10-K/A 1 form10ka-72071_msx.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K/A (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number 0-422 MIDDLESEX WATER COMPANY (Exact name of registrant as specified in its charter) New Jersey 22-1114430 ---------- ---------- (State of Incorporation) (IRS employer identification no.) 1500 Ronson Road, Iselin NJ 08830 (Address of principal executive offices, including zip code) (732) 634-1500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class: Name of each exchange on which registered: None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No par Value -------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_| The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2004 was $212,760,366 based on the closing market price of $19.41 per share. The number of shares outstanding for each of the registrant's classes of common stock, as of March 1, 2005: Common Stock, No par Value: 11,377,403 shares outstanding Documents Incorporated by Reference ----------------------------------- Proxy Statement to be filed in connection with the Registrant's Annual Meeting of Shareholders to be held on May 25, 2005, which will be filed with the Securities and Exchange Commission within 120 days, is incorporated as to Part III. ================================================================================ Explanatory Note This amendment on Form 10-K/A reflects the restatement of Middlesex Water Company's (the Company) consolidated balance sheets as of December 31, 2004 and 2003 and consolidated statements of cash flows for the years ended December 31, 2004, 2003, and 2002 to correct the accounting and disclosure of non-cash contributions of utility plant from developers, as discussed in Note 10 of the Notes to the Consolidated Financial Statements, included in Item 8. In addition, the Company has amended Item 9A and Management's Report on Internal Control Over Financial Reporting to update the disclosure regarding disclosure controls and procedures and internal control over financial reporting. The restatement affects only Items 6, 7, 8 and 15 of this report. Except for the foregoing amended items, the information in this Form 10-K/A is as of March 16, 2005, the filing date of the original Form 10-K for the year ended December 31, 2004, and has not been updated for the events subsequent to that date other than for the matter discussed above. MIDDLESEX WATER COMPANY FORM 10-K/A INDEX ----- PAGE ---- Forward-Looking Statements 1 PART I Item 1. Business: Overview 2 Financial Information 4 Water Supplies and Contracts 4 Employees 6 Competition 6 Regulation 6 Management 8 Risk Factors 10 Item 2. Properties 13 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 15 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities 15 Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A. Qualitative and Quantitative Disclosure About Market Risk 26 Item 8. Financial Statements and Supplementary Data 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49 Item 9A. Controls and Procedures 49 Item 9B. Other Information 53 PART III Item 10. Directors and Executive Officers of the Registrant 54 Item 11. Executive Compensation 54 Item 12. Security Ownership of Certain Beneficial Owners and Management 54 Item 13. Certain Relationships and Related Transactions 54 Item 14. Principal Accountant Fees and Services 54 PART IV Item 15. Exhibits and Financial Statement Schedules 55 Signatures 56 Exhibit Index 57 Forward-Looking Statements Certain statements contained in this annual report are "forward-looking statements" within the meaning of federal securities laws. The Company intends that these statements be covered by the safe harbors created under those laws. These statements include, but are not limited to: - statements as to expected financial condition, performance, prospects and earnings of the Company; - statements regarding strategic plans for growth; - statements regarding the amount and timing of rate increases and other regulatory matters; - statements regarding expectations and events concerning capital expenditures; - statements as to the Company's expected liquidity needs during fiscal 2005 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 cost of cash contributions to fund the Company's pension plan, including statements as to anticipated discount rates and rates of return on plan assets; - statements as to trends; and - statements regarding the availability and quality of our water supply. These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from anticipated results and outcomes include, but are not limited to: - the effects of general economic conditions; - increases in competition in the markets served by the Company; - the ability of the Company to control operating expenses and to achieve efficiencies in its operations; - the availability of adequate supplies of water; - actions taken by government regulators, including decisions on base rate increase requests; - new or additional water quality standards; - weather variations and other natural phenomena; - acts of war or terrorism; and - other factors discussed elsewhere in this annual report. Many of these factors are beyond the Company's ability to control or predict. Given these uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which only speak to the Company's understanding as of the date of this annual 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 annual 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 1. Business- Risk Factors. 1 PART I Item 1. Business. Overview Middlesex Water Company was incorporated as a water utility company in 1897 and owns and operates regulated water utility systems in central and southern New Jersey and in Delaware as well as a regulated wastewater utility in southern New Jersey. We also operate water and wastewater systems on behalf of others in New Jersey and Delaware. The terms "the Company," "we," "our," and "us" refer to Middlesex Water Company and its subsidiaries, including Tidewater Utilities, Inc. (Tidewater) and Tidewater's wholly-owned subsidiaries, Southern Shores Water Company, LLC (Southern Shores) and White Marsh Environmental Systems, Inc. (White Marsh), Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), Utility Service Affiliates, Inc. (USA), Utility Service Affiliates (Perth Amboy) Inc., (USA-PA) and Bayview Water Company (Bayview). We recently created a new wholly-owned Delaware corporation named Tidewater Environmental Services, Inc. (TESI), which will be used to own and operate regulated wastewater systems in Delaware (see Regulation for further discussion). Middlesex principal executive offices are located at 1500 Ronson Road, Iselin, New Jersey 08830. Our telephone number is (732) 634-1500. Our internet website address is http://www.middlesexwater.com. We make available, free of charge through our internet website, reports and amendments filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). Middlesex System The Middlesex System provides water services to approximately 58,000 retail customers, primarily in eastern Middlesex County, New Jersey and provides water under contract to the Township of Edison, the Boroughs of Highland Park and Sayreville, and both the Old Bridge and the Marlboro Township Municipal Utilities Authorities. The Middlesex System treats, stores and distributes water for residential, commercial, industrial and fire prevention purposes. Under a special contract, the Middlesex System also provides water treatment and pumping services to the Township of East Brunswick. The Middlesex System, through its retail and contract sales, produced approximately 67% of our 2004 revenue. The Middlesex System's retail customers are located in an area of approximately 55 square miles in Woodbridge Township, the City of South Amboy, the Boroughs of Metuchen and Carteret, portions of Edison Township and the Borough of South Plainfield in Middlesex County and, to a minor extent, a portion of the Township of Clark in Union County. The retail customers include a mix of residential customers, large industrial concerns and commercial and light industrial facilities. These retail customers are located in generally well-developed areas of central New Jersey. The contract customers of the Middlesex System comprise an area of approximately 141 square miles with a population of approximately 267,000. Contract sales to Edison, Sayreville, Old Bridge and Marlboro are supplemental to the existing water systems of these customers. The State of New Jersey in the mid-1980's approved plans to increase available surface water supply to the South River Basin area of the state to permit a reduced use of ground water in this area. The Middlesex System 2 provides treated surface water under long-term agreements to East Brunswick, Marlboro, Old Bridge and Sayreville consistent with the state-approved plan. Tidewater System Tidewater, together with its wholly-owned subsidiary, Southern Shores Water Company, LLC, provides water services to approximately 26,000 retail customers for domestic, commercial and fire protection purposes in over 250 separate community water systems in New Castle, Kent and Sussex Counties, Delaware. Tidewater has another wholly-owned subsidiary, White Marsh Environmental Systems, Inc., which operates water and wastewater systems under contract for approximately 4,500 customers and also owns the office building that Tidewater uses as its business office. White Marsh's rates for water and wastewater operations are not regulated by the Delaware Public Service Commission (PSC). The Tidewater System produced approximately 17% of our total revenue in 2004. Utility Service Affiliates (Perth Amboy) USA-PA operates the City of Perth Amboy's water and wastewater systems under a 20-year agreement, which expires in 2018. Perth Amboy has a population of 40,000 and has approximately 9,600 customers, most of whom are served by both systems. The agreement was effected under New Jersey's Water Supply Public-Private Contracting Act and the New Jersey Wastewater Public/Private Contracting Act and requires USA-PA to lease from Perth Amboy all of its employees who currently work on the Perth Amboy water and wastewater systems. Under the agreement, USA-PA receives both fixed and variable fees based on increased system billing. Fixed fee payments began at $6.4 million in the first year and are to increase over the term of the 20-year contract to $10.2 million. USA-PA produced approximately 11% of our total revenue in 2004. In connection with the agreement, we guaranteed a series of bonds in the principal amount of approximately $26.3 million, of which approximately $23.9 million remains outstanding. In addition to the agreement with Perth Amboy, USA-PA entered into a 20-year subcontract with a wastewater operating company for the operation and maintenance of the Perth Amboy wastewater system. The subcontract provides for the sharing of certain fixed and variable fees and operating expenses. Pinelands System Pinelands Water provides water services to approximately 2,400 residential customers in Burlington County, New Jersey. Pinelands Water produced less than 1% of our total revenue in 2004. Pinelands Wastewater provides wastewater services to approximately 2,400 primarily residential retail customers. Under contract, it also services one municipal wastewater system in Burlington County, New Jersey with about 200 residential customers. Pinelands Wastewater produced approximately 1% of our total revenue in 2004. Utility Service Affiliates, Inc. In 1999, we implemented a franchise agreement with the City of South Amboy (South Amboy) to provide water service and install water system facilities in South Amboy. The South Amboy franchise was approved by the Board of Public Utilities (BPU) and its implementation significantly impacted two existing agreements entered into by the parties. The first agreement was for the sale of water to South Amboy on a wholesale basis. The second agreement was for the provision of management services for a fixed fee. USA provides customers within the Middlesex System a service line maintenance program called LineCare(SM). LineCare(SM) is an affordable maintenance program that covers all parts, material and labor required to repair or replace specific elements of the customer's water service line and customer shut-off value. 