XNAS:MSEX Middlesex Water Co Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

       þ       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the quarterly period ended June 30, 2012

 

OR

 

       ¨      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________________ to______________________

 

Commission File Number     0-422

 

MIDDLESEX WATER COMPANY

(Exact name of registrant as specified in its charter)

New Jersey

(State of incorporation)

22-1114430

(IRS employer identification no.)

 

1500 Ronson Road, Iselin, NJ 08830

(Address of principal executive offices, including zip code)

(732) 634-1500

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post files).

Yes þ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨ Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨ No þ

The number of shares outstanding of each of the registrant's classes of common stock, as of July 31, 2012: Common Stock, No Par Value: 15,733,286 shares outstanding.

 

 
 

 

INDEX

 

 

PART I. FINANCIAL INFORMATION PAGE
     
Item 1. Financial Statements (Unaudited):  
     
  Condensed Consolidated Statements of Income 1
     
  Condensed Consolidated Balance Sheets 2
     
  Condensed Consolidated Statements of Cash Flows 3
     
  Condensed Consolidated Statements of Capital Stock  and Long-Term Debt 4
     
  Notes to Unaudited Condensed Consolidated Financial Statements 5
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
     
Item 3. Quantitative and Qualitative Disclosures of Market Risk 21
     
Item 4. Controls and Procedures 22
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 23
     
Item 1A. Risk Factors 23
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
     
Item 3. Defaults upon Senior Securities 23
     
Item 4. Mine Safety Disclosures 23
     
Item 5. Other Information 23
     
Item 6. Exhibits 23
     
SIGNATURES 24

 

 

 

 

 

 MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share amounts)

 

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2011   2012   2011 
                 
Operating Revenues  $27,401   $26,102   $50,947   $50,098 
                     
Operating Expenses:                    
Operations and Maintenance   14,765    14,062    29,140    28,093 
Depreciation   2,582    2,417    5,130    4,829 
Other Taxes   2,844    2,885    5,590    5,670 
                     
Total Operating Expenses   20,191    19,364    39,860    38,592 
                     
Operating Income   7,210    6,738    11,087    11,506 
                     
Other Income (Expense):                    
Allowance for Funds Used During Construction   137    197    273    391 
Other Income   125    202    317    359 
Other Expense   (11)   (111)   (151)   (160)
                     
Total Other Income, net   251    288    439    590 
                     
Interest Charges   1,779    1,714    3,133    2,928 
                     
Income before Income Taxes   5,682    5,312    8,393    9,168 
                     
Income Taxes   1,957    1,687    2,861    2,913 
                     
Net Income   3,725    3,625    5,532    6,255 
                     
Preferred Stock Dividend Requirements   51    51    103    103 
                     
Earnings Applicable to Common Stock  $3,674   $3,574   $5,429   $6,152 
                     
Earnings per share of Common Stock:                    
Basic  $0.23   $0.23   $0.35   $0.40 
Diluted  $0.23   $0.23   $0.35   $0.40 
                     
Average Number of                    
Common Shares Outstanding :                    
Basic   15,716    15,598    15,704    15,587 
Diluted   15,979    15,861    15,967    15,850 
                     
Cash Dividends Paid per Common Share  $0.1850   $0.1825   $0.3700   $0.3650 

 

See Notes to Condensed Consolidated Financial Statements.

 

1

 

 

MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED  BALANCE SHEETS
(Unaudited)
(In thousands)

 

 

   June 30,  December 31,  
ASSETS   2012  2011  
UTILITY PLANT: Water Production  $129,118   $127,827 
  Transmission and Distribution   332,715    326,629 
  General   54,035    47,519 
  Construction Work in Progress   9,940    12,575 
  TOTAL   525,808    514,550 
  Less Accumulated Depreciation   95,832    92,351 
  UTILITY PLANT - NET   429,976    422,199 
            
CURRENT ASSETS: Cash and Cash Equivalents   2,727    3,106 
  Accounts Receivable, net   10,232    11,280 
  Unbilled Revenues   6,193    4,842 
  Materials and Supplies (at average cost)   2,041    2,023 
  Prepayments   2,242    1,622 
  TOTAL CURRENT ASSETS   23,435    22,873 
            
DEFERRED CHARGES Unamortized Debt Expense   2,550    2,611 
AND OTHER ASSETS: Preliminary Survey and Investigation Charges   5,157    5,179 
  Regulatory Assets   66,338    67,302 
  Operations  and Developer Contracts Receivable   2,147    5,300 
  Restricted Cash   5,838    3,260 
  Non-utility Assets - Net   9,106    8,182 
  Other   594    630 
  TOTAL DEFERRED CHARGES AND OTHER ASSETS   91,730    92,464 
  TOTAL ASSETS  $545,141   $537,536 
            
CAPITALIZATION AND LIABILITIES          
CAPITALIZATION: Common Stock, No Par Value  $142,592   $141,432 
  Retained Earnings   35,168    35,549 
  TOTAL COMMON EQUITY   177,760    176,981 
  Preferred Stock   3,353    3,353 
  Long-term Debt   135,079    132,167 
  TOTAL CAPITALIZATION   316,192    312,501 
            
CURRENT Current Portion of Long-term Debt   4,996    4,569 
LIABILITIES: Notes Payable   25,250    24,250 
  Accounts Payable   4,797    5,706 
  Accrued Taxes   9,252    7,847 
  Accrued Interest   1,622    1,628 
  Unearned Revenues and Advanced Service Fees   743    734 
  Other   1,875    1,953 
  TOTAL CURRENT LIABILITIES   48,535    46,687 
            
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)          
            
DEFERRED CREDITS Customer Advances for Construction   21,707    21,944 
AND OTHER LIABILITIES: Accumulated Deferred Investment Tax Credits   1,107    1,146 
  Accumulated Deferred Income Taxes   37,753    37,022 
  Employee Benefit Plans   51,304    51,006 
  Regulatory Liability - Cost of Utility Plant Removal   8,405    8,029 
  Other   974    995 
  TOTAL DEFERRED CREDITS AND OTHER LIABILITIES   121,250    120,142 
            
CONTRIBUTIONS IN AID OF CONSTRUCTION   59,164    58,206 
  TOTAL CAPITALIZATION AND LIABILITIES  $545,141   $537,536 

 

See Notes to Condensed Consolidated Financial Statements.

