SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File For Quarter Ended: June 30, 2001 No. 0-422 ------------- ----- MIDDLESEX WATER COMPANY ----------------------- (Exact name of registrant as specified in its charter) INCORPORATED IN NEW JERSEY 22-1114430 - -------------------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1500 RONSON ROAD, ISELIN, NJ 08830 - ---------------------------- ----- (Address of principal executive offices) (Zip Code) (732) 634-1500 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that this registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 30 days. YES [ X ] NO [ ] Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. Class Outstanding at June 30, 2001 ----- ---------------------------- Common Stock, No Par Value 5,066,207
INDEX PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements: Consolidated Statements of Income 1 Consolidated Balance Sheets 2 Consolidated Statements of Capitalization and Retained Earnings 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures of Market Risk 12 PART II. OTHER INFORMATION 13 SIGNATURE 14
<TABLE> <CAPTION> MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Six Months Twelve Months Ended June 30, Ended June 30, Ended June 30, 2001 2000 2001 2000 2001 2000 ----- ----- ----- ----- ----- ---- <S> <C> <C> <C> <C> <C> <C> Operating Revenues $14,753,732 $14,057,242 $27,897,630 $27,038,331 $55,335,842 $55,042,803 ------------ ----------- ------------ ------------- ----------- ------------ Operating Expenses: Operations 7,156,442 7,189,473 14,178,673 14,111,742 27,780,155 27,654,254 Maintenance 657,901 637,689 1,280,270 1,316,354 2,519,153 2,688,573 Depreciation 1,259,107 1,160,508 2,508,952 2,306,641 4,903,245 4,452,367 Other Taxes 1,883,940 1,764,805 3,586,937 3,433,195 7,085,703 7,011,978 Federal Income Taxes 988,394 776,656 1,463,330 1,291,025 2,809,363 2,917,638 ------------ ----------- ------------ ------------- ----------- ------------ Total Operating Expenses 11,945,784 11,529,131 23,018,162 22,458,957 45,097,619 44,724,810 ------------ ----------- ------------ ------------- ----------- ------------ Operating Income 2,807,948 2,528,111 4,879,468 4,579,374 10,238,223 10,317,993 Other Income: Allowance for Funds Used During Construction 22,353 27,588 38,258 44,764 128,655 317,944 Other - Net 345,010 37,910 416,169 75,265 569,696 253,252 ------------ ----------- ------------ ------------- ----------- ------------ Total Other Income 367,363 65,498 454,427 120,029 698,351 571,196 Income Before Interest Charges 3,175,311 2,593,609 5,333,895 4,699,403 10,936,574 10,889,189 ------------ ----------- ------------ ------------- ----------- ------------ Interest Charges 1,257,232 1,225,128 2,532,166 2,424,806 5,104,382 4,798,781 ------------ ----------- ------------ ------------- ----------- ------------ Net Income 1,918,079 1,368,481 2,801,729 2,274,597 5,832,192 6,090,408 Preferred Stock Dividend Requirements 63,696 63,696 127,393 127,393 254,786 268,786 ------------ ----------- ------------ ------------- ----------- ------------ Earnings Applicable to Common Stock $1,854,383 $1,304,785 $2,674,336 $2,147,204 $5,577,406 $5,821,622 ============ =========== ============ ============= =========== ============ Earnings per share of Common Stock: Basic $ 0.37 $ 0.26 $ 0.53 $ 0.43 $ 1.11 $ 1.17 Diluted $ 0.36 $ 0.26 $ 0.53 $ 0.43 $ 1.11 $ 1.17 Average Number of Common Shares Outstanding : Basic 5,062,171 5,014,922 5,057,411 5,010,138 5,045,623 4,977,788 Diluted 5,233,741 5,186,492 5,228,981 5,181,708 5,217,193 5,171,784 Cash Dividends Paid per Common Share $0.31 $0.30 1/2 $0.62 $0.61 $1.23 1/2 $1.21 </TABLE> See Notes to Consolidated Financial Statements. -1-
<TABLE> <CAPTION> MIDDLESEX WATER COMPANY CONSOLIDATED BALANCE SHEETS ASSETS AND OTHER DEBITS June 30, December 31, 2001 2000 ------------ ------------ (Unaudited) <S> <C> <C> UTILITY PLANT: Water Production $ 69,812,258 $ 69,363,626 Transmission and Distribution 138,071,845 136,545,596 General 20,457,631 20,189,182 Construction Work in Progress 2,157,505 1,036,498 ------------ ------------ TOTAL 230,499,239 227,134,902 Less Accumulated Depreciation 41,005,600 38,856,591 ------------ ------------ UTILITY PLANT-NET 189,493,639 188,278,311 ------------ ------------ NONUTILITY ASSETS-NET 3,180,387 2,918,133 ------------ ------------ CURRENT ASSETS: Cash and Cash Equivalents 2,959,558 2,497,154 Temporary Cash