3 Middlesex and USA have entered into a venture with an entity that provides meter installation and related services. This venture seeks to obtain competitively bid service contracts with municipalities in the Mid-Atlantic and New England regions. The contract work may include any or all of the following: meter purchases, replacement meter program, new meter program and meter testing. These businesses contributed approximately 3% of our total revenue in 2004. Bayview System Bayview provides water service to approximately 300 customers in Cumberland County, New Jersey. Bayview produced less than 1% of our total revenue in 2004. Financial Information Consolidated operating revenues and operating income are as follows: (Thousands of Dollars) Years Ended December 31, ------------------------ 2004 2003 2002 ------- ------- ------- Operating Revenues $70,991 $64,111 $61,933 Operating Income $13,119 $11,500 $12,467 Operating revenues were earned from the following sources: Years Ended December 31, ------------------------ 2004 2003 2002 ----- ----- ----- Residential 39.9% 39.4% 40.0% Commercial 9.5 9.8 9.7 Industrial 10.9 11.1 11.9 Fire Protection 10.2 10.7 10.5 Contract Sales 12.8 13.2 14.1 Contract Operations 11.2 12.6 12.1 Other 5.5 3.2 1.7 ----- ----- ----- TOTAL 100.0% 100.0% 100.0% ----- ----- ----- Water Supplies and Contracts Our New Jersey and Delaware water supply systems are physically separate and are not interconnected. In New Jersey, the Pinelands System and Bayview System are not interconnected with the Middlesex System or each other. We believe we have adequate sources of water supply to meet the current and anticipated future service requirements of our present customers in New Jersey and Delaware. Middlesex System Our Middlesex System, which produced 16,623 million gallons in 2004, obtains water from surface sources and wells, which we call groundwater sources. In 2004, surface sources of water provided approximately 70% of the 4 Middlesex System's water supply, groundwater from wells provided approximately 23% and the balance of 7% was purchased from a nonaffiliated water utility. Middlesex System's distribution storage facilities are used to supply water to its customers at times of peak demand, outages and emergencies. The principal source of surface water supply for the Middlesex System is the Delaware & Raritan Canal, which is owned by the State of New Jersey and operated as a water resource by the New Jersey Water Supply Authority. Middlesex renewed and modified its agreement with the New Jersey Water Supply Authority, which was effective January 1, 2004 and expires November 30, 2023, and provides for an average purchase of 27 million gallons per day of untreated water from the Delaware & Raritan Canal, augmented by the Round Valley/Spruce Run Reservoir System. Surface water is pumped to and treated at the Carl J. Olsen (CJO) Plant. Middlesex also has an agreement with a nonaffiliated water utility for the purchase of treated water. This agreement, which expires December 31, 2005, provides for the minimum purchase of 3 million gallons per day of treated water with provisions for additional purchases. Purchased water costs are shown below: (Millions of Dollars) Years Ended December 31, ------------------------ Purchased Water 2004 2003 2002 --------------- ---- ---- ---- Untreated $2.2 $2.0 $1.9 Treated 2.0 1.8 1.8 ---- ---- ---- Total Costs $4.2 $3.8 $3.7 ==== ==== ==== Our Middlesex System also derives water from groundwater sources equipped with electric motor-driven, deepwell turbine-type pumps. The Middlesex System has 31 wells, which provide an aggregate pump capacity of approximately 27 million gallons per day. The Middlesex System's groundwater sources are:
2004 Maximum Use No.of Per Day Pumpage Pump Source Wells (millions of gallons) Capacity (mgd) Location ------ ----- --------------------- -------------- -------- Park Avenue 15 8.3 15.2 South Plainfield Tingley Lane North 4 2.8 2.8 Edison Tingley Lane South 5 2.1 2.6 Edison Spring Lake 4 0.0 2.8 South Plainfield Sprague Avenue #1 1 1.1 1.1 South Plainfield Sprague Avenue #2 1 1.3 1.3 South Plainfield Maple Avenue 1 0.0 0.9 South Plainfield -- ---- ---- Totals 31 15.6 26.7
Tidewater System Our Tidewater System, which produced 1,517 million gallons in 2004, obtains 100% of its water from 202 wells. In 2004, we placed 11 new wells in service and also deactivated, sealed and abandoned 18 wells. Tidewater continues to submit applications to Delaware regulatory authorities for the approval of additional wells as growth, demand and water quality warrants. The Tidewater System does not have a central treatment facility but has several regional filter plants. Several of its water systems in New Castle, Kent and Sussex Counties, Delaware have interconnected transmission systems. 5 Pinelands System Water supply to our Pinelands System is derived from four wells drilled into the Mt. Laurel aquifer which provided overall system delivery of 179 million gallons in 2004. The pump capacity for the four wells is 2.2 million gallons per day. Bayview System Water supply to Bayview customers is derived from two wells, which provided an overall system delivery of 11 million gallons in 2004. Each well has treatment facilities. Pinelands Wastewater System The Pinelands Wastewater System discharges into the South Branch of the Rancocas Creek through a tertiary treatment plant that provides clarification, sedimentation, filtration and disinfection. The total capacity of the plant is 0.5 million gallons per day. Current average flow is 0.3 million gallons per day. Pinelands has a current valid discharge permit issued by the New Jersey Department of Environmental Protection (DEP). Employees As of December 31, 2004, we had a total of 149 employees in New Jersey, and a total of 71 employees in Delaware. In addition, we lease 22 employees under the USA-PA contract with the City of Perth Amboy, New Jersey. No employees are represented by a union except the leased employees. We believe our employee relations are good. Wages and benefits, other than for leased employees, are reviewed annually and are considered competitive within the industry. Competition Our business in our franchised service area is substantially free from direct competition with other public utilities, municipalities and other entities. However, our ability to provide some contract water supply and wastewater services and operations and maintenance services is subject to competition from other public utilities, municipalities and other entities. Although Tidewater has been granted an exclusive franchise for each of its existing community water systems, its ability to expand service areas can be affected by the PSC awarding franchises to other regulated water utilities. Regulation We are regulated as to rates charged to customers for water and wastewater services in New Jersey and for water services in Delaware, as to the quality of water service we provide and as to certain other matters. Only our USA, USA-PA and White Marsh subsidiaries are not regulated utilities. We are subject to environmental and water quality regulation by the United States Environmental Protection Agency (EPA), and the DEP with respect to operations in New Jersey and the Delaware Department of Natural Resources and Environmental Control (DNREC), Delaware Department of Health and Social Services-Division of Public Health (DPH), and the Delaware River Basin Commission (DRBC) with respect to operations in Delaware. In addition, our issuances of securities are subject to the prior approval of the Securities and Exchange Commission and the BPU or the PSC. During 2004, the PSC assumed regulatory authority over wastewater services in Delaware and issued proposed rules and regulations similar to the water systems it regulates. 6 Regulation of Rates and Services New Jersey water and wastewater service operations (excluding the operations of USA-PA) are subject to regulation by the BPU. Similarly, our Delaware water service operations, and beginning in 2005, wastewater services to be offered by TESI, are subject to regulation by the PSC. These regulatory authorities have jurisdiction with respect to rates, service, accounting procedures, the issuance of securities and other matters of utility companies operating within the States of New Jersey and Delaware, respectively. For ratemaking purposes, we account separately for operations in New Jersey and Delaware to facilitate independent ratemaking by the BPU for New Jersey operations and the PSC for Delaware operations. In determining our rates, the BPU and the PSC consider the income, expenses, rate base of property used and useful in providing service to the public and a fair rate of return on that property each within its separate jurisdiction. Rate determinations by the BPU do not guarantee particular rates of return to us for our New Jersey operations nor do rate determinations by the PSC guarantee particular rates of return for our Delaware operations. Thus, we may not achieve the rates of return permitted by the BPU or the PSC. Effective May 27, 2004, Middlesex Water Company received approval from the BPU for a 9.5%, or $4.3 million increase in its water rates. This increase represents a portion of the Company's November 2003 request for a total rate increase of 17.8% to cover the costs of its increased capital investment, as well as maintenance and operating expenses. Effective June 24, 2004, Pinelands Water and Pinelands Wastewater received approval from the BPU for increases of 9.2% and 9.9%, respectively, or approximately $131,000 in the aggregate. This increase represents a portion of Pinelands' December 2003 request for a total base rate increase of approximately $250,000 to help offset the increased costs associated with capital improvements, and the operation and maintenance of their systems. Effective June 25, 2004, Tidewater received approval from the PSC for an interim increase of 15%, or $1.5 million in its water rates, which includes 4.89% of previously Distribution System Improvement Charges (DSIC). On October 19, 2004, the PSC approved a settlement between Tidewater and the interveners in the matter. The settlement allowed the interim rates to become permanent. This increase represents a portion of Tidewater's April 2004 request for at 24% rate increase to accommodate the growth of Tidewater's customer base, improvements to water treatment, fire protection and to interconnect systems for service reliability and back-up. As part of the settlement, Tidewater will be eligible to apply for a second phase rate increase of $0.5 million, provided it completes a number of capital projects within a specified time schedule. Tidewater must file an application for this increase no earlier than March 2005 or later than May 2005. Upon verification of project completion, new rates will become effective 30 days after the filing date. Tidewater also agreed to waive its right to file DSIC applications over the next three six-month cycles (January and July 2005, and January 2006) and to defer making an application for a general rate increase until after April 1, 2006. In accordance with the tariff established for Southern Shores, a rate increase of 2.8% based on the Consumer Price Index was implemented on January 1, 2004. Other than rates for the Southern Shores system, there can be no assurance that any future rate increases will be granted or, if granted, that they will be in the amounts we requested. Water Quality and Environmental Regulations Both the EPA and the DEP regulate our operations in New Jersey with respect to water supply, treatment and distribution systems and the quality of the water, as do the EPA, DNREC, DPH and DRBC with respect to operations in Delaware. 7 Federal, New Jersey and Delaware regulations adopted relating to water quality require us to perform expanded types of testing to ensure that our water meets state and federal water quality requirements. In addition, environmental regulatory agencies are reviewing current regulations governing the limits of certain organic compounds found in the water as byproducts of treatment. We participate in industry-related research to identify the various types of technology that might reduce the level of organic, inorganic and synthetic compounds found in the water. The cost to water companies of complying with the proposed water quality standards depends in part on the limits set in the regulations and on the method selected to implement such reduction. We believe the CJO Plant capabilities put us in a strong position to meet any such future standards with regard to our Middlesex System. We use regular testing of our water to determine compliance with existing federal, New Jersey and Delaware primary water quality standards. Well water treatment in our Tidewater System is by chlorination and, in some cases, pH correction and filtration for nitrate and iron removal. Well water treatment in the Pinelands and Bayview Systems (disinfection only) is done at individual well sites. The DEP and the DPH monitor our activities and review the results of water quality tests that are performed for adherence to applicable regulations. Other regulations applicable to us include the Lead and Copper Rule, the maximum contaminant levels established for various volatile organic compounds, the Federal Surface Water Treatment Rule and the Total Coliform Rule. Management This table lists information concerning our senior management team:
Name Age Principal Position(s) ------------------ --- ----------------------------------------------------- Dennis G. Sullivan 63 President and Chief Executive Officer Dennis W. Doll 46 Executive Vice President A. Bruce O'Connor 46 Vice President and Chief Financial Officer Ronald F. Williams 55 Vice President-Operations and Chief Operating Officer Kenneth J. Quinn 57 Vice President, General Counsel, Secretary and Treasurer James P. Garrett 59 Vice President-Human Resources Richard M. Risoldi 48 Vice President- Subsidiary Operations Gerard L. Esposito 53 President, Tidewater Utilities, Inc.