 

2

 

MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

 

 

   Six  Months Ended June  30, 
   2012   2011 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Income  $5,532   $6,255 
Adjustments to Reconcile Net Income to          
Net Cash Provided by Operating Activities:          
Depreciation and Amortization   5,489    5,174 
Provision for Deferred Income Taxes and Investment Tax Credits   990    422 
Equity Portion of Allowance for Funds Used During Construction (AFUDC)   (170)   (260)
Cash Surrender Value of Life Insurance   (90)   (86)
Stock Compensation Expense   372    234 
Changes in Assets and Liabilities:          
Accounts Receivable   4,201    1,827 
Unbilled Revenues   (1,351)   (1,567)
Materials & Supplies   (18)   247 
Prepayments   (620)   (836)
Accounts Payable   (909)   (699)
Accrued Taxes   1,405    485 
Accrued Interest   (6)   82 
Employee Benefit Plans   1,846    891 
Unearned Revenue & Advanced Service Fees   9    2 
Other Assets and Liabilities   (867)   (87)
           
NET CASH PROVIDED BY OPERATING ACTIVITIES   15,813    12,084 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Utility Plant Expenditures, Including AFUDC of $103 in 2012, $131 in 2011   (12,574)   (11,039)
Restricted Cash   (2,578)   1,145 
Investment in Joint Venture   (500)    
           
NET CASH USED IN INVESTING ACTIVITIES   (15,652)   (9,894)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Redemption of Long-term Debt   (1,590)   (1,434)
Proceeds from Issuance of Long-term Debt   4,929    2,315 
Net Short-term Bank Borrowings   1,000    3,250 
Deferred Debt Issuance Expense   (22)   (19)
Repurchase of Preferred Stock       (9)
Proceeds from Issuance of Common Stock   788    775 
Payment of Common Dividends   (5,809)   (5,688)
Payment of Preferred Dividends   (103)   (103)
Construction Advances and Contributions-Net   267    553 
           
NET CASH USED IN FINANCING ACTIVITIES   (540)   (360)
NET CHANGES IN CASH AND CASH EQUIVALENTS   (379)   1,830 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   3,106    2,453 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $2,727   $4,283 
           
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:          
Utility Plant received as Construction Advances and Contributions  $453   $6,288 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:          
  Cash Paid During the Year for:          
Interest  $3,208   $2,918 
Interest Capitalized  $103   $131 
Income Taxes  $774   $2,550 

 

See Notes to Condensed Consolidated Financial Statements.

 

3

 

MIDDLESEX WATER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
(Unaudited)
(In thousands)

 

 

  June 30,    December 31, 
   2012   2011 
Common Stock, No Par Value          
Shares Authorized - 40,000          
Shares Outstanding -  2012 - 15,730  $142,592   $141,432 
  2011 - 15,682         
Retained Earnings   35,168    35,549 
TOTAL COMMON EQUITY  $177,760   $176,981 
Cumulative Preferred Stock, No Par Value:          
Shares Authorized -  134         
Shares Outstanding - 32          
  Convertible:          
Shares Outstanding, $7.00 Series - 14   1,457    1,457 
Shares Outstanding, $8.00 Series - 7   816    816 
  Nonredeemable:          
Shares Outstanding, $7.00 Series -   1   80    80 
Shares Outstanding, $4.75 Series - 10   1,000    1,000 
TOTAL PREFERRED STOCK  $3,353   $3,353 
Long-term Debt:          
  8.05%, Amortizing Secured Note, due December 20, 2021  $2,245   $2,319 
  6.25%, Amortizing Secured Note, due May 19, 2028   6,685    6,895 
  6.44%, Amortizing Secured Note, due August 25, 2030   5,087    5,227 
  6.46%, Amortizing Secured Note, due September 19, 2031   5,367    5,507 
  4.22%, State Revolving Trust Note, due December 31, 2022   527    546 
  3.30% to 3.60%, State Revolving Trust Note, due May 1, 2025   3,519    3,623 
  3.49%, State Revolving Trust Note, due January 25, 2027   618    633 
  4.03%, State Revolving Trust Note, due December 1, 2026   805    825 
  4.00% to 5.00%, State Revolving Trust Bond, due August 1, 2021   434    434 
  0.00%, State Revolving Fund Bond, due August 1, 2021   352    359 
  3.64%, State Revolving Trust Note, due July 1, 2028   356    364 
  3.64%, State Revolving Trust Note, due January 1, 2028   119    122 
  3.45%, State Revolving Trust Note, due August 1, 2031   392    39 
  6.59%, Amortizing Secured Note, due April 20, 2029   5,871    6,046 
  7.05%, Amortizing Secured Note, due January 20, 2030   4,396    4,521 
  5.69%, Amortizing Secured Note, due January 20, 2030   9,017    9,273 
  3.75%, State Revolving Trust Note, due July 1, 2031   2,664    2,021 
  3.75%, State Revolving Trust Note, due November 30, 2030   1,415    1,404 
  First Mortgage Bonds:          
 5.20%, Series S, due October 1, 2022   12,000    12,000 
 5.25%, Series T, due October 1, 2023   6,500    6,500 
 5.25%, Series V, due February 1, 2029   10,000    10,000 
 5.35%, Series W, due February 1, 2038   23,000    23,000 
 0.00%, Series X, due September 1, 2018   368    375 
 4.25% to 4.63%, Series Y, due September 1, 2018   410    410 
 0.00%, Series Z, due September 1, 2019   876    894 
 5.25% to 5.75%, Series AA, due September 1, 2019   1,080    1,080 
 0.00%, Series BB, due September 1, 2021   1,183    1,206 
 4.00% to 5.00%, Series CC, due September 1, 2021   1,400    1,400 
 5.10%, Series DD, due January 1, 2032   6,000    6,000 
 0.00%, Series EE, due August 1, 2023   4,709    4,804 
 3.00% to 5.50%, Series FF, due August 1, 2024   6,160    6,160 
 0.00%, Series GG, due August 1, 2026   1,330    1,352 
 4.00% to 5.00%, Series HH, due August 1, 2026   1,640    1,640 
 0.00%, Series II, due August 1, 2024   1,127    1,150 
 3.40% to 5.00%, Series JJ, due August 1, 2027   1,560    1,560 
 0.00%, Series KK, due August 1, 2028   1,500    1,526 
 5.00% to 5.50%, Series LL, due August 1, 2028   1,635    1,635 
 0.00%, Series MM, due August 1, 2030   1,868    1,901 
 3.00% to 4.375%, Series NN, due August 1, 2030   1,985    1,985 
 0.00%, Series OO, due August 1, 2031   2,960     
 2.00% to 5.00%, Series PP, due August 1, 2031   915     
SUBTOTAL LONG-TERM DEBT   140,075    136,736 
Less: Current Portion of Long-term Debt   (4,996)   (4,569)
TOTAL LONG-TERM DEBT  $135,079   $132,167 

 

See Notes to Condensed Consolidated Financial Statements.

