed with the
State of New Jersey on April 30, 1999.
*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.
*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.
4.1 Form of Common Stock Certificate. 2-55058 2(a)
4.2 Registration Statement, Form S-3, under Securities Act of 1933 filed
February 3, 1987, relating to the Dividend Reinvestment and Common
Stock Purchase Plan. 33-11717
4.3 Revised Prospectus relating to the Dividend Reinvestment and Common
Stock Purchase Plan, Submitted to the Securities and Exchange
Commission, January 20, 2000. 33-11717
4.4 Post Effective Amendments No. 7, Form S-3, under Securities Act of
1933 filed February 1, 2002, relating to the Dividend Reinvestment
and Common Stock Purchase Plan. 33-11717
10.1 Copy of Purchased Water Agreement between the Company and
Elizabethtown Water Company, filed as Exhibit 10.1 of 1996 Form
10-K.
t10.2 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
47
EXHIBIT INDEX
Previous Filing's
Exhibit Registration Exhibit
No. Document Description No. No.
------- -------------------- --------- ---------
October 1, 1939 and April 1, 1949. 2-15795 4(a)-4(f)
10.3 Copy of Supplemental Indentures, 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
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.
10.8 Copy of Treating and Pumping Agreement, dated April 9, 1984, between
the Company and the Township of East Brunswick. 33-31476 10.17
10.9 Copy of Supply Agreement, dated June 4, 1990, between the Company
and Edison Township. 33-54922 10.24
10.10 Copy of Supply Agreement, between the Company and the Borough of
Highland Park, filed as Exhibit No. 10.15 of 1996 Form 10-K.
10.11 Copy of Supplemental Executive Retirement Plan, filed as Exhibit
10.13 of 1999 Third Quarter Form 10-Q.
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
48
EXHIBIT INDEX
Previous Filing's
Exhibit Registration Exhibit
No. Document Description No. No.
------- -------------------- --------- ---------
t10.13(a) Change In Control Termination Agreement between Middlesex Water
Company and Dennis G. Sullivan, filed as Exhibit 10.15(f) of 1999
Third Quarter Form 10-Q.
t10.13(b) Change In Control Termination Agreement between Middlesex Water
Company and A. Bruce O'Connor, filed as Exhibit 10.15(c) of 1999
Third Quarter Form 10-Q.
t10.13(c) Change In Control Termination Agreement between Middlesex Water
Company and Ronald F. Williams, filed as Exhibit 10.15(g) of 1999
Third Quarter Form 10-Q.
t*10.13(d) Change In Control Termination Agreement between Middlesex Water
Company and Richard M. Risoldi.
t*10.13(e) Change In Control Termination Agreement between Middlesex Water
Company and Kenneth J.Quinn.
t*10.13(f) Change In Control Termination Agreement between Middlesex Water
Company and James P. Garrett.
t*10.13(g) Change In Control Terminationt Agreement between Tidewater
Utilities, Inc. and Gerard L. Esposito.
t*10.13(h) Consulting Agreement between Middlesex Water Company and J. Richard
Tompkins
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
49
EXHIBIT INDEX
Previous Filing's
Exhibit Registration Exhibit
No. Document Description No. No.
------- -------------------- --------- ---------
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.
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 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 10.23 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 10.24 of the 2001 Form 10-K
50
EXHIBIT INDEX
Previous Filing's
Exhibit Registration Exhibit
No. Document Description No. No.
------- -------------------- --------- ---------
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.
*21 Middlesex Water Company Subsidiaries.
*23 Independent Auditors' Consent.
*31 Section 302 Certification by Dennis G. Sullivan
Pursuant to Rule 13a-14 and 15d-14 of the
Securities Exchange Act of 1934.
*31.1 Section 302 Certification by A. Bruce O'Connor
Pursuant to Rule 13a-14 and 15d-14 of the
Securities Exchange Act of 1934.
*32 Section 906 Certification by Dennis G. Sullivan Pursuant to 18
U.S.C.ss.1350
*32.1 Section 906 Certification by A. Bruce O'Connor Pursuant to 18
U.S.C.ss.1350
51