Dennis G. Sullivan - Mr. Sullivan has been a Director of Middlesex since 1999. Mr. Sullivan was hired in 1984 as Corporate Attorney, responsible for general corporate internal legal matters. He was elected Assistant Secretary-Assistant Treasurer in 1988 and Vice President and General Counsel in 1990. He was elected President and General Counsel in 2001 and became President and Chief Executive Officer in January 2003. He is Chairman of the Board and a Director of Tidewater Utilities, Inc., Tidewater Environmental Services, Inc., White Marsh Environmental Systems, Inc., Pinelands Water Company, Pinelands Wastewater Company, Utility Service Affiliates, Inc., Utility Service Affiliates (Perth Amboy) Inc. and Bayview Water Company. He is also a Director of the New Jersey Utilities Association and the National Association of Water Companies. Dennis W. Doll - Mr. Doll, a Certified Public Accountant, joined the Company in November 2004 as Executive Vice President. Prior to joining the Company Mr. Doll was employed by Elizabethtown Water Company since 1985, serving most recently as a member of the senior leadership team of the Northeast Region of American Water, which was comprised of Elizabethtown Water Company, New Jersey-American Water Company and 8 Long Island Water Corporation and included other regulated and non-regulated subsidiaries. In this capacity, Mr. Doll served as Vice President - Finance & Controller and served previously, as Vice President - Merger Integration. Prior to 2001, Mr. Doll served as Vice President & Controller of Elizabethtown, Elizabethtown's parent company, E'town Corporation, and various other regulated and non-regulated subsidiaries, primarily engaged in the water and wastewater fields. A. Bruce O'Connor - Mr. O'Connor, a Certified Public Accountant, joined the Company in 1990 as Assistant Controller and was elected Controller in 1992 and Vice President in 1995. He was elected Vice President and Controller and Chief Financial Officer in 1996. In July 2004, his Controller responsibilities were assigned to the newly created Corporate Controller position. He is responsible for financial reporting, customer service, rate cases, cash management and financings. He is Treasurer and a Director of Tidewater Utilities, Inc., Tidewater Environmental Services, Inc., Bayview Water Company, Utility Service Affiliates, Inc., and White Marsh Environmental Systems, Inc. He is Vice President, Treasurer and a Director of Utility Service Affiliates (Perth Amboy) Inc., Pinelands Water Company and Pinelands Wastewater Company. Ronald F. Williams - Mr. Williams was hired in 1995 as Assistant Vice President-Operations, responsible for the Company's Engineering and Distribution Departments. He was elected Vice President-Operations in October 1995. Mr. Williams was elected to the additional posts of Assistant Secretary and Assistant Treasurer for Middlesex in 2004. He was formerly employed with the Garden State Water Company as President and Chief Executive Officer. He is a Director and President of Utility Service Affiliates (Perth Amboy) Inc., and Director of Utility Service Affiliates, Inc., Pinelands Water Company, Pinelands Wastewater Company, and Bayview Water Company. Kenneth J. Quinn - Mr. Quinn joined the Company in 2002 as General Counsel and was elected Assistant Secretary in 2003. In 2004, Mr. Quinn was elected Vice President, Secretary and Treasurer for Middlesex and Secretary and Assistant Treasurer for all subsidiaries of Middlesex. He has been engaged in the practice of law for 29 years and prior to joining the Company he had been employed by the law firm of Schenck, Price, Smith and King in Morristown, New Jersey. Prior to that, Mr. Quinn spent 10 years as in-house counsel to two major banking institutions located in New Jersey. In May 2003, he was elected Assistant Secretary of Tidewater Utilities, Inc., Pinelands Water Company, Pinelands Wastewater Company, Utility Service Affiliates (Perth Amboy) Inc., Bayview Water Company and White Marsh Environmental Systems, Inc. He is a Director of Utility Service Affiliates (Perth Amboy) Inc., Utility Service Affiliates, Inc., Pinelands Water Company, Pinelands Wastewater Company, and Bayview Water Company. He is a member of the New Jersey State Bar Association and is also a member of the Public Utility Law Section of the Bar. James P. Garrett - Mr. Garrett joined the Company in 2003 as Assistant Vice President-Human Resources. In May 2004, he was elected Vice President- Human Resources. Prior to his hire, Mr. Garrett was employed by Toys "R" Us, Inc. for 23 years, most recently as Director of Organizational Development. Mr. Garrett is responsible for all human resource programs and activities at Middlesex Water Company and its subsidiaries. Richard M. Risoldi - Mr. Risoldi joined the Company in 1989 as Director of Production, responsible for the operation and maintenance of the Company's treatment and pumping facilities. He was appointed Assistant Vice President of Operations in 2003. He was elected Vice President in May 2004, responsible for regulated subsidiary operations and business development. He is a Director of Tidewater Utilities, Inc., Tidewater Environmental Services, Inc., White Marsh Environmental Systems Inc and USA-PA. He also serves as Director and President of Pinelands Water Company, Pinelands Wastewater Company, Bayview Water Company and Utility Service Affiliates, Inc. Gerard L. Esposito - Mr. Esposito joined Tidewater Utilities, Inc. in 1998 as Executive Vice President. He was elected President of Tidewater and White Marsh Environmental Systems, Inc. in 2003 and elected President of Tidewater Environmental Services, Inc. in January 2005 . Prior to joining the Company he worked for 22 years 9 in various executive positions for Delaware environmental protection and water quality governmental agencies. He is a Director of Tidewater Utilities, Inc., Tidewater Environmental Services, Inc., and White Marsh Environmental Systems, Inc. Risk Factors Our revenue and earnings depend on the rates we charge our customers. We cannot raise utility rates without filing a petition with the appropriate governmental agency. If these agencies modify, delay, or deny our petition, our revenues will not increase and our earnings will decline unless we are able to reduce costs. The BPU regulates all of our public utility companies in New Jersey with respect to rates and charges for service, classification of accounts, awards of new service territory, acquisitions, financings and other matters. That means, for example, that we cannot raise the utility rates we charge to our customers without first filing a petition with the BPU and going through a lengthy administrative process. In much the same way, the PSC regulates our public utility companies in Delaware. We cannot give assurances of when we will request approval for any such matter, nor can we predict whether the BPU or PSC will approve, deny or reduce the amount of such requests. Certain costs of doing business are not within our control. The failure to obtain any rate increase would prevent us from increasing our revenues and, unless we are able to reduce costs, would result in reduced earnings. We are subject to penalties unless we comply with environmental laws and regulations, including water quality regulations. Compliance with those laws and regulations impose costs on us. The EPA and DEP regulate our operations in New Jersey with respect to water supply, treatment and distribution systems and the quality of the water, as do the EPA, DNREC, DPH and DRBC with respect to operations in Delaware. Federal, New Jersey and Delaware regulations relating to water quality require us to perform expanded types of testing to ensure that our water meets state and federal water quality requirements. We are subject to EPA regulations under the Federal Safe Drinking Water Act, which include the Lead and Copper Rule, the maximum contaminant levels established for various volatile organic compounds, the Federal Surface Water Treatment Rule and the Total Coliform Rule. There are also similar state regulations by the DEP in New Jersey. The DEP and DPH monitor our activities and review the results of water quality tests that we perform for adherence to applicable regulations. In addition, environmental regulatory agencies are reviewing current regulations governing the limits of certain organic compounds found in the water as byproducts of treatment. The cost to water companies of complying with the proposed water quality standards depends in part on the limits set in the regulations and on the method selected to implement them. Those costs could be very high and make us less profitable if we cannot recover those costs through our rates that we charge our customers. We depend upon our ability to raise money in the capital markets to finance some of the costs of complying with laws and regulations, including environmental laws and regulations or to pay for some of the costs of improvements or the expansion of our utility system assets. We cannot issue debt or equity securities without regulatory approval. We require financing to fund the ongoing capital program for the improvement of our utility system assets and for planned expansion of that system. We project that we may expend approximately $74.4 million for existing capital projects. We must have regulatory approval to sell debt or equity securities to raise money for these projects. If sufficient capital is not available or the cost of capital is too high, or if the regulatory authorities deny a petition of ours to sell debt or equity securities, we would not be able to meet the cost of complying with 10 environmental laws and regulations or the costs of improving and expanding our utility system assets. This might result in the imposition of fines or restrictions on our operations and may curtail our ability to improve upon and expand our utility system assets. Weather conditions and overuse of underground aquifers may interfere with our sources of water, demand for water services, and our ability to supply water to customers. Our ability to meet the existing and future water demands of our customers depends on an adequate supply of water. Unexpected conditions may interfere with our water supply sources. Drought and overuse of underground aquifers may limit the availability of ground and surface water. These factors might adversely affect our ability to supply water in sufficient quantities to our customers. Governmental drought restrictions might result in decreased use of water services and can adversely affect our revenue and earnings. Additionally, cool and wet weather may reduce consumption demands, also adversely affecting our revenue and earnings. Freezing weather may also contribute to water transmission interruptions caused by pipe and main breakage. Any interruption in our water supply could cause a reduction in our revenue and profitability. Our water sources may become contaminated by naturally-occurring or man-made compounds and events. This may cause disruption in services and impose costs to restore the water to required levels of quality. Our sources of water may become contaminated by naturally-occurring or man-made compounds and events. In the event that our water supply is contaminated, we may have to interrupt the use of that water supply until we are able to install treatment equipment or substitute the flow of water from an uncontaminated water source through our transmission and distribution systems. We