 

4

 

MIDDLESEX WATER COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Basis of Presentation and Recent Developments

 

Middlesex Water Company (Middlesex or the Company) is the parent company and sole shareholder of Tidewater Utilities, Inc. (Tidewater), Tidewater Environmental Services, Inc. (TESI), Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), Utility Service Affiliates, Inc. (USA), Utility Service Affiliates  (Perth Amboy) Inc. (USA-PA), and Twin Lakes Utilities, Inc. (Twin Lakes). Southern Shores Water Company, LLC (Southern Shores) and White Marsh Environmental Systems, Inc. (White Marsh) are wholly-owned subsidiaries of Tidewater. The financial statements for Middlesex and its wholly-owned subsidiaries (the Company) are reported on a consolidated basis. All significant intercompany accounts and transactions have been eliminated.

 

The consolidated notes within the 2011 Annual Report on Form 10-K (the 2011 Form 10-K) are applicable to these financial statements and, in the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (including normal recurring accruals) to present fairly the financial position as of June 30, 2012, the results of operations for the three and six month periods ended June 30, 2012 and 2011 and cash flows for the six month periods ended June 30, 2012 and 2011. Information included in the Condensed Consolidated Balance Sheet as of December 31, 2011, has been derived from the Company’s audited financial statements for the year ended December 31, 2011 included in the 2011 Form 10-K.

 

Contract Awarded to USA

In March 2012, the Borough of Avalon, New Jersey (Avalon) awarded an operations and maintenance contract to USA for the Avalon water utility, sewer utility and storm water system. In addition to performing the day to day operations, USA will be responsible for all billing, collections, customer service, emergency responses and capital projects funded by Avalon. The contract is for a ten year term and USA assumed operation and maintenance of the Avalon water utility, sewer utility and storm water system on July 1, 2012.

 

Recent Accounting Guidance

Fair Value Measurements and Disclosures – In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2011-04, which amends Accounting Standards Codification 820, Fair Value Measurements and Disclosures, to update guidance related to fair value measurements and disclosures as a step towards achieving convergence between generally accepted accounting principles and international financial reporting standards. ASU 2011-04 clarifies intent about application of existing fair value measurements and disclosures, changes certain requirements for fair value measurements and requires expanded disclosures. ASU 2011-04 was effective for interim and annual periods beginning after December 15, 2011. The Company’s adoption of ASU 2011-04 resulted in expanded fair value disclosures and did not have any impact on the Company’s results of operations, cash flows or financial position.

 

Note 2 Rate Matters

 

Middlesex - In July 2012, Middlesex’s application with the New Jersey Board of Public Utilities (NJBPU) seeking permission to increase its base water rates was partially approved, granting an increase in annual operating revenues of $8.1 million. The originally-filed base water rate increase request of $11.3 million, which was filed in January 2012, was made to seek recovery of increased costs of operations, chemicals and fuel, electricity, taxes, labor and benefits, decreases in industrial and commercial customer demand patterns, as well as capital investment. The new base water rates are designed to recover these increased costs, as well as a return on invested capital in rate base of $202.4 million based on a return on equity of 10.15%. The rate increase became effective on July 20, 2012.

 

5

Tidewater – In June 2012, Tidewater’s application with the Delaware Public Service Commission (DEPSC) seeking permission to increase its base water rates was partially approved, granting an increase in annual operating revenues of $3.9 million. The originally-filed base water rate increase request of $6.9 million, which was filed in September 2011, was made to seek recovery of increased costs for operations, maintenance and taxes, as well as capital investment. Under PSC regulations, Tidewater had implemented interim rates in November 2011, which amounted to approximately $2.5 million on an annual basis. The new final base rates will reflect the remaining $1.4 million and became effective June 19, 2012.

 

TESI In June 2012, TESI’s application with the DEPSC seeking permission to increase its base wastewater rates was partially approved, granting an increase in annual operating revenues of $0.6 million, a portion of which is to be phased in through 2015. The originally-filed base wastewater rate increase request of $0.8 million, which was filed in July 2011, was made to seek recovery of increased operation and maintenance costs, as well as capital investment. Under PSC regulations, TESI had implemented interim rates in September 2011, which amounted to approximately $0.1 million on an annual basis. The new final base rates became effective June 5, 2012.

 

Note 3 – Capitalization

 

Common Stock

During the six months ended June 30, 2012, there were 42,472 common shares (approximately $0.8 million) issued under the Company’s Amended and Restated Dividend Reinvestment and Common Stock Purchase Plan (DRP).

 

The Company maintains a stock plan for its non-management directors (Outside Director Stock Compensation Plan). In May 2012, the Company granted and issued 5,768 shares of common stock (approximately $0.1 million) to the non-management directors under the plan.

 

Long-term Debt

In May 2012, Middlesex borrowed $3.9 million through the New Jersey Environmental Infrastructure Trust under the New Jersey State Revolving Fund (SRF) loan program and issued first mortgage bonds designated as Series OO ($3.0 million) and Series PP ($0.9 million).  The interest rate on the Series OO bond is zero and the interest rate on the Series PP bond ranges from 2.0% to 5.0% depending on the serial maturity date. The final maturity date for both bonds is August 1, 2031. Proceeds were recorded as Restricted Cash and may only be used for the Middlesex 2012 RENEW Program, which is Middlesex’s program to clean and cement unlined mains in the Middlesex system.

 

In March 2011, Tidewater closed on a $2.8 million loan with the Delaware State Revolving Fund (SRF) program which allows, but does not obligate, Tidewater to draw against a General Obligation Note for a specific project. The interest rate on any draw will be set at 3.75% with a final maturity of July 1, 2031 on the amount actually borrowed. As of June 30, 2012, Tidewater has borrowed $2.7 million against this loan.

 

In March 2011, Southern Shores closed on a $1.6 million loan with the Delaware SRF program, which allows, but does not obligate, Southern Shores to draw against a General Obligation Note for a specific. The interest rate on any draw will be set at 3.75% with a final maturity of November 30, 2030 on the amount actually borrowed. As of June 30, 2012, Southern Shores has borrowed $1.4 million against this loan.