Investments-Restricted 2,820,219 2,819,661 Accounts Receivable (net of allowance for doubtful accounts) 6,241,446 5,282,796 Unbilled Revenues 3,474,501 2,969,043 Materials and Supplies (at average cost) 1,071,020 1,009,956 Prepayments and Other Current Assets 937,212 694,111 ------------ ------------ TOTAL CURRENT ASSETS 17,503,956 15,272,721 ------------ ------------ DEFERRED CHARGES: Unamortized Debt Expense 2,881,430 2,950,276 Preliminary Survey and Investigation Charges 1,033,848 573,128 Regulatory Assets Income Taxes 6,012,748 6,012,748 Post Retirement Costs 998,572 1,041,676 Other 2,373,835 2,352,966 ------------ ------------ TOTAL DEFERRED CHARGES 13,300,433 12,930,794 ------------ ------------ TOTAL $223,478,415 $219,399,959 ============ ============ </TABLE> See Notes to Consolidated Financial Statements. -2-
<TABLE> <CAPTION> MIDDLESEX WATER COMPANY CONSOLIDATED BALANCE SHEETS LIABILITIES AND OTHER CREDITS June 30, December 31, 2001 2000 ------------ ------------ (Unaudited) <S> <C> <C> CAPITALIZATION (see accompanying statements) $156,918,263 $156,807,552 ------------ ------------ CURRENT LIABILITIES: Current Portion of Long-term Debt 217,915 215,859 Notes Payable 9,100,000 6,050,000 Accounts Payable 2,206,181 2,438,664 Taxes Accrued 6,791,538 6,050,322 Interest Accrued 1,785,216 1,797,520 Other 1,272,349 1,454,276 ------------ ------------ TOTAL CURRENT LIABILITIES 21,373,199 18,006,641 ------------ ------------ DEFERRED CREDITS: Customer Advances for Construction 10,821,224 11,364,818 Accumulated Deferred Investment Tax Credits 1,971,724 2,011,033 Accumulated Deferred Federal Income Taxes 12,470,603 12,371,473 Employee Benefit Plans 5,029,806 4,658,364 Other 1,036,809 1,203,051 ------------ ------------ TOTAL DEFERRED CREDITS 31,330,166 31,608,739 ------------ ------------ CONTRIBUTIONS IN AID OF CONSTRUCTION 13,856,787 12,977,027 ------------ ------------ TOTAL $223,478,415 $219,399,959 ============ ============ </TABLE> See Notes to Consolidated Financial Statements. -3-
<TABLE> <CAPTION> MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION AND RETAINED EARNINGS June 30, December 31, 2001 2000 ------------- ------------- (Unaudited) <S> <C> <C> CAPITALIZATION: Common Stock, No Par Value Shares Authorized, 10,000,000 Shares Outstanding - 2001 - 5,066,207; 2000 - 5,048,534 $ 49,486,750 $ 48,838,486 Retained Earnings 21,336,565 21,796,707 ------------- ------------- TOTAL COMMON EQUITY 70,823,315 70,635,193 ------------- ------------- 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 CUMULATIVE PREFERRED STOCK 4,063,062 4,063,062 ------------- ------------- Long-term Debt: 8.05% Amortizing Secured Note, due December 20, 2021 3,293,110 3,320,428 First Mortgage Bonds: 7.25%, Series R, due July 1, 2021 6,000,000 6,000,000 5.20%, Series S, due October 1, 2022 12,000,000 12,000,000 5.25%, Series T, due October 1, 2023 6,500,000 6,500,000 6.40%, Series U, due February 1, 2009 15,000,000 15,000,000 5.25%, Series V, due February 1, 2029 10,000,000 10,000,000 5.35%, Series W, due February 1, 2038 23,000,000 23,000,000 0.00%, Series X, due August 1, 2018 955,963 970,667 4.53%, Series Y, due August 1, 2018 1,095,000 1,095,000 0.00%, Series Z, due September 1, 2019 2,055,728 2,089,061 5.25%, Series AA, due September 1, 2019 2,350,000 2,350,000 ------------- ------------- SUBTOTAL LONG-TERM DEBT 82,249,801 82,325,156 ------------- ------------- Less: Current Portion of Long-term Debt (217,915) (215,859) ------------- ------------- TOTAL LONG-TERM DEBT 82,031,886 82,109,297 ------------- ------------- TOTAL CAPITALIZATION $ 156,918,263 $ 156,807,552 ============= ============= <CAPTION> Six Months Ended Year Ended June 30, December 31, 2001 2000 ------------- ------------- (Unaudited) <S> <C> <C> RETAINED EARNINGS: BALANCE AT BEGINNING OF PERIOD $ 21,796,707 $ 22,895,844 Net Income 2,801,729 5,305,060 ------------- ------------- TOTAL 24,598,436 28,200,904 ------------- ------------- Cash Dividends: Cumulative Preferred Stock 127,393 254,786 Common Stock 3,134,478 6,149,411 TOTAL DEDUCTIONS 3,261,871 6,404,197 ------------- ------------- BALANCE AT END OF PERIOD $ 21,336,565 $ 21,796,707 ============= ============= </TABLE> See Notes to Consolidated Financial Statements -4- <TABLE> <CAPTION> MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, Twelve Months Ended June 30, 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 2,801,729 $ 2,274,597 $ 5,832,192 $ 6,090,408 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 2,693,378 2,415,146 5,222,933 4,795,652 Provision for Deferred Income Taxes 99,130 88,574 211,875 205,616 Allowance for Funds Used During Construction (38,258) (44,764) (128,655) (317,944) Changes in Current Assets and Liabilities: Accounts Receivable (958,650) (99,172) (172,729) 111,100 Accounts Payable (232,483) (477,847) (708,406) 661,129 Accrued Taxes 741,216 743,476 689,324 88,110 Accrued Interest (12,304) 47,860 (23,114) 69,145 Unbilled Revenues (505,458) (548,699) (297,939) (58,912) Employee Benefit Plans 371,442 557,229 (183,999) 953,666 Other-Net (525,954) (142,399) (826,132) (142,429) ------------ ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 4,433,788 4,814,001 9,615,350 12,455,541 ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Utility Plant Expenditures* (3,730,912) (5,887,054) (11,483,149) (18,788,413) Note Receivable 97,500 (13,500) 70,500 2,759,130 Preliminary Survey and Investigation Charges (460,720) (222,576) (338,985) (349,880) Other-Net (572,013) (82,740) (1,343,964) (236,374) ------------ ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (4,666,145) (6,205,870) (13,095,598) (16,615,537) ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of Long-term Debt (75,355) (40,188) (241,524) (89,084) Proceeds from Issuance of Long-term Debt -- -- -- 4,500,000 Short-term Bank Borrowings 3,050,000 1,000,000 6,100,000 -- Deferred Debt Issuance Expenses (1,885) -- (43,502) (20,404) Temporary Cash Investments-Restricted (558) (121,327) 3,032,935 (3,036,297) Proceeds from Issuance of Common Stock-Net 648,264 618,471 1,274,765 1,210,689 Payment of Common Dividends (3,134,478) (3,054,712) (6,229,177) (6,018,228) Payment of Preferred Dividends (127,393) (127,393) (254,786) (268,786) Construction Advances and Contributions-Net 336,166 63,669 684,672 1,344,923 ------------ ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 694,761 (1,661,480) 4,323,383 (2,377,187) ------------ ------------ ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 462,404 (3,053,349) 843,135 (6,537,183) ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,497,154 5,169,772 3,797,660 8,653,606 ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,959,558 $ 2,116,423 $ 4,640,795 $ 2,116,423 ============ ============ ============ ============ * Excludes Allowance for Funds Used During Construction SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash Paid During the Period for: Interest (net of amounts capitalized) $ 2,450,576 $ 2,236,251 $ 4,857,460 $ 4,249,599 Income Taxes $ 1,157,792 $ 988,450 $ 2,150,792 $ 3,202,750 </TABLE> See Notes to Consolidated Financial Statements. -5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies Organization - Middlesex Water Company (Middlesex) is the parent company and sole shareholder of Tidewater Utilities, Inc. (Tidewater), Pinelands Water Company, Pinelands Wastewater Company, Utility Service Affiliates, Inc. (USA), Utility Service Affiliates (Perth Amboy) Inc. (USA-PA) and Bayview Water Company (See Note 2). White Marsh Environmental Systems, Inc. is a wholly-owned subsidiary of Tidewater. The financial statements for Middlesex and its wholly owned subsidiaries (the Company) are reported on a consolidated basis. All intercompany accounts and transactions have been eliminated. The consolidated notes accompanying the 2000 Form 10-K are applicable to this report and, in the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2001 and the results of operations and its cash flows for the periods ended June 30, 2001 and 2000. Information included in the Balance Sheet as of December 31, 2000, has been derived from the Company's audited financial statements included in its annual report on Form 10-K for the year ended December 31, 2000. The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. The adoption of this statement on January 1, 2001, had no impact on the financial statements. Note 2 - Regulatory Matters Base Rate Cases - On June 6, 2001, Middlesex received a signed order from the New Jersey Board of Public Utilities (BPU) approving an 8.1% rate increase or approximately $3.3 million. The decision was based upon a rate base of $133.0 million and a Return on Equity of 10.5%. These components are expected to allow the Company the opportunity to earn a 7.95% rate of return on the allowed rate base. The BPU approved an increase in base rates for the two Pinelands companies. Pinelands Pinelands Water Wastewater -------------- -------------- Effective Date August 1, 2001 August 1, 2001 Percentage Increase 26.92% 11.81% Revenue Increase $ 86,000 $ 104,000 Rate Base $956,000 $1,471,000 Return on Equity 10.5% 10.5% Rate of Return 9.1% 9.2% -6-