may also incur significant costs in treating the contaminated water through the use of our current treatment facilities, or development of new treatment methods. Our inability to substitute water supply from an uncontaminated water source, or to adequately treat the contaminated water source in a cost-effective manner may reduce our revenues and make us less profitable. The necessity for increased security has and may continue to result in increased operating costs. In the wake of the September 11, 2001 terrorist attacks and the ensuing threats to the health and security of the United States of America, we have taken steps to increase security measures at our facilities and heighten employee awareness of threats to our water supply. We have tightened our security measures regarding the delivery and handling of certain chemicals used in our business. We are at risk for terrorist attacks and have and will continue to incur increased costs for security precautions to protect our facilities, operations and supplies from such risks. We face competition from other utilities and service providers which might hinder our growth and reduce our profitability. We face risks of competition from other utilities authorized by federal, state or local agencies. Once a utility regulator grants a service territory to a utility, that utility is usually the only one to service that territory. Although a new territory offers some protection against competitors, the pursuit of service territories is competitive, especially in Delaware where new territories may be awarded to utilities based upon competitive negotiation. Competing utilities have challenged, and may in the future challenge, our applications for new service territories. Also, third parties entering into long-term agreements to operate municipal systems might adversely affect us and our long-term agreements to supply water on a contract basis to municipalities. We have a long-term contractual obligation for water and wastewater system operation and maintenance under which we may incur costs in excess of payments received. 11 Middlesex Water Company and USA-PA operate and maintain the water and wastewater systems of the City of Perth Amboy, New Jersey under a multi-year contract. This contract does not protect us against incurring costs in excess of payments we will receive pursuant to the contract. There can be no assurance that we will not experience losses resulting from this contract. Losses under this contract or our failure or inability to perform may have a material adverse effect on our financial condition and results of operations. Also, as of December 31, 2004, approximately $23.9 million of Perth Amboy's bonds we have guaranteed remain outstanding. If Perth Amboy defaults on its obligations to pay the bonds we have guaranteed, we would have to raise funds to meet our obligations under that guarantee, An important element of our growth strategy is the acquisition of water and wastewater systems. Any pending or future acquisitions we decide to undertake may involve risks. The acquisition of water and wastewater systems is an important element in our growth strategy. This strategy depends on identifying suitable acquisition opportunities and reaching mutually agreeable terms with acquisition candidates. The negotiation of potential acquisitions as well as the integration of acquired businesses could require us to incur significant costs and cause diversion of our management's time and resources. Further, acquisitions may result in dilution of our equity securities, incurrence of debt and contingent liabilities, fluctuations in quarterly results and other acquisition related expenses. In addition, the business and other assets we acquire may not achieve the sales and profitability expected. We have restrictions on our dividends. There can also be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. Our Restated Certificate of Incorporation and our Indenture of Mortgage dated as of April 1, 1927, as supplemented impose conditions on our ability to pay dividends. We have paid dividends on our common stock each year since 1912 and have increased the amount of dividends paid each year since 1973. Our earnings, financial condition, capital requirements, applicable regulations and other factors, including the timeliness and adequacy of rate increases, will determine both our ability to pay dividends on common stock and the amount of those dividends. There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends. We are subject to anti-takeover measures that may be used by existing management to discourage, delay or prevent changes of control that might benefit non-management shareholders. Subsection 10A of the New Jersey Business Corporation Act, known as the Shareholder Protection Act, applies to us. The Shareholder Protection Act deters merger proposals, tender offers or other attempts to effect changes in our control that are not negotiated and approved by our Board of Directors. In addition, we have a classified Board of Directors, which means only one-third of the Directors are elected each year. A classified Board can make it harder for an acquirer to gain control by voting its candidates onto the Board of Directors and may also deter merger proposals and tender offers. Our Board of Directors also has the ability, subject to obtaining BPU approval, to issue one or more series of preferred stock having such number of shares, designation, preferences, voting rights, limitations and other rights as the Board of Directors may fix. This could be used by the Board of Directors to discourage, delay or prevent an acquisition that might benefit non-management shareholders. 12 Item 2. Properties. Utility Plant The water utility plant in our systems consist of source of supply, pumping, water treatment, transmission and distribution, general facilities and all appurtenances, including all connecting pipes. Middlesex System The Middlesex System's principal source of surface supply is the Delaware & Raritan Canal owned by the State of New Jersey and operated as a water resource by the New Jersey Water Supply Authority. Water is withdrawn from the Delaware & Raritan Canal at New Brunswick, New Jersey through our intake and pumping station, which has a design capacity of 80 million gallons per day and is located on state-owned land bordering the canal. The four electric motor-driven, vertical turbine pumps presently installed have an aggregate design capacity of 82 million gallons per day. Water is transported through our 4,900 foot 54-inch reinforced concrete supply main for treatment and distribution at our CJO Plant in Edison, New Jersey. The design capacity of our raw water supply main is 55 million gallons per day. In the Spring of 2004, the Company began construction on a second raw water pipeline from the intake and pumping station to the CJO Plant. The pipeline, which is approximately 6,100 feet of 60-inch ductile iron pipe, will provide for redundancy, additional security, and additional capacity. The project, which includes renovations to the intake and pumping station, is scheduled to be completed in the Spring of 2005 (see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation- Liquidity and Capital Resources- Capital Expenditures and Commitments for additional discussion). The CJO Plant includes chemical storage and chemical feed equipment, two dual rapid mixing basins, four upflow clarifiers which are also called superpulsators, four underground reinforced chlorine contact tanks, twelve rapid filters containing gravel, sand and anthracite for water treatment and a steel washwater tank. The CJO Plant also includes a computerized Supervisory Control and Data Acquisitions system to monitor and control the CJO Plant and the water supply and distribution system in the Middlesex System. There is an on site State certified laboratory capable of performing bacteriological, chemical, process control and advanced instrumental chemical sampling and analysis. The firm design capacity of the CJO Plant is 45 million gallons per day (60 million gallons per day maximum capacity). The main pumping station at the CJO Plant has a design capacity of 90 million gallons per day. The four electric motor-driven, vertical turbine pumps presently installed have an aggregate capacity of 72 million gallons per day. In addition, there is a 15 million gallon per day auxiliary pumping station located in a separate building at the CJO Plant location. It has a dedicated substation and emergency power supply provided by a diesel-driven generator. It pumps from the 10 million gallon distribution storage reservoir directly into the distribution system. The transmission and distribution system is comprised of 722 miles of mains and includes 23,200 feet of 48-inch reinforced concrete transmission main connecting the CJO Plant to our distribution pipe network and related storage facilities. Also included is a 58,600 foot transmission main and a 38,800 foot transmission main, augmented with a long-term, non-exclusive agreement with the East Brunswick system to transport water to several of our contract customers. Middlesex System's storage facilities consist of a 10 million gallon reservoir at the CJO Plant, 5 million gallon and 2 million gallon reservoirs in Edison (Grandview), a 5 million gallon reservoir in Carteret (Eborn) and a 2 million gallon reservoir at the Park Avenue Well Field. 13 In New Jersey, we own the properties on which Middlesex System's 31 wells are located, the properties on which our storage tanks are located as well as the property where the CJO Plant is located. We also own our headquarters complex located at 1500 Ronson Road, Iselin, New Jersey, consisting of a 27,000 square foot, two story office building and an adjacent 16,500 square foot maintenance facility. Tidewater System The Tidewater System's is comprised of 91 production plants that vary in pumping capacity from 40,000 gallons per day to 1.5 million gallons per day. Water is transported to our customers through 446 miles of transmission and distribution mains. Storage facilities include 38 tanks, with an aggregate capacity of 4.7 million gallons. Our Delaware operations are managed from Tidewater's leased offices in Dover, Delaware and Millsboro, Delaware. Tidewater's Dover, Delaware office property, located on property owned by White Marsh, consists of a 6,800 square foot office building situated on an eleven-acre lot. White Marsh also owns another business site for which it is exploring several options for future use. Pinelands System Pinelands Water owns well site and storage properties that are located in Southampton Township, New Jersey. The Pinelands Water storage facility is a 1.2 million gallon standpipe. Water is transported to our customers through 18 miles of transmission and distribution mains. Pinelands Wastewater System Pinelands Wastewater owns a 12 acre site on which its 0.5 million gallons per day capacity tertiary treatment plant and connecting pipes are located. Its wastewater collection system is comprised of approximately 24.5 miles of main. Bayview System Bayview owns two wells, which are located in Downe Township, Cumberland County, New Jersey. Water is transported to its customers through our 3.5 mile distribution system. USA-PA, USA and White Marsh Our non-regulated subsidiaries, namely USA-PA, USA and White Marsh, do not own utility plant property. Item 3. Legal Proceedings A lawsuit was filed in 1998 against the Company for damages involving the break of both a Company water line and an underground electric power cable containing both electric lines and petroleum based insulating fluid. The electric utility also asserted claims against the Company. The lawsuit was settled in 2003, and by agreement, the electric utility's counterclaim for approximately $1.1 million in damages was submitted to binding arbitration, in which the agreed maximum exposure of the Company is $0.3 million, which the Company has accrued for. While we are unable to predict the outcome of the arbitration, we believe that we have substantial defenses. A claim involving a construction subcontractor, the Company's general contractor and the Company concerning a major construction project was settled during October 2004. The matter was instituted in 2001, and related to work required to be performed under a construction contract and related subcontracts and included payment 14 issues and timing/delay issues. The amount that was determined to be due from us for the work performed was $1.4 million and was recorded as an addition to utility plant in service during fiscal 2004. The Company is defendant in various lawsuits. We believe the resolution of pending claims and legal proceedings will not have a material adverse effect on the Company's consolidated financial statements. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. (a) Market Information The Company's common stock is traded on the NASDAQ Stock Market, under the symbol MSEX. The following table shows the range of high and low share prices per share for the common stock and the dividend paid to shareholders in such quarter. 2004 High Low Dividend ---- ---- --- -------- Fourth Quarter $ 20.72 $ 17.06 $0.1675 Third Quarter 19.50 16.65 0.1650 Second Quarter 21.81 18.83 0.1650 First Quarter 21.32 19.38 0.1650 2003 High Low Dividend ---- ---- --- -------- Fourth Quarter $ 21.12 $ 18.19 $0.1650 Third Quarter 21.23 17.72 0.1613 Second Quarter 18.49 16.32 0.1613 First Quarter 18.00 15.77 0.1613 (b) Approximate Number of Equity Security Holders as of December 31, 2004 Number of Title of Class Record Holders -------------- -------------- Common Stock, No Par Value 2,077 Cumulative Preferred Stock, No Par Value: $7.00 Series 14 $4.75 Series 1 Cumulative Convertible Preferred Stock, No Par Value: $7.00 Series 4 $8.00 Series 3 15 (c) Dividends The Company has paid dividends on its common stock each year since 1912. Although it is the present intention of the Board of Directors of the Company to continue to pay regular quarterly cash dividends on its common stock, the payment of future dividends is contingent upon the future earnings of the Company, its financial condition and other factors deemed relevant by the Board of Directors at its discretion. If four or more quarterly dividends are in arrears, the preferred shareholders, as a class, are entitled to elect two members to the Board of Directors in addition to Directors elected by holders of the common stock. In the event dividends on the preferred stock are in arrears, no dividends may be declared or paid on the common stock of the Company. Substantially all of the Utility Plant of the Company is subject to the lien of its mortgage, which also includes certain restrictions as to cash dividend payments and other distributions on common stock. (d) Restricted Stock Plan The Company maintains a shareholder approved restricted Stock Plan, under which 65,233 shares of the Company's common stock are held in escrow by the Company for key employees. Such stock is subject to an agreement requiring forfeiture by the employee in the event of termination of employment within five years of the grant other than as a result of retirement, death or disability. The maximum number of shares authorized for grant under this plan is 240,000 shares. (e) Sale of Unregistered Securities The Company did not issue any shares of unregistered securities during fiscal years 2004, 2003, or 2002. (f) Issuer Purchases of Equity Securities The Company did not purchase any shares of its equity securities during fiscal year 2004. 16 Item 6. Selected Financial Data CONSOLIDATED SELECTED FINANCIAL DATA (Thousands of Dollars Except per Share Data)
2004 2003 2002 2001 2000 ---------------------------------------------------------------------------------------------------- Operating Revenues $ 70,991 $ 64,111 $ 61,933 $ 59,638 $ 54,477 ---------------------------------------------------------------------------------------------------- Operating Expenses: Operations and Maintenance 39,984 36,195 32,767 31,740 30,269 Depreciation 5,846 5,363 4,963 5,051 4,701 Other Taxes 8,228 7,816 7,737 7,594 6,916 Income Taxes 3,814 3,237 3,999 3,760 2,653 ---------------------------------------------------------------------------------------------------- Total Operating Expenses 57,872 52,611 49,466 48,145 44,539 ---------------------------------------------------------------------------------------------------- Operating Income 13,119 11,500 12,467 11,493 9,938 Other Income, Net 795 358 442 502 364 Interest Charges 5,468 5,227 5,144 5,042 4,997 ---------------------------------------------------------------------------------------------------- Net Income 8,446 6,631 7,765 6,953 5,305 Preferred Stock Dividend 255 255 255 255 255 ---------------------------------------------------------------------------------------------------- Earnings Applicable to Common Stock $ 8,191 $ 6,376 $ 7,510 $ 6,698 $ 5,050 ---------------------------------------------------------------------------------------------------- Earnings per Share: Basic $ 0.74 $ 0.61 $ 0.73 $ 0.66 $ 0.50 Diluted $ 0.73 $ 0.61 $ 0.73 $ 0.66 $ 0.50 Average Shares Outstanding: Basic 11,080 10,475 10,280 10,131 10,044 Diluted 11,423 10,818 10,623 10,474 10,387 Dividends Declared and Paid $ 0.663 $ 0.649 $ 0.634 $ 0.623 $ 0.613 Total Assets $305,634* $267,956* $251,971* $242,512* $224,534* Convertible Preferred Stock $ 2,961 $ 2,961 $ 2,961 $ 2,961 $ 2,961 Long-term Debt $115,281 $ 97,377 $ 87,483 $ 88,140 $ 82,109 ---------------------------------------------------------------------------------------------------- * As Restated (see Note 10 of the Notes to the Consolidated Financial Statements included in Item 8)
17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. The following discussions of the Company's historical results of operations and financial condition should be read in conjunction with the Company's consolidated financial statements and related notes. This Management's Discussion and Analysis of Financial Condition and Results of Operation reflects the restatement of the Company's Consolidated Financial Statements, as discussed in Note 10 of the Notes to the Consolidated Financial Statements. Overview Middlesex Water Company has operated as a water utility in New Jersey since 1897, and in Delaware, through our wholly-owned subsidiary, Tidewater, since 1992. We are in the business of collecting, treating, distributing and selling water for domestic, commercial, municipal, industrial and fire protection purposes. We also operate a New Jersey municipal water and wastewater system under contract and provide wastewater services in New Jersey and Delaware through our subsidiaries. We are regulated as to rates charged to customers for water and wastewater services in New Jersey and for water services in Delaware, as to the quality of water service we provide and as to certain other matters. Our TESI subsidiary is expected to commence operations during 2005 as a regulated wastewater utility in Delaware. Only our USA, USA-PA and White Marsh subsidiaries are not regulated utilities. Our New Jersey water utility system (the Middlesex System) provides water services to approximately 58,000 retail customers, primarily in central New Jersey. The Middlesex System also provides water service under contract to municipalities in central New Jersey with a total population of approximately 267,000. In partnership with our subsidiary, USA-PA, we operate the water supply system and wastewater system for the City of Perth Amboy, New Jersey. Our other New Jersey subsidiaries, Pinelands Water and Pinelands Wastewater, provide water and wastewater services to residents in Southampton Township, New Jersey. Our Delaware subsidiaries, Tidewater and Southern Shores, provide water services to approximately 26,000 retail customers in New Castle, Kent and Sussex Counties, Delaware. Our other Delaware subsidiary, White Marsh, services an additional 4,500 customers in Kent and Sussex Counties. The majority of our revenue is generated from retail and contract water services to customers in our service areas. We record water service revenue as such service is rendered and include estimates for amounts unbilled at the end of the period for services provided after the last billing cycle. Fixed service charges are billed in advance by our subsidiary, Tidewater, and are recognized in revenue as the service is provided. Our ability to increase operating income and net income is based significantly on three factors: weather, adequate and timely rate increases, and customer growth. These factors are evident in the discussions below which compare our results of operations from prior years. Results of Operations in 2004 Compared to 2003 Operating revenues for the year rose $6.9 million, or 10.7% over the same period in 2003. Water sales improved by $2.9 million in our Middlesex system, which was primarily a result of base rate increases. Customer growth of 10.4% in Delaware provided additional consumption revenues of $1.2 million and higher base rates provided $0.8 million. Our meter services venture provided $2.0 million of additional revenues for completed meter installations. New unregulated wastewater contracts in Delaware provided $0.3 million in additional revenues. Base rate increases for our Pinelands system contributed $0.1 million of additional revenues. Revenues from our operations and maintenance contracts decreased $0.4 million due to scheduled reductions in fixed fees under the City of Perth Amboy contract. While we anticipate continued growth in the number of customers and increased water consumption among our Delaware systems, such growth and increased consumption cannot be guaranteed. Weather conditions may 18 adversely impact future consumption even with an anticipated growth in the number of customers. Our New Jersey systems are also highly dependent on the effects of weather. Our ability to generate operating revenues by our meter services venture is dependent upon our ability to obtain additional contracts, however USA did not submit bids for any meter service contracts during fiscal 2004 and currently does not expect to submit any bids during fiscal 2005. The existing meter services contracts were substantially completed during the fourth quarter of 2004. Operating expenses increased by $5.3 million, or 10.0% as compared to the same period in 2003. Operation and maintenance expenses increased $3.8 million or 10.5%. In New Jersey, payroll costs, employee benefits and corporate governance related fees increased costs by $1.1 million. Source of supply and pumping costs for the Middlesex system increased by $0.7 million combined due to increased costs for electricity and purchased water. Costs to operate the Tidewater system, as well as an increase in our Delaware employee base, general wage increases and higher costs associated with employee medical and retirement benefits increased costs by $0.6 million. The costs of our meter services venture increased $1.6 million due to