 

6

 

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 condensed consolidated balance sheets for cash and cash equivalents, trade receivables, accounts payable and notes payable 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 and SRF Bonds is based on quoted market prices for similar issues. Under the fair value hierarchy, the fair value of cash and cash equivalents is classified as a Level 1 measurement and the fair value of notes payable and the First Mortgage and SRF Bonds in the table below are classified as Level 2 measurements. The carrying amount and fair market value of the Company’s bonds were as follows:

 

   (Thousands of Dollars) 
   June 30, 2012   December 31, 2011 
   Carrying   Fair   Carrying   Fair 
   Amount   Value   Amount   Value 
First Mortgage Bonds  $90,208   $91,370   $86,577   $87,283 
SRF Bonds  $785   $790   $793   $799 

 

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 was $49.1 million at June 30, 2012 and $49.3 million at December 31, 2011. Customer advances for construction have a carrying amount of $21.7 million and $21.9 million, respectively, at June 30, 2012 and December 31, 2011. 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 4 – Earnings Per Share

 

Basic earnings per share (EPS) are computed on the basis of the weighted average number of shares outstanding during the period presented. Diluted EPS assumes the conversion of both the Convertible Preferred Stock $7.00 Series and the Convertible Preferred Stock $8.00 Series.

 

   (In Thousands Except per Share Amounts) 
   Three Months Ended June 30, 
   2012   2011 
Basic:  Income   Shares   Income   Shares 
Net Income  $3,725    15,716   $3,625    15,598 
Preferred Dividend   (51)          (51)         
Earnings Applicable to Common Stock  $3,674    15,716   $3,574    15,598 
                     
Basic EPS  $0.23        $0.23      
                     
Diluted:                    
Earnings Applicable to Common Stock  $3,674    15,716   $3,574    15,598 
$7.00 Series Preferred Dividend   24    167    24    167 
$8.00 Series Preferred Dividend   14    96    14    96 
Adjusted Earnings Applicable to  Common Stock  $3,712    15,979   $3,612    15,861 
                     
Diluted EPS  $0.23        $0.23      

 

7

 

 

 

   (In Thousands Except per Share Amounts) 
   Six Months Ended June 30, 
   2012   2011 
Basic:  Income   Shares   Income   Shares 
Net Income  $5,532    15,704   $6,255    15,587 
Preferred Dividend   (103)        (103)     
Earnings Applicable to Common Stock  $5,429    15,704   $6,152    15,587 
                     
Basic EPS  $0.35        $0.40      
                     
Diluted:                    
Earnings Applicable to Common Stock  $5,429    15,704   $6,152    15,587 
$7.00 Series Preferred Dividend   49    167    49    167 
$8.00 Series Preferred Dividend   28    96    28    96 
Adjusted Earnings Applicable to  Common Stock  $5,506    15,967   $6,229    15,850 
                     
Diluted EPS  $0.35        $0.40      

 

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, Delaware and Pennsylvania. This segment also includes regulated wastewater systems in New Jersey and Delaware. The Company is subject to regulations as to its rates, services and other matters by New Jersey, Delaware and Pennsylvania with respect to utility services within these states. The other segment is primarily comprised of non-regulated contract services for the operation and maintenance of municipal and private water and wastewater systems in New Jersey and Delaware. Inter-segment transactions relating to operational costs are treated as pass-through expenses. Finance charges on inter-segment loan activities are based on interest rates that are below what would normally be charged by a third party lender.

8

 

   (In Thousands) 
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
Operations by Segments:  2012   2011   2012   2011 
Revenues:                    
  Regulated  $24,442   $23,437   $45,300   $44,673 
  Non – Regulated   3,089    2,774    5,847    5,615 
Inter-segment Elimination   (130)   (109)   (200)   (190)
Consolidated Revenues  $27,401   $26,102   $50,947   $50,098 
 
Operating Income:
                    
  Regulated  $6,878   $6,317   $10,381   $10,652 
  Non – Regulated   332    421    706    854 
Consolidated Operating Income  $7,210   $6,738   $11,087   $11,506 
                     
Net Income:                    
  Regulated  $3,557   $3,372   $5,144   $5,745 
  Non – Regulated   168    253    388    510 
Consolidated Net Income  $3,725   $3,625   $5,532   $6,255 
 
Capital Expenditures:
                    
 Regulated  $6,296   $6,024   $12,335   $10,856 
  Non – Regulated   140    127    239    183 
Total Capital Expenditures  $6,436   $6,151   $12,574   $11,039 

 

  

 

As of

June 30,

2012

  

 

As of

December 31,

2011

 
Assets:          
  Regulated  $544,458   $539,947 
  Non – Regulated   10,862    10,325 
Inter-segment Elimination   (10,179)   (12,736)
Consolidated Assets  $545,141   $537,536 

 

Note 6 – Short-term Borrowings

 

As of June 30, 2012, the Company has established lines of credit aggregating $60.0 million. At June 30, 2012, the outstanding borrowings under these credit lines were $25.3 million at a weighted average interest rate of 1.36%.

 

The weighted average daily amounts of borrowings outstanding under the Company’s credit lines and the weighted average interest rates on those amounts were as follows:

  

   ($ In Thousands) 
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2012   2011   2012   2011 
                 
Average Daily Amounts Outstanding  $24,635   $19,548   $24,102   $18,426 
Weighted Average Interest Rates   1.38%   1.59%   1.35%   1.59%

 

 

9

The maturity dates for the $25.3 million outstanding as of June 30, 2012 are all in July 2012 and are extendable at the discretion of the Company.

 

Interest rates for short-term borrowings under the lines of credit are below the prime rate with no requirement for compensating balances.

 

Note 7 – Commitments and Contingent Liabilities

 

Contract Operations - USA-PA operates the City of Perth Amboy, NJ’s water and wastewater systems under a 20-year agreement, which expires in 2018. In connection with the agreement with Perth Amboy, USA-PA entered into a 20-year subcontract with a wastewater operating company for the operation and maintenance of the Perth Amboy wastewater collection system. The subcontract provides for the sharing of certain fixed and variable fees and operating expenses.

 

Water Supply

Middlesex has an agreement with the NJWSA for the purchase of untreated water through November 30, 2023, which provides for an average purchase of 27 million gallons a day (mgd). Pricing is set annually by the NJWSA through a public rate making process. The agreement has provisions for additional pricing in the event Middlesex overdrafts or exceeds certain monthly and annual thresholds.