Note 3 - Capitalization Common Stock - During the three months ended June 30, 2001, 8,848 common shares ($0.3 million) were issued under the Company's Dividend Reinvestment and Common Stock Purchase Plan. Note 4 - Earnings Per Share Basic earnings per share (EPS) are computed on the basis of the weighted average number of shares outstanding. Diluted EPS assumes the conversion of both the Convertible Preferred Stock $7.00 Series and the Convertible Preferred Stock $8.00 Series. <TABLE> <CAPTION> (In Thousands Except for per Share Amounts) Three Months Ended Six Months Ended Twelve Months Ended June 30, June 30, June 30, 2001 2000 2001 2000 2001 2000 Basic: Income Shares Income Shares Income Shares Income Shares Income Shares Income Shares --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Net Income $1,918 5,062 $1,368 5,015 $2,801 5,058 $2,275 5,010 $5,832 5,046 $6,090 4,978 Preferred Dividend (64) (64) (127) (127) (255) (269) ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Earnings Applicable to Common Stock $1,854 5,062 $1,304 5,015 $2,674 5,058 $2,148 5,010 $5,577 5,046 $5,821 4,978 Basic EPS $ 0.37 $ 0.26 $ 0.53 $ 0.43 $ 1.11 $ 1.17 --------------------------------------------------------------------------------------------------------------------------------- Diluted: --------------------------------------------------------------------------------------------------------------------------------- Earnings Applicable to Common Stock $1,854 5,062 $1,304 5,015 $2,674 5,058 $2,148 5,010 $5,577 5,046 $5,821 4,978 $7.00 Series Dividend 26 89 26 89 52 89 52 89 104 89 104 89 $8.00 Series Dividend 24 82 24 82 48 82 48 82 96 82 110 105 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Adjusted Earnings Applicable to Common Stock $1,904 5,233 $1,354 5,186 $2,774 5,229 $2,248 5,181 $5,777 5,217 $6,035 5,172 Diluted EPS $ 0.36 $ 0.26 $ 0.53 $ 0.43 $ 1.11 $ 1.17 </TABLE> Note 5 - 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 the non-regulated contract services for the operation and maintenance of municipal and private water and wastewater systems in New Jersey and Delaware. On January 1, 1999 the Company began operating the water and wastewater systems of the City of Perth Amboy, New Jersey under a service contract. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to the Consolidated Financial Statements. Inter-segment transactions relating to operational costs are treated as pass through expenses. -7-
<TABLE> <CAPTION> Three Months Ended Six Months Ended Twelve Months Ended June 30 June 30 June 30 Operations by Segments: 2001 2000 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Revenues: Regulated $ 13,059 $ 12,287 $ 24,469 $ 23,578 $ 48,524 $ 47,731 Non - Regulated 1,704 1,779 3,447 3,478 6,848 7,348 Inter-segment Elimination (9) (9) (18) (18) (36) (36) -------- -------- -------- -------- -------- -------- Consolidated Revenues $ 14,754 $ 14,057 $ 27,898 $ 27,038 $ 55,336 $ 55,043 -------- -------- -------- -------- -------- -------- Operating Income: Regulated $ 2,702 $ 2,385 $ 4,722 $ 4,354 $ 9,893 $ 9,506 Non - Regulated 106 143 157 225 345 812 Inter-segment Elimination -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- Consol. Operating Income $ 2,808 $ 2,528 $ 4,879 $ 4,579 $ 10,238 $ 10,318 -------- -------- -------- -------- -------- -------- Depreciation/Amortization: Regulated $ 1,245 $ 1,147 $ 2,481 $ 2,281 $ 4,846 $ 4,413 Non - Regulated 14 14 28 26 57 39 Inter-segment Elimination -- -- -- -- -- -- Consolidated -------- -------- -------- -------- -------- -------- Depreciation/Amortization $ 1,259 $ 1,161 $ 2,509 $ 2,307 $ 4,903 $ 4,452 -------- -------- -------- -------- -------- -------- Other Income: Regulated $ 617 $ 395 $ 853 $ 604 $ 1,534 $ 1,980 Non - Regulated 5 -- 55 (3) 62 (3) Inter-segment Elimination (255) (330) (454) (481) (898) (1,406) -------- -------- -------- -------- -------- -------- Consolidated Other Income $ 367 $ 65 $ 454 $ 120 $ 698 $ 571 -------- -------- -------- -------- -------- -------- Interest Expense: Regulated $ 1,476 $ 1,370 $ 2,958 $ 2,707 $ 5,897 $ 5,321 Non - Regulated 14 23 28 45 39 145 Inter-segment Elimination (233) (168) (454) (327) (832) (667) -------- -------- -------- -------- -------- -------- Consol. Interest Expense $ 1,257 $ 1,225 $ 2,532 $ 2,425 $ 5,104 $ 4,799 -------- -------- -------- -------- -------- -------- Net Income: Regulated $ 1,843 $ 1,410 $ 2,617 $ 2,250 $ 5,529 $ 6,164 Non - Regulated 97 120 184 179 368 664 Inter-segment Elimination (22) (162) -- (154) (65) (738) -------- -------- -------- -------- -------- -------- Consolidated Net Income $ 1,918 $ 1,368 $ 2,801 $ 2,275 $ 5,832 $ 6,090 -------- -------- -------- -------- -------- -------- Capital Expenditures: Regulated $ 2,419 $ 3,178 $ 3,667 $ 5,367 $ 11,365 $ 18,257 Non - Regulated 29 49 64 520 118 531 Inter-segment Elimination -- -- -------- -------- -------- -------- -------- -------- Total Capital Expenditures $ 2,448 $ 3,227 $ 3,731 $ 5,887 $ 11,483 $ 18,788 -------- -------- -------- -------- -------- -------- <CAPTION> As of As of June 30, December 31, 2001 2000 <S> <C> <C> Assets: Regulated $ 244,107 $ 236,923 Non - Regulated 3,169 3,034 Inter-segment Elimination (23,798) (20,557) --------- --------- Consolidated Assets $ 223,478 $ 219,400 --------- --------- </TABLE> -8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - Three Months Ended June 30, 2001 Operating revenues for the three months ended June 30, 2001 were up $0.7 million or 5.0% from the same period in 2000. Higher base rates in our Middlesex service territory provided $0.2 million of the increase. Increased consumption in all service areas generated the balance of the revenue increase. Operating expenses increased $0.4 million or 3.6%. Operations and maintenance expenses declined slightly over the prior period Depreciation expense increased 8.5% over the same period from last year. Plant improvements of $11.0 million over the last twelve months plus an increase in the composite depreciation rate for our Delaware utility plant were the primary reasons for the increase of this expense. Other taxes rose $0.1 million due to higher revenue related taxes. Federal income taxes rose 27.3%, reflecting a higher amount of current taxable income. Other income rose $0.3 million due to a one-time gain on the sale of excess land by a small investor owned utility in Southern Delaware. Middlesex is a 23% equity owner of that utility. Net income rebounded in the second quarter and increased by 40.1% to $1.9 million. Results of Operations -Six Months Ended June 30, 2001 Operating revenues for the six months ended June 30, 2001 were up $0.9 million or 3.2% from the same period in 2000. Higher base rates in our Middlesex service territory provided $0.2 million of the increase. Increased consumption in all service areas generated the balance of the revenue increase. Operating expenses increased $0.6 million or 2.5% over the same period last year. Operations and maintenance expenses increased slightly over the prior period. Depreciation expense increased 8.8% over the same period from last year. Plant improvements of $11.0 million over the last twelve months plus an increase in the composite depreciation rate for our Delaware utility plant were the primary reasons for the increase of this expense. Federal income taxes rose 13.4%, reflecting a higher amount of current taxable income. Other income rose $0.3 million due to a one-time gain on the sale of excess land by a small investor owned utility in Southern Delaware. Middlesex is a 23% equity owner of that utility. Net income increased in the second quarter by 23.1% to $2.8 million. -9-
Results of Operations - Twelve Months Ended June 30, 2001 Operating revenues for the twelve months ended June 30, 2001 were up $0.3 million to $55.3 million. Higher consumption in all our service territories provided $0.5 million of additional revenue. Rate increases accounted for $0.3 million. Service fees from our operations and maintenance contracts fell $0.5 million. $0.3 million of that decline was due to lower variable fees earned under the City of Perth Amboy contract. These variable fees are based upon consumption revenue growth, which failed to materialize due to unfavorable weather during the comparative period. The balance of the decline is the result of the 1999 acquisition by Middlesex of the franchised customers previously served under the City of South Amboy contract. Operating expenses increased $0.4 million or less than one