completed installations. The costs of our non-regulated wastewater operations and maintenance contracts increased $0.3 million due to additional contracts obtained during the year. These increases were partially offset by $0.4 million of reduced costs related to our City of Perth Amboy contract due to reduced water treatment costs and a decrease of $0.1 million for water main repair costs in our Middlesex system. Going forward we anticipate an increase in New Jersey's electric generation costs due to deregulation of electricity. These increasing costs, in addition to higher business insurance and corporate governance costs, as well as completion of the new raw water pipeline during the second quarter of 2005 will require us to file for a base rate increase with the BPU for Middlesex during 2005. We cannot predict whether the BPU will approve, deny or reduce the amount of any request. Depreciation expense for 2004 increased by $0.5 million, or 9.0%, due to a higher level of utility plant in service. Allowance for funds used during construction rose by $0.3 million for the year, due to large construction projects in New Jersey for the RENEW program and a new raw water pipeline (see Liquidity and Capital Resources for additional discussion of capital spending). As our investments in utility plant and operating expenses increase, we continue to seek timely rate relief through base rate filings as discussed above. Other taxes increased by $0.4 million generally reflecting additional taxes on higher taxable gross revenues, payroll and real estate. Improved operating results in 2004 compared to 2003 led to higher income taxes of $0.8 million, which was partially offset by $0.2 million of tax benefits. Other income increased $0.1 million, primarily due the recognition of a gain on the sale of real estate that had previously been deferred pending the outcome of the Middlesex rate case. Interest expense increased by $0.2 million, primarily due to higher average long-term borrowings as compared to the prior year period. Net income increased by 27.4% to $8.4 million from $6.6 million in the prior year, and basic earnings per share increased from $0.61 to $0.74. Diluted earnings per share increased from $0.61 to $0.73. The increase in earnings per share was impacted by the higher number of shares outstanding during the current year as a result of the sale of 700,000 shares of common stock in May 2004. 19 Results of Operations in 2003 Compared to 2002 Operating revenues for the year rose $2.2 million, or 3.5% over the same period in 2002. Customer growth of 10.9% in Delaware provided additional facility charges and connection fees of $1.4 million. Higher base rates in our Delaware service territories provided $0.6 million of the increase. For the year ended December 31, 2003, cool wet weather in the Mid-Atlantic region pushed Tidewater's consumption revenue down by $0.3 million and Middlesex consumption revenue down by $0.5 million. Despite such adverse weather conditions, revenues from our operations and maintenance contracts rose $0.5 million due to scheduled increases in fixed fees under the City of Perth Amboy contract. New unregulated wastewater operations in Delaware provided $0.1 million in additional revenues. Our new meter services venture provided $0.3 million in additional revenues. All other operations accounted for $0.1 million of the higher revenues. Operating expenses increased by $3.1 million, or 6.4%. Costs related to main breaks resulting from severe winter weather conditions in the first quarter of 2003 contributed to additional expenses of $0.4 million. There were also higher sewer disposal fees and security costs for USA-PA that helped increase costs by $0.6 million. An increase in our Delaware employee base, general wage increases and higher costs associated with employee medical and retirement benefits pushed up costs by $0.7 million. In New Jersey, payroll costs, employee benefits and legal fees pushed up costs by $0.9 million. Non-regulated operations of meter installations and wastewater, which began in 2003, contributed $0.3 million of the overall expense increase. Water treatment, source of supply and pumping costs increased by $0.5 million combined. Depreciation expense for 2003 increased by $0.4 million, or 8.1%, due to a higher level of utility plant in service. Allowance for funds used during construction rose 17% for the year as Tidewater's capital program included larger projects with longer construction schedules. Other taxes increased by $0.1 million generally due to higher payroll related taxes and real estate taxes in both New Jersey and Delaware. Lower federal income taxes of $0.8 million over last year are attributable to the reduced operating results for 2003 as compared to 2002. Other income decreased by $0.1 million as interest rates fell on short-term cash balance investments. Interest expense increased by $0.1 million due to a higher level of overall debt outstanding as compared to last year. Net income decreased to $6.6 million from $7.8 million and basic and diluted earnings per share decreased by $0.12 to $0.61 due to lower earnings. Outlook In addition to some of the factors previously discussed under "Results of Operations in 2004 Compared to 2003," our revenues are expected to increase in 2005 from anticipated customer growth in Delaware for our regulated operations and, to a lesser degree, from growth of non-regulated operations in Delaware and elsewhere. We settled four rate cases during 2004, from which we expect to receive the full annualized benefit in 2005. Revenues and earnings will also be influenced by weather. Changes in these factors, as well as increases in capital expenditures and operating costs are the primary factors that determine the need for rate increase filings. The level of revenues and earnings will be impacted by the ultimate timing and outcome of the anticipated base rate filing in New Jersey during 2005. We continue to explore viable plans to streamline operations and reduce costs, particularly in Delaware, where customer growth continues to exceed industry averages. Part of the challenge is that our Delaware operations are a combination of over 91 stand-alone production and distribution systems serving 250 communities. 20 As a result of anticipated regulation of wastewater services in Delaware, we have established a new regulated wastewater operation that will commence operations during fiscal 2005. Due to the start-up nature of this operation, we expect our expenses with respect to this subsidiary to exceed its revenues in the near term. We expect our interest expense to increase during 2005 as a result of incurring a full year of interest expense on the approximately $19.0 million of long-term debt we financed during fiscal 2004 and higher expected average borrowings and interest rates on short-term credit facilities in order to finance a portion of our capital expenditures during the coming year (see Liquidity and Capital Resources). Our strategy includes continued revenue growth through acquisitions, internal expansion, contract operations and when necessary, rate relief. We will continue to pursue opportunities in both the regulated and non-regulated sectors that are financially sound, complement existing operations and increase shareholder value. Liquidity and Capital Resources Cash flows from operations are largely based on three factors: weather, adequate and timely rate increases, and customer growth. The effect of those factors on net income is discussed in results of operations. For 2004, cash flows from operating activities increased $1.4 million to $15.6 million, as compared to the prior year. This increase was primarily attributable to improved profitability during the current year period and the timing of payments made toward prepaid expenses, materials and supplies, and employee benefit plans. These increases in cash flows were partially offset by the timing of collection of customer accounts and payments to vendors. The $15.6 million of net cash flow from operations allowed us to fund approximately 54% of our utility plant expenditures for the period internally, with the remainder funded with both short-term and long-term borrowings. Net proceeds from issuing long-term debt were used to fund the balance of those expenditures. For 2003, net cash flow from operations of $14.2 million, which increased over 2002 due to lower working capital requirements, and proceeds from prior year financings allowed us to fund approximately 81% of our 2003 utility plant expenditures. Net proceeds from issuing long-term debt were used to fund the balance of those expenditures. Increases in certain operating costs will impact our liquidity and capital resources. As described in our results of operations discussion, during 2004 we received rate relief for Middlesex, Tidewater and the Pinelands Companies. We also plan to file for a base rate increase for Middlesex in 2005 in conjunction with the completion of the raw water pipeline project (see Capital Expenditures and Commitments). There is no certainty, however, that the BPU will approve any or all of this or other future requested increases. Sources of Liquidity Short-Term Debt. The Board of Directors has authorized lines of credit for up to an aggregate of $40.0 million. As of December 31, 2004, the Company has established revolving lines of credit aggregating $33.0 million. At December 31, 2004, the outstanding borrowings under these credit lines were $11.0 million at a weighted average interest rate of 3.42%. As of that date, the Company had borrowing capacity of $22.0 million under its credit lines. The weighted average daily amounts of borrowings outstanding under the Company's credit lines and the weighted average interest rates on those amounts were $8.9 million and $14.0 million at 2.37% and 1.89% for the years ended December 31, 2004 and 2003, respectively. Long-Term Debt. Subject to regulatory approval, the Company periodically finances capital projects under State Revolving Fund (SRF) loan programs in New Jersey and Delaware. These government programs provide 21 financing at interest rates that are typically below rates available in the financial markets. A portion of the borrowings under the New Jersey SRF is interest free. We participated in the SRF loan programs during 2004 and will continue to pursue opportunities to participate as circumstances allow us in the future. During 2004, Middlesex closed on $16.6 million of first mortgage bonds through the New Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey SRF loan program in order to finance the costs of a new raw water pipeline and our 2005 and 2006 RENEW programs (see Capital Expenditures and Commitments for discussion of these projects). The proceeds of these bonds and any interest earned are held by a trustee, and are classified as Restricted Cash on the Consolidated Balance Sheet. During 2004, Tidewater closed on a Delaware SRF loan of $0.8 million to fund a portion of its multi-year capital program. The Delaware SRF program will allow, but does not obligate, Tidewater to draw down against a General Obligation Note for three specific projects. Substantially all of the Utility Plant of the Company is subject to the lien of its mortgage, which also includes debt service and capital ratio covenants, certain restrictions as to cash dividend payments and other distributions on common stock. The Company is in compliance with all of its mortgage covenants and restrictions. Common Stock. The Company