 

Middlesex also has an agreement with a non-affiliated regulated water utility for the purchase of treated water. This agreement, which expires February 27, 2016, provides for the minimum purchase of 3 mgd of treated water with provisions for additional purchases.

 

Purchased water costs are shown below:

 

   (In Thousands) 
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2012   2011   2012   2011 
                 
Treated  $775   $652   $1,494   $1,292 
Untreated   516    516    1,128    1,122 
Total Costs  $1,291   $1,168   $2,622   $2,414 

 

Construction

The Company has budgeted approximately $21.8 million on its construction program in 2012. The actual amount and timing of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain projects.

 

Litigation

The Company is a defendant in lawsuits in the normal course of business. We believe the resolution of pending claims and legal proceedings will not have a material adverse effect on the Company’s consolidated financial statements.

 

Change in Control Agreements

The Company has Change in Control Agreements with certain of its officers that provide compensation and benefits in the event of termination of employment in connection with a change in control of the Company.

 

10

Note 8 – Employee Benefit Plans

 

Pension Benefits

The Company’s Pension Plan covers substantially all employees hired prior to March 31, 2007. Employees hired after March 31, 2007 are not eligible to participate in this plan, but do participate in a defined contribution plan that provides an annual contribution into a self-directed retirement account at the discretion of the Company, based upon a percentage of the participants’ compensation. In order to be eligible for contribution, the participating employee must be employed by the Company on December 31st of the year to which the award relates. For the three months ended June 30, 2012, the Company did not make any Pension Plan cash contributions. For the three months ended June 30, 2011, the Company made Pension Plan cash contributions of $0.4 million. For the six months ended June 30, 2012 and 2011, the Company made Pension Plan cash contributions of $0.8 million and $0.7 million, respectively. The Company expects to make additional Pension Plan cash contributions of approximately $3.3 million over the remainder of the current year. The Company also maintains an unfunded supplemental retirement benefit plan for certain active and retired Company officers and currently pays $0.3 million in annual benefits to the retired participants.

 

Other Benefits

The Company’s Other Benefits Plan covers substantially all of its retired employees. Employees hired after March 31, 2007 are not eligible to participate in this plan. Coverage includes healthcare and life insurance. For the three months ended June 30, 2012 and 2011, the Company did not make any Other Benefits Plan cash contributions. For the six months ended June 30, 2012 and 2011, the Company made Other Benefits Plan cash contributions of $0.8 million and $0.5 million, respectively. The Company expects to make additional Other Benefits Plan cash contributions of approximately $4.0 million over the remainder of the current year.

 

The following tables set forth information relating to the Company’s periodic costs for its employee retirement benefit plans:

 

   (In Thousands) 
   Pension Benefits   Other Benefits 
   Three Months Ended June 30, 
   2012   2011   2012   2011 
                 
Service Cost  $549   $393   $446   $327 
Interest Cost   604    565    467    401 
Expected Return on Assets   (614)   (570)   (315)   (257)
Amortization of Unrecognized Losses   388    142    442    220 
Amortization of Unrecognized Prior Service Cost   3    3         
Amortization of Transition Obligation           34    34 
Net Periodic Benefit Cost  $930   $533   $1,074   $725 
11

 

         
   (In Thousands) 
   Pension Benefits   Other Benefits 
   Six Months Ended June 30, 
   2012   2011   2012   2011 
                 
Service Cost  $1,099   $787   $892   $653 
Interest Cost   1,208    1,130    934    802 
Expected Return on Assets   (1,229)   (1,141)   (629)   (513)
Amortization of Unrecognized Losses   775    283    883    439 
Amortization of Unrecognized Prior Service Cost   5    5         
Amortization of Transition Obligation           68    68 
Net Periodic Benefit Cost  $1,858   $1,064   $2,148   $1,449 

 

 

12

 

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of Middlesex Water Company (Middlesex or the Company) included elsewhere herein and with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Forward-Looking Statements

Certain statements contained in this periodic report and in the documents incorporated by reference constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The Company intends that these statements be covered by the safe harbors created under those laws.  These statements include, but are not limited to:

-statements as to expected financial condition, performance, prospects and earnings of the Company;
-statements regarding strategic plans for growth;
-statements regarding the amount and timing of rate increases and other regulatory matters, including the recovery of certain costs recorded as regulatory assets;
-statements as to the Company’s expected liquidity needs during the upcoming fiscal year and beyond and statements as to the sources and availability of funds to meet its liquidity needs;
-statements as to expected rates, consumption volumes, service fees, revenues, margins, expenses and operating results;
-statements as to the Company’s compliance with environmental laws and regulations and estimations of the materiality of any related costs;
-statements as to the safety and reliability of the Company’s equipment, facilities and operations;
-statements as to financial projections;
-statements as to the ability of the Company to pay dividends;
-statements as to the Company’s plans to renew municipal franchises and consents in the territories it serves;
-expectations as to the amount of cash contributions to fund the Company’s retirement benefit plans, including statements as to anticipated discount rates and rates of return on plan assets;
-statements as to trends; and
-statements regarding the availability and quality of our water supply.

These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from anticipated results and outcomes include, but are not limited to:

-the effects of general economic conditions;
-increases in competition in the markets served by the Company;
-the ability of the Company to control operating expenses and to achieve efficiencies in its operations;
-the availability of adequate supplies of water;
-actions taken by government regulators, including decisions on rate increase requests;
-new or additional water quality standards;
-weather variations and other natural phenomena;
-the existence of attractive growth opportunities and the risks involved in pursuing those opportunities;
-acts of war or terrorism;
-significant changes in the pace of housing development in Delaware;
-the availability and cost of capital resources;
-the ability to translate Preliminary Survey & Investigation (PS&I) charges into viable projects; and
-other factors discussed elsewhere in this quarterly report.

 

13

Many of these factors are beyond the Company’s ability to control or predict. Given these uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which only speak to the Company’s understanding as of the date of this report. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.

 

For an additional discussion of factors that may affect the Company’s business and results of operations, see Item 1A. - Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

Overview

 

Middlesex has operated as a water utility in New Jersey since 1897, in Delaware through our wholly-owned subsidiary, Tidewater Utilities, Inc. (Tidewater), since 1992 and in Pennsylvania through our wholly-owned subsidiary, Twin Lakes Utilities, Inc. (Twin Lakes), since 2009. We are in the business of collecting, treating and distributing water for domestic, commercial, municipal, industrial and fire protection purposes. We also operate a New Jersey municipal water and wastewater system under contract and provide wastewater services in New Jersey and Delaware through our subsidiaries. We are regulated as to rates charged to customers for water and wastewater services, as to the quality of water service we provide and as to certain other matters in New Jersey, Delaware and Pennsylvania. Only our Utility Services Affiliates, Inc. (USA), Utility Services Affiliates (Perth Amboy), Inc. (USA-PA) and White Marsh Environmental Systems, Inc. (White Marsh) subsidiaries are not regulated utilities.