percent. Maintenance costs decreased by $0.2 million due to a lower number of cold weather related main breaks and a decreased number of emergency repairs at the Delaware mobile home parks systems acquired in January 2000. Depreciation expense increased $0.5 million or 10.1% as a result of the CJO Plant completion in July 1999, with a cost of approximately $35.0 million and other utility plant improvements of $28.2 million since June 30, 1999. Federal income taxes declined $0.1 million or 3.7% as a result of the lower amount of taxable income. Other income rose $0.1 million as earnings from our investment in Sussex Shores contributed $0.3 million due to a one-time gain on the sale of excess land by a small investor owned utility in Southern Delaware. Middlesex is a 23% equity owner of that utility. AFUDC declined due to reduced capital expenditures on projects that would be subject to AFUDC. The 5.2% decrease in preferred stock dividend requirements reflects the partial exercise of the conversion feature of the $8.00 Series of Preferred Stock in late 1999. Basic and diluted earnings per share decreased almost 5.1% to $1.11. Capital Resources The Company's capital program for 2001 is estimated to be $17.3 million and includes $8.6 million for water system additions and improvements for our Delaware systems and $1.8 million for final expenditures on the upgrade to the CJO Plant. The capital program also includes $6.9 million for scheduled upgrades to our existing systems in New Jersey. The scheduled upgrades consist of $0.8 million for mains, $0.9 million for service lines, $0.3 million for meters, $0.3 million for hydrants, $0.8 million for computer systems and $3.8 million for various other items. Liquidity The capital program in Delaware will be financed through a combination of a capital contribution from Middlesex and long-term debt financing from either a financial institution or the Company. Middlesex, Tidewater and Bayview each have filed applications with their respective state agencies to qualify certain capital projects for financing through the State Revolving Fund (SRF). SRF provides low cost financing for projects that meet certain water quality improvement benchmarks. Most of the proceeds from those loans, if granted, will be used in 2002 with some minor expenditure in 2001. Other capital expenditures will be financed through internally generated funds and sale of common stock through the Dividend Reinvestment and Common Stock Purchase Plan (DRP). Capital expenditures of $4.2 million have been incurred in the six months ended June 30, 2001. The Company will also utilize short-term borrowings through $18.0 million of available lines of credit it has with two commercial banks for working capital purposes. At June 30, 2001, there was $9.1 million outstanding against the lines of credit. -10-
Accounting Standards The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. The adoption of this statement on January 1, 2001, had no impact on the financial statements. The FASB issued two new accounting pronouncements. SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 will require business combinations entered into after June 30, 2001 to be accounted for using the purchase method of accounting. Specifically identifiable intangible assets acquired, other than goodwill, will be amortized over their estimated useful economic life. SFAS No. 142 eliminates amortization of goodwill. Goodwill impairment testing will be required at least annually. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The FASB also issued SFAS No. 143, Assets Retirement Obligation, which the Company is required to adopt January 1, 2003. The Company is currently evaluating the effect of adopting these three new accounting pronouncements. Regulatory Matters On April 10, 2001, Middlesex completed the purchase of the water utility assets and certain trade payables of Fortescue Realty Company. This transaction was effected with the creation of a wholly-owned subsidiary, Bayview Water Company. The first long-term objective for improving service to the 300 customers is to obtain low cost financing through the New Jersey State Revolving Fund (SRF) to replace the entire water distribution system. This plan calls for construction to begin in the fourth quarter of 2001. SRF financing is also expected to be in place by November 2001. Because of the system replacement, significant rate