 

Our New Jersey water utility system (the Middlesex System) provides water services to approximately 60,000 retail customers, primarily in central New Jersey. The Middlesex System also provides water service under contract to several municipalities in central New Jersey. 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 Bayview system provides water services in Downe Township, New Jersey. Our other New Jersey subsidiaries, Pinelands Water Company and Pinelands Wastewater Company (collectively, Pinelands), provide water and wastewater services to residents in Southampton Township, New Jersey.

 

USA offers residential customers in New Jersey and Delaware water service line and sewer lateral maintenance programs, which are serviced by HomeServe USA (HomeServe), a leading provider of home maintenance service programs. HomeServe has recently expanded its maintenance offerings under the program to include other household services. USA receives a service fee for the billing, cash collection and other administrative matters associated with HomeServe’s service contracts. In February 2012, USA began to operate a wastewater treatment facility under contract at an industrial site in Southern New Jersey. On July 1, 2012, USA began operating the water and sewer utilities and storm water system of the Borough of Avalon, New Jersey.

 

Our Delaware subsidiaries, Tidewater and Southern Shores Water Company, LLC (Southern Shores), provide water services to approximately 36,000 retail customers in New Castle, Kent and Sussex Counties, Delaware. Tidewater’s subsidiary, White Marsh, services an additional 4,700 customers in Kent and Sussex Counties through various operations and maintenance contracts.

 

Our Tidewater Environmental Services, Inc. (TESI) subsidiary provides wastewater services to approximately 2,200 residential retail customers. We expect the growth of our regulated wastewater operations in Delaware will eventually become a more significant component of our operations.

 

Our Pennsylvania subsidiary, Twin Lakes, provides water services to approximately 120 retail customers in the Township of Shohola, Pike County, Pennsylvania.

 

14

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 four factors: weather, adequate and timely rate relief, effective cost management, and customer growth. These factors are evident in the discussions below which compare our results of operations with prior periods.

 

Recent Developments

 

Rate Matters

Middlesex - In July 2012, Middlesex’s application with the New Jersey Board of Public Utilities (NJBPU) seeking permission to increase its base water rates was partially approved, granting an increase in annual operating revenues of $8.1 million. The originally-filed base water rate increase request of $11.3 million, which was filed in January 2012, was made to seek recovery of increased costs of operations, chemicals and fuel, electricity, taxes, labor and benefits, decreases in industrial and commercial customer demand patterns, as well as capital investment. The new base water rates are designed to recover these increased costs, as well as a return on invested capital in rate base of $202.4 million based on a return on equity of 10.15%. The rate increase became effective on July 20, 2012.

 

Tidewater – In June 2012, Tidewater’s application with the Delaware Public Service Commission (DEPSC) seeking permission to increase its base water rates was partially approved, granting an increase in annual operating revenues of $3.9 million. The originally-filed base water rate increase request of $6.9 million, which was filed in September 2011, was made to seek recovery of increased costs for operations, maintenance and taxes, as well as capital investment. Under PSC regulations, Tidewater had implemented interim rates in November 2011, which amounted to approximately $2.5 million on an annual basis. The new final base rates will reflect the remaining $1.4 million and became effective June 19, 2012.

 

TESI In June 2012, TESI’s application with the DEPSC seeking permission to increase its base wastewater rates was partially approved, granting an increase in annual operating revenues of $0.6 million, a portion of which is to be phased in through 2015. The originally-filed base wastewater rate increase request of $0.8 million, which was filed in July 2011, was made to seek recovery of increased operation and maintenance costs, as well as capital investment. Under PSC regulations, TESI had implemented interim rates in September 2011, which amounted to approximately $0.1 million on an annual basis. The new final base rates became effective June 5, 2012.

 

Contract Awarded to USA

In March 2012, the Borough of Avalon, New Jersey (Avalon) awarded an operations and maintenance contract to USA for the Avalon water utility, sewer utility and storm water system. In addition to performing the day to day operations, USA will be responsible for all billing, collections, customer service, emergency responses and capital projects funded by Avalon. The contract is for a ten year term and USA began operating the systems on July 1, 2012. The contract is expected to contribute less than $0.01 to annual earnings per share.

 

15

Outlook

 

Revenues for 2012 are expected to be favorably impacted from approved rate increases at Middlesex, Tidewater, TESI, Southern Shores and Twin Lakes. In addition, Pinelands Water and Pinelands Wastewater intend to file for base rate increases in the third quarter of 2012. Any decision on the expected rate filing would be rendered in 2013.

 

Ongoing economic conditions continue to negatively impact our customers’ water consumption, particularly the level of water usage by our commercial and industrial customers in our Middlesex system. We are unable to determine when these customers’ water demands may fully return to previous levels, or if a reduced level of demand will continue indefinitely. We were given appropriate recognition for this decrease in customer consumption in Middlesex’s July 2012 rate increase.

 

Revenues and earnings are influenced by weather. Changes in usage patterns, as well as increases in capital expenditures and operating costs, are the primary factors in determining the need for rate increase requests. We continuously implement plans to streamline operations and reduce operating costs.

 

Changes in certain actuarial assumptions, including a lower discount rate and revised plan participant mortality factors, as well as a lower actual return in 2011 on assets held in our retirement plan funds resulted in a significant increase in our underfunded employee benefit plan obligation and will result in higher employee benefit plan expense and cash contributions in 2012.  The rate increases recently approved for Tidewater and Middlesex reflected the resulting increased employee benefit plan expenses. 

 

As a result of ongoing challenging economic conditions impacting the pace of new residential home construction, there may be an increase in the amount of PS&I costs that will not be currently recoverable in rates. If it is determined that recovery is unlikely, the PS&I costs deemed unrecoverable will be charged against income in the period of determination.

 

Our strategy is focused on four key areas:

 

  Serve as a trusted and continually-improving provider of safe, reliable and cost-effective water, wastewater and related services;

 

  Provide a comprehensive suite of water and wastewater solutions in the continually-developing Delaware market that results in profitable growth;

 

  Pursue profitable growth in our core states of New Jersey and Delaware, as well as additional states; and

 

  Invest in products, services and other viable opportunities that complement our core competencies.

 

16

Operating Results by Segment

 

The discussion of the Company’s operating results is on a consolidated basis and includes significant factors by subsidiary. The Company has two operating segments, Regulated and Non-Regulated.

 

The segments in the tables included below consist of the following companies: Regulated-Middlesex, Tidewater, Pinelands, Southern Shores, TESI and Twin Lakes; Non-Regulated- USA, USA-PA, and White Marsh.

 

Results of Operations – Three Months Ended June 30, 2012

 

   (In Thousands) 
   Three Months Ended June 30, 
   2012   2011 
   Regulated   Non-
Regulated
   Total   Regulated   Non-
Regulated
   Total 
Revenues  $24,389   $3,012   $27,401   $23,381   $2,721   $26,102 
Operations and maintenance expenses   12,207    2,558    14,765    11,867    2,195    14,062 
Depreciation expense   2,541    41    2,582    2,380    37    2,417 
Other taxes   2,763    81    2,844    2,817    68    2,885 
   Operating income   6,878    332    7,210    6,317    421    6,738 
                               
Other income, net   235    16    251    229    59    288 
Interest expense   1,754    25    1,779    1,689    25    1,714 
Income taxes   1,802    155    1,957    1,485    202    1,687 
   Net income  $3,557   $168   $3,725   $3,372   $253   $3,625 

 

Operating revenues for the three months ended June 30, 2012 increased $1.3 million from the same period in 2011. This increase was primarily related to the following factors:

 

·Middlesex System revenues increased $0.1 million, primarily due to:
oSales to General Metered Service (GMS) customers increased by $0.2 million due to increased customer demand for water and implementation of a purchased water adjustment clause in August 2011; and
oContract Sales to Municipalities decreased by $0.1 million due to lower customer demand for water;
·Tidewater System revenues increased $0.7 million, primarily due to the 10.49% interim rate increase that went into effect in November 2011 and increased connection fees;
·USA-PA’s revenues increased $0.2 million, primarily from scheduled increases in the fixed fees paid under contract with the City of Perth Amboy;
·Southern Shores’ revenues increased $0.1 million, primarily due to rate increases that went into effect in June 2011 and January 2012; and
·Revenues from all other subsidiaries increased $0.2 million.

 

17

Operation and Maintenance Expense

 

Operation and maintenance expenses for the three months ended June 30, 2012 increased $0.7 million from the same period in 2011. This increase was primarily related to the following factors:

 

·Employee benefit expenses increased $0.6 million, primarily due to changes in certain postretirement benefit plan actuarial assumptions, including a lower discount rate and revised plan participant mortality factors, as well as a lower actual return on assets held in our retirement plan funds;
·Reserves for bad debts increased $0.1 million;
·Costs associated with main breaks decreased $0.1 million, due to more favorable weather conditions, which led to below average number of main breaks in 2012;
·Labor costs decreased $0.2 million primarily due to higher capitalized payroll and decreased headcount; and
·Operation and maintenance expenses for all other categories increased $0.3 million.

 

Depreciation

 

Depreciation expense for the three months ended June 30, 2012 increased $0.2 million from the same period in 2011 due to a higher level of utility plant in service.

 

Other Taxes

 

Other taxes for the three months ended June 30, 2012 was consistent with the same period in 2011.

 

Interest Charges

 

Interest charges for the three months ended June 30, 2012 increased $0.1 million from the same period in 2011, primarily due to higher average short and long term debt outstanding in the second quarter of 2012 as compared to the second quarter of 2011.

 

Other Income, net

 

Other Income, net for the three months ended June 30, 2012 was consistent with the same period in 2011.

 

Income Taxes

 

Income taxes for the three months ended June 30, 2012 increased $0.3 million from the same period in 2011, due to increased operating income in 2012 as compared to 2011.

 

Net Income and Earnings Per Share

 

Net income for the three months ended June 30, 2012 increased $0.1 million from the same period in 2011. Basic and diluted earnings per share was $0.23 for the each of the three months ended June 30, 2012 and 2011.

 

18

 

Results of Operations – Six Months Ended June 30, 2012

 

   (In Thousands) 
   Six Months Ended June 30, 
   2012   2011 
   Regulated   Non-
Regulated
  

 

Total

   Regulated   Non-
Regulated
   Total 
Revenues  $45,230   $5,717   $50,947   $44,589   $5,509   $50,098 
Operations and maintenance expenses   24,363    4,777    29,140    23,647    4,446    28,093 
Depreciation expense   5,053    77    5,130    4,755    74    4,829 
Other taxes   5,433    157    5,590    5,535    135    5,670 
 Operating income   10,381    706    11,087    10,652    854    11,506 
                               
Other income, net   376    63    439    475    115    590 
Interest expense   3,086    47    3,133    2,877    51    2,928 
Income taxes   2,527    334    2,861    2,505    408    2,913 
 Net income  $5,144   $388   $5,532   $5,745   $510   $6,255 

 

Operating Revenues

 

Operating revenues for the six months ended June 30, 2012 increased $0.8 million from the same period in 2011. This increase was primarily related to the following factors:

 

·Middlesex System revenues decreased $0.7 million, primarily due to:
oSales to GMS customers decreased by $0.3 million due to decreased customer demand for water. The decline in water use by our GMS customers includes commercial and industrial (C&I) customers. Several of the larger industrial customers’ consumption demands have decreased due to reduced output from their production processes. We have also seen a decline in consumption from our commercial customers, which are generally office facilities, guest facilities and multi-family residential facilities. Certain of our C&I customers are unable to determine when their water demands may return to previous levels or if the declines will continue; and
oContract Sales to Municipalities decreased by $0.4 million due to lower customer demand for water;
·Tidewater System revenues increased $1.1 million, primarily due to the 10.49% interim rate increase that went into effect in November 2011 and increased connection fees;
·USA-PA’s revenues increased $0.2 million, primarily from scheduled increases in the fixed fees paid under contract with the City of Perth Amboy;
·Southern Shores’ revenues increased $0.1 million, primarily due to rate increases that went into effect in June 2011 and January 2012; and
·Revenues from all other subsidiaries increased $0.1 million.