relief will be required. The Company is currently reviewing its timetable for filing for the necessary rate increase. The Hearing Examiner issued his findings and recommendations report in connection with the petition by Tidewater before the Delaware Public Service Commission (PSC) to acquire the 2,200 customer Sea Colony, LLC water system. Although the Hearing Examiner stated that the record supports the approval of the application, the Hearing Examiner recommended that the PSC condition their approval on the removal of PSC Order No. 5592, which referenced failure to provide adequate or proper safe water services. That PSC Order pertained to the December 2000 base rate increase approved by the PSC. Tidewater has filed a motion for the removal of PSC Order No. 5592. Three public hearings and one evidentiary hearings were held in connection with that motion. Tidewater believes that the record from those hearings will be favorable for the approval of the motion by the PSC at their August 21, 2001 meeting. -11-
Outlook Middlesex and its subsidiaries continue to review operations for cost reductions, without sacrificing service to our customers. Higher revenues from the most recently approved rate increases for Middlesex and the two Pinelands cases should help improve earnings over last year. A return to more typical spring and summer weather patterns will also increase revenues. Similarly, increased usage in Delaware may provide additional revenue as a result of the rate increase and restructured rates. The restructured rates now reflect a greater proportionate charge on the consumption component of the rate. Even with the recent rate increase in Delaware, we are earning less than half of the approved 9.14% rate of return. We are evaluating the timing of additional rate relief request in that jurisdiction. Our latest earnings projections for 2001 are between $1.14 and $1.18 per basic share. Forward Looking Information Certain matters discussed in this report on Form 10-Q are "forward-looking statements" intended to qualify for safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Such statements may address future plans, objectives, expectations and events concerning various matters such as capital expenditures, earnings, litigation, growth potential, rate and other regulatory matters, liquidity, capital resources and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Item 3. Quantitative and Qualitative Disclosures of Market Risk The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to manage interest rates through the use of fixed rate, long-term debt and, to a lesser extent, short-term debt. The Company's interest rate risk related to existing fixed rate, long-term debt is not material due to the term of the majority of our First Mortgage Bonds, which have maturity dates ranging from 2009 to 2038. Over the next twelve months, approximately $0.2 million of the current portion of four existing long-term debt instruments will mature. Applying a hypothetical change in the rate of interest charged by 10% on those borrowings would not have a material effect on earnings. -12-
PART II. OTHER INFORMATION Item 1. Legal Proceedings A claim has been made by multiple plaintiffs for damages resulting from personal injury, including death, and property damage alleged to have been caused by the delivery in Delaware of inadequate quality water, and related claims. While the Company has little detail about the claim at this time, we have substantial insurance coverage, which we believe will be sufficient for all claims in this matter other than for punitive damages. Item 2. Changes in Securities None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders Annual Meeting of Shareholders held May 23, 2001. Matters voted upon at the meeting: Nominees for Class II, term expiring 2004 FOR WITHHOLD Stephen H. Mundy 4,068,835 72,303 Richard A. Russo 4,085,360 55,778 Resolution approving appointment of Deloitte & Touche LLP, Certified Public Accountants, as independent auditors for 2001: FOR AGAINST ABSTAIN --- ------- ------- 4,103,743 19,564 17,831 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None. (b) Reports on Form 8-K: Filed June 26, 2001. -13-
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. MIDDLESEX WATER COMPANY (Registrant) /s/ A. Bruce O'Connor ---------------------- Date: August 14, 2001 A. Bruce O'Connor Vice President and Controller -14-