 

19

 

Operation and Maintenance Expense

 

Operation and maintenance expenses for the six months ended June 30, 2012 increased $1.0 million from the same period in 2011. This increase was primarily related to the following factors:

 

·Employee benefit expenses increased $1.1 million, primarily due to changes in certain postretirement benefit plan actuarial assumptions, including a lower discount rate and revised plan participant mortality factors, as well as a lower actual return on assets held in our retirement plan funds;
·Reserves for bad debts increased $0.1 million;
·Costs associated with main breaks decreased $0.2 million, due to more favorable weather conditions, which led to below average number of main breaks in 2012;
·Labor costs decreased $0.3 million primarily due to higher capitalized payroll and less overtime expended on main breaks; and
·Operation and maintenance expenses for all other categories increased $0.3 million.

 

Depreciation

 

Depreciation expense for the six months ended June 30, 2012 increased $0.3 million from the same period in 2011 due to a higher level of utility plant in service.

 

Other Taxes

 

Other taxes for the six months ended June 30, 2012 decreased $0.1 million from the same period in 2011 primarily due to lower revenue related taxes for our New Jersey operations compared to the same period in 2011.

 

Interest Charges

 

Interest charges for the six months ended June 30, 2012 increased $0.2 million from the same period in 2011, primarily due to primarily due to higher average short and long term debt outstanding in 2012 as compared to 2011.

 

Other Income, net

 

Other Income, net for the six months ended June 30, 2012 decreased $0.2 million from the same period in 2011, primarily due to lower Allowance for Funds Used During Construction, resulting from lower average construction work in progress balances.

 

Income Taxes

 

Income taxes for the six months ended June 30, 2012 decreased $0.1 million from the same period in 2011, due to decreased operating income in 2012 as compared to 2011.

 

Net Income and Earnings Per Share

 

Net income for the six months ended June 30, 2012 decreased $0.7 million from the same period in 2011. Basic and diluted earnings per share decreased to $0.35 for the six months ended June 30, 2012 as compared to $0.40 for the six months ended June 30, 2011.

20

 

Liquidity and Capital Resources

 

Operating Cash Flows

Cash flows from operations are largely based on four factors: weather, adequate and timely rate increases, effective cost management and customer growth. The effect of those factors on net income is discussed in “Results of Operations.”

 

For the six months ended June 30, 2012, cash flows from operating activities increased $3.7 million to $15.8 million. Decreased accounts receivable and timing of certain income tax payments were the primary reason for the increase in cash flow. The $15.8 million of net cash flow from operations enabled us to fund 100% of our utility plant expenditures internally for the period.

 

Capital Expenditures and Commitments

To fund our capital program, we use internally generated funds, short-term and long-term debt borrowings and, when market conditions are favorable, proceeds from sales of common stock under our Amended and Restated Dividend Reinvestment and Common Stock Purchase Plan (DRP) and common stock offerings. See below for a more detailed discussion regarding the funding of our capital program.

 

The capital investment program for 2012 is currently estimated to be $21.8 million.  Through June 30, 2012, we have expended $12.6 million and expect to incur approximately $9.2 million for capital projects for the remainder of 2012.

 

We currently project that we may be required to expend approximately $34.0 million for capital projects in 2013 and 2014. The actual amount and timing of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain capital projects.

 

To fund our capital program for the remainder of 2012, we plan on utilizing:

·Internally generated funds
·Proceeds from the sale of common stock through the DRP
·Funds available and held in trust under existing New Jersey and Delaware State Revolving Fund (SRF) loans (currently, $3.7 million and $0.9 million, respectively). The SRF programs provide low cost financing for projects that meet certain water quality and system improvement benchmarks.
·Short-term borrowings, if necessary, through $60.0 million of available lines of credit with several financial institutions. As of June 30, 2012, the outstanding borrowings under these credit lines were $25.3 million.

 

Recent Accounting Pronouncements – See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.

 

Item 3. Quantitative and Qualitative Disclosures of Market Risk

 

The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our 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 2018 to 2038. Over the next twelve months, approximately $5.0 million of the current portion of 34 existing long-term debt instruments will mature. Applying a hypothetical change in the rate of interest charged by 10% on those borrowings, would not have a material effect on our earnings.

 

21

  

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

  

As required by Rule 13a-15 under the Securities and Exchange Act of 1934 (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.

 

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.

 

Material Change in Internal Controls

  

In the second quarter of 2012, the Company implemented the work and asset management module of an enterprise resource planning (ERP) system. As previously disclosed, the Company had implemented various other modules of the ERP system in 2010.

 

The implementation of the work and asset management module and the related workflow changes have resulted in material changes to the Company’s internal controls over financial reporting (as that term is defined in Rule 13(a)-15 under the Exchange Act). In connection with the implementation of the work and asset management module, the Company is continuing to replace and supplement existing internal controls over financial reporting, as appropriate. The decision to implement the ERP system was made to improve the efficiency and effectiveness of our management and financial reporting systems and was not made in response to any actual or perceived deficiencies in the Company’s internal control over financial reporting.

 

We continually review our disclosure controls and procedures and make changes, as necessary, to ensure the quality of our financial reporting. Other than the changes made related to the implementation of the work and asset management module and the related work flow changes, there have been no changes in internal control over financial reporting that occurred in the second quarter of 2012 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

22

 

PART II.  OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

The information about risk factors does not differ materially from those set forth in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits
   
10.43 Copy of Loan Agreement By and Between The State of New Jersey, Acting By and Through The New Jersey Department of Environmental Protection and Middlesex Water Company, dated as of May 1, 2012 (Series 00).
   
10.44 Copy of Loan Agreement by and Between New Jersey Environmental Infrastructure Trust and Middlesex Water Company dated as of May 1, 2012 (Series PP).
   
31.1 Section 302 Certification by Dennis W. Doll pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

31.2 Section 302 Certification by A. Bruce O’Connor pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

32.1 Section 906 Certification by Dennis W. Doll pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.2 Section 906 Certification by A. Bruce O’Connor pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
101.INS XBRL Instance Document
   
101.SCH XBRL Schema Document
   
101.CAL XBRL Calculation Linkbase Document
   
101.LAB XBRL Labels Linkbase Document
   
101.PRE XBRL Presentation Linkbase Document
   
101.DEF XBRL Definition Linkbase Document
   
   
23

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  MIDDLESEX WATER COMPANY
     
  By: /s/A. Bruce O’Connor             
    A. Bruce O’Connor
    Vice President and
    Chief Financial Officer
     (Principal Accounting Officer)

 

Dated: August 2, 2012

 

 

24

 

XNAS:MSEX Middlesex Water Co Quarterly Report 10-Q Filling

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