periodically issues shares of common stock in connection with its dividend reinvestment and stock purchase plan. Periodically, the Company may issue additional equity to reduce short-term indebtedness and for other general corporate purposes. During 2004, the Company issued $15.1 million of common stock, which included a common stock offering of 700,000 shares that was priced at $19.80 in May. The majority of the net proceeds of approximately $12.9 million from the common stock offering were used to repay most of the Company's short-term borrowings outstanding at that time. Capital Expenditures and Commitments As shown in the following table, we expect our capital expenditures in 2005 and 2006 to increase over 2004. These increases are attributable to a major pipeline installation in the Middlesex system and continued customer growth and service improvement requirements in our Tidewater systems in Delaware, where we spent $12.8 million on utility plant in 2004. At this time we have not determined any amounts anticipated to be spent by TESI in the table below. (Millions of Dollars) 2005 2006 2007 ----- ----- ----- Delaware Systems $16.5 $18.1 $ 9.3 Raw Water Line 3.4 -- -- RENEW Program 3.3 3.3 3.3 Scheduled Upgrades to Existing Systems 5.3 8.1 3.8 ----- ----- ----- Total $28.5 $29.5 $16.4 ===== ===== ===== Under our capital program for 2005, we plan to expend $16.5 million for water system additions and improvements for our Delaware systems, which include the construction of several storage tanks and the creation of new wells and interconnections. We expect to spend approximately $3.4 million to complete the new raw water line to the Middlesex primary water treatment plant that began in 2004. We expect to spend $3.3 million for the RENEW program, which is our program to clean and cement line unlined mains in the Middlesex System. There remains a total of approximately 129 miles of unlined mains in the 730-mile Middlesex System. In 2004, nine miles of unlined mains were cleaned and cement lined. The capital program also includes $5.3 million for scheduled upgrades to our existing systems in New Jersey. The scheduled upgrades consist of $1.1 million for improvements to existing plant, $1.2 million for mains, $0.8 million for 22 service lines, $0.3 million for meters, $0.3 million for hydrants, and $1.6 million for computer systems and various other items. To pay for our capital program in 2005, we will utilize internally generated funds and funds available under existing NJEIT loans (currently, $8.3 million) and Delaware SRF loans (currently, $1.8 million). The SRF programs provide low cost financing for projects that meet certain water quality and system improvement benchmarks. If necessary, we will also utilize short-term borrowings through $33.0 million of available lines of credit with four financial institutions. As of December 31, 2004, we had $11.0 million outstanding against the lines of credit. Going forward into 2006 through 2007, we currently project that we will be required to expend approximately $45.9 million for capital projects. To the extent possible and because of the favorable interest rates available to regulated water utilities, we will finance our capital expenditures under the SRF loan programs. We also expect to use internally generated funds and proceeds from the sale of common stock through the Dividend Reinvestment and Common Stock Purchase Plan. Contractual Obligations In the course of normal business activities, the Company enters into a variety of contractual obligations and commercial commitments. Some of these items result in direct obligations on the Company's balance sheet while others are commitments, some firm and some based on uncertainties, which are disclosed in the Company's underlying consolidated financial statements. The table below presents our known contractual obligations for the periods specified as of December 31, 2004.
Payment Due by Period (Millions of Dollars) Less than 1-3 4-5 More than Total 1 Year Years Years 5 Years ------ ------ ------ ------ ------- Long-term Debt $116.4 $ 1.1 $ 3.4 $ 3.9 $108.0 Notes Payable 11.0 11.0 -- -- -- Interest on Long-term Debt 104.0 5.6 11.2 10.2 77.0 Purchased Water Contracts 21.7 3.9 4.5 4.5 8.8 Wastewater Operations 63.0 3.8 7.8 8.3 43.1 ------ ------ ------ ------ ------ Total $316.1 $ 25.4 $ 26.9 $ 26.9 $236.9 ====== ====== ====== ====== ======
Guarantees USA-PA operates the City of Perth Amboy's (Perth Amboy) water and wastewater systems under a service contract agreement through June 30, 2018. The agreement was effected under New Jersey's Water Supply Public/Private Contracting Act and the New Jersey Wastewater Public/Private Contracting Act. Under the agreement, USA-PA receives a fixed fee and a variable fee based on increased system billing. Scheduled fixed fee payments began at $6.4 million in the first year and will increase over the term of the contract to $10.2 million at the end of the contract. In connection with the agreement, Perth Amboy, through the Middlesex County Improvement Authority, issued approximately $68.0 million in three series of bonds. Middlesex guaranteed one of those series of bonds, designated the Series C Serial Bonds, in the principal amount of approximately $26.3 million. Perth Amboy guaranteed the two other series of bonds. The Series C Serial Bonds have various maturity dates with the final 23 maturity date on September 1, 2015. As of December 31, 2004, approximately $23.9 million of the Series C Serial Bonds remained outstanding. We are obligated to perform under the guarantee in the event notice is received from the Series C Serial Bonds trustee of an impending debt service deficiency. If Middlesex funds any debt service obligations as guarantor, there is a provision in the agreement that requires Perth Amboy to reimburse us. There are other provisions in the agreement that we believe make it unlikely that we will be required to perform under the guarantee, such as scheduled annual rate increases for the water and wastewater services as well as rate increases due to unforeseen circumstances. In the event revenues from customers could not satisfy the reimbursement requirements, Perth Amboy has Ad Valorem taxing powers, which could be used to raise the needed amount. Critical Accounting Policies and Estimates The application of accounting policies and standards often requires the use of estimates, assumptions and judgments. Changes in these variables may lead to significantly different financial statement results. Our critical accounting policies are set forth below. Regulatory Accounting We maintain our books and records in accordance with accounting principles generally accepted in the United States of America. Middlesex and certain of its subsidiaries, which account for 86% of Operating Revenues and 99% of Total Assets, are subject to regulation in the states in which they operate. Those companies are required to maintain their accounts in accordance with regulatory authorities' rules and guidelines, which may differ from other authoritative accounting pronouncements. In those instances, the Company follows the guidance provided in the Financial Accounting Standards Board (FASB), Statement of Financial Accounting Standards No. 71, "Accounting For the Effects of Certain Types of Regulation" (SFAS 71). In accordance with SFAS No. 71, costs and obligations are deferred if it is probable that these items will be recognized for rate-making purposes in future rates. Accordingly, we have recorded costs and obligations, which will be amortized over various future periods. Any change in the assessment of the probability of rate-making treatment will require us to change the accounting treatment of the deferred item. We have no reason to believe any of the deferred items that are recorded would be treated differently by the regulators in the future. Revenues Revenues from metered customers include amounts billed on a cycle basis and unbilled amounts estimated from the last meter reading date to the end of the accounting period. The estimated unbilled amounts are determined by utilizing factors which include historical consumption usage and current climate conditions. Differences between estimated revenues and actual billings are recorded in a subsequent period. Revenues from unmetered customers are billed at a fixed tariff rate in advance at the beginning of each service period and are recognized in revenue ratably over the service period. Revenues from the Perth Amboy management contract are comprised of fixed and variable fees. Fixed fees, which have been set for the life of the contract, are billed monthly and recorded as earned. Variable fees, which are based on billings and other factors and are not significant, are recorded upon approval of the amount by Perth Amboy. 24 Pension Plan We maintain a noncontributory defined benefit pension plan which covers substantially all employees with more than 1,000 hours of service. The discount rate utilized for determining future pension obligations has decreased from 6.75% at December 31, 2002 to 6.00% at December 31, 2003 to 5.875% at December 31, 2004. Lowering the discount rate by 0.5% would have increased the net periodic pension cost by $0.1 million in 2004. Lowering the expected long-term rate of return on the pension plans by 0.5% (from 8.0% to 7.5%) would have increased the net periodic pension cost in 2004 by approximately $0.1 million. The discount rate for determining future pension obligations are determined based on market rates for long-term, high-quality corporate bonds at our December 31 measurement date. The expected long-term rate of return for pension assets is determined based on historical returns and our asset allocation. Future actual pension income will depend on future investment performance, changes in future discount rates and various other factors related to the population participating in the pension plans. Recent Accounting Standards In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No.123(R) "Share-Based Payment", which replaces SFAS No.123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. The Statement also establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans. This statement is effective for quarters beginning after June 15, 2005. The Company currently recognizes compensation expense at fair value for stock-based payment awards in accordance with SFAS No. 123 "Accounting for Stock-Based Compensation," and does not anticipate adoption of this standard will have a material impact on its financial position, results of operations, or cash flows. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for nonmonetary asset exchanges occurring in quarters beginning after June 15, 2005. The Company does not anticipate adoption of this standard will have a material impact on its financial position, results of operations, or cash flows. In May 2004, the FASB issued FASB Staff Position (FSP) 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FSP 106-2). FSP 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Medicare Drug Act) for employers who sponsor postretirement health care plans that provide prescription drug benefits. FSP 106-2 also requires those employers to provide certain disclosures regarding the effect of the federal subsidy provided by the Medicare Drug Act. The Medicare Drug Act generally permits plan sponsors that provide retiree prescription drug benefits that are "actuarially equivalent" to the benefits of Medicare Part D to be eligible for a non-taxable federal subsidy. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. FSP 106-2 provides that if the effect of the Medicare Drug Act is not considered a significant event, the measurement date for the adoption of FSP 106-2 is delayed until the next regular measurement date. Based on Management's discussions with its Actuary, Management determined the effect of the Medicare Drug Act was not considered a significant event and thus 25 the Company will account for the effects of FSP 106-2 at its next measurement date (January 1, 2005). The adoption of FSP 106-2 will not have a material effect on the Company's financial statements. In March 2004, the Emerging Issues Task Force (EITF) reached consensus on EITF No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" (EITF 03-1). EITF 03-1 further defines the meaning of an "other-than-temporary impairment" and its application to debt and equity securities. Impairment occurs when the fair value of a security is less than its cost basis. When such a condition exists, the investor is required to evaluate whether the impairment is other-than-temporary as defined in EITF 03-1. When an impairment is other-than-temporary, the security must be written down to its fair value. EITF 03-1 also requires additional annual quantitative and qualitative disclosures for available for sale and held to maturity impaired investments that are not other-than temporarily impaired. On September 30, 2004, the FASB issued FSP EITF 03-1-1, "Effective date of Paragraph's 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" (FSP EITF 03-1-1). FSP EITF 03-1-1 delayed the effective date for the measurement and recognition guidance contained in EITF 03-1 until further implementation guidance is issued. The Company does not expect any material effects from the adoption of EITF 03-1 on its financial statements. Item 7A. Qualitative and Quantitative Disclosures About Market Risk. The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt. The Company's interest rate risk related to existing fixed rate, long-term debt is not material due to the term of the majority of our First Mortgage Bonds, which have final maturity dates ranging from 2009 to 2038. Over the next twelve months, approximately $1.1 million of the current portion of ten existing long-term debt instruments will mature. Combining this amount with the $11.0 million in short-term debt outstanding at December 31, 2004, and applying a hypothetical change in the rate of interest charged by 10% on those borrowings, would not have a material effect on our earnings. 26 Item 8. Financial Statements and Supplementary Data. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Middlesex Water Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capital stock and long-term debt of Middlesex Water Company and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of income, common stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2005 (November 17, 2005 as to the effect of the material weakness described in Management's Report on Internal Controls Over Financial Reporting (as revised)) expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an adverse opinion on the effectiveness of the Company's internal control over financial reporting. As discussed in Note 10, the accompanying consolidated balance sheets and statements of cash flows have been restated. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey March 15, 2005 (November 14, 2005 as to the effects of the restatement described in Note 10) 27
MIDDLESEX WATER COMPANY CONSOLIDATED BALANCE SHEETS December 31, ASSETS 2004 2003 ======================================================================================================================== (Restated - (Restated - see Note 10) see Note 10) UTILITY PLANT: Water Production $ 82,340,798 $ 77,265,782 Transmission and Distribution 194,531,035 179,219,783 General 20,451,215 19,776,293 Construction Work in Progress 13,013,391 2,798,070 -------------------------------------------------------------------------------------------- TOTAL 310,336,439 279,059,928 Less Accumulated Depreciation 52,017,761 47,510,797 -------------------------------------------------------------------------------------------- UTILITY PLANT - NET 258,318,678 231,549,131 -------------------------------------------------------------------------------------------- ======================================================================================================================== CURRENT ASSETS: Cash and Cash Equivalents 4,034,768 3,005,610 Accounts Receivable, net 6,316,853 5,682,608 Unbilled Revenues 3,572,713 3,234,788 Materials and Supplies (at average cost) 1,203,906 1,419,142 Prepayments 823,976 1,009,304 -------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 15,952,216 14,351,452 ======================================================================================================================== DEFERRED CHARGES Unamortized Debt Expense 3,172,254 3,272,783 AND OTHER ASSETS: Preliminary Survey and Investigation Charges 1,032,182 1,380,771 Regulatory Assets 8,198,565 8,216,117 Operations Contracts Fees Receivable 685,599 699,806 Restricted Cash 13,257,106 3,825,420 Non-utility Assets - Net 4,552,023 4,147,685 Other 465,419 513,116 -------------------------------------------------------------------------------------------- TOTAL DEFERRED CHARGES AND OTHER ASSETS 31,363,148 22,055,698 -------------------------------------------------------------------------------------------- TOTAL ASSETS $ 305,634,042 $ 267,956,281 -------------------------------------------------------------------------------------------- CAPITALIZATION AND LIABILITIES ======================================================================================================================== CAPITALIZATION: Common Stock, No Par Value $ 71,979,902 $ 56,924,028 Retained Earnings 23,103,908 22,668,348 Accumulated Other Comprehensive Income, net of tax 44,841 50,808 ============================================================================================ TOTAL COMMON EQUITY 95,128,651 79,643,184 ============================================================================================ Preferred Stock 4,063,062 4,063,062 Long-term Debt 115,280,649 97,376,847 -------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION 214,472,362 181,083,093 ======================================================================================================================== CURRENT Current Portion of Long-term Debt 1,091,351 1,067,258 LIABILITIES: Notes Payable 11,000,000 12,500,000 Accounts Payable 6,001,806 4,777,400 Accrued Taxes 6,784,380 6,258,739 Accrued Interest 1,703,131 1,810,639 Unearned Revenues and Advanced Service Fees 387,156 602,854 Other 795,456 678,596 -------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 27,763,280 27,695,486 ======================================================================================================================== COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) ======================================================================================================================== DEFERRED CREDITS Customer Advances for Construction 14,018,006 12,838,342 AND OTHER LIABILITIES: Accumulated Deferred Investment Tax Credits 1,696,566 1,775,183 Accumulated Deferred Income Taxes 14,556,153 14,125,970 Employee Benefit Plans 5,464,056 5,086,988 Regulatory Liability - Cost of Utility Plant Removal 5,363,152 4,830,308 Other 849,551 909,498 -------------------------------------------------------------------------------------------- TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 41,947,484 39,566,289 ======================================================================================================================== CONTRIBUTIONS IN AID OF CONSTRUCTION 21,450,916 19,611,413 ------------------------------------------------------------------------------------------------------------------------ TOTAL CAPITALIZATION AND LIABILITIES $ 305,634,042 $ 267,956,281 --------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 28 MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2004 2003 2002 ================================================================================================== Operating Revenues $ 70,991,146 $ 64,111,214 $ 61,932,786 -------------------------------------------------------------------------------------------------- Operating Expenses: Operations 36,519,355 32,666,099 29,918,921 Maintenance 3,464,036 3,529,113 2,847,209 Depreciation 5,846,191 5,362,727 4,963,268 Other Taxes 8,228,354 7,815,918 7,737,155 Income Taxes 3,814,418 3,237,218 3,999,295 -------------------------------------------------------------------------------------------------- Total Operating Expenses 57,872,354 52,611,075 49,465,848 ================================================================================================== Operating Income 13,118,792 11,500,139 12,466,938 -------------------------------------------------------------------------------------------------- Other Income (Expense): Allowance for Funds Used During Construction 606,019 315,919 269,668 Other Income 221,950 131,499 249,324 Other Expense (32,676) (89,931) (77,114) -------------------------------------------------------------------------------------------------- Total Other Income, net 795,293 357,487 441,878 Interest Charges 5,468,576 5,227,030 5,143,463 -------------------------------------------------------------------------------------------------- Net Income 8,445,509 6,630,596 7,765,353 Preferred Stock Dividend Requirements 254,786 254,786 254,786 -------------------------------------------------------------------------------------------------- Earnings Applicable to Common Stock $ 8,190,723 $ 6,375,810 $ 7,510,567 ================================================================================================== Earnings per share of Common Stock: Basic $ 0.74 $ 0.61 $ 0.73 Diluted $ 0.73 $ 0.61 $ 0.73 Average Number of Common Shares Outstanding : Basic 11,079,835 10,475,295 10,280,302 Diluted 11,422,975 10,818,435 10,623,442 Cash Dividends Paid per Common Share $ 0.663 $ 0.649 $ 0.634
See Notes to Consolidated Financial Statements. 29 MIDDLESEX WATER COMPANY
MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2004 2003 2002 --------------------------------------------- (Restated - (Restated - (Restated - see Note 10) see Note 10) see Note 10) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 8,445,509 $ 6,630,596 $ 7,765,353 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 6,387,808 5,633,863 5,436,525 Provision for Deferred Income Taxes and ITC 603,275 306,919 197,714 Allowance for Funds Used During Construction (606,019) (315,919) (269,668) Changes in Assets and Liabilities: Accounts Receivable (634,245) 345,694 637,418 Unbilled Revenues (337,925) (53,697) (380,076) Materials & Supplies 215,236 (228,805) (162,417) Prepayments 185,328 (193,912) 54,301 Other Assets (578,048) 275,802 (256,683) Operations Contracts Receivable 14,207 (699,806) -- Accounts Payable 1,224,406 2,260,431 (476,148) Accrued Taxes 528,715 333,815 (432,126) Accrued Interest (107,508) 196,361 (199,618) Employee Benefit Plans 377,068 (192,749) 17,061 Unearned Revenue & Advanced Service Fees (215,698) 186,265 71,316 Other Liabilities 56,913 (236,431) (803,949) -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 15,559,022 14,248,427 11,199,003 -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Utility Plant Expenditures* (28,878,576) (17,576,634) (16,255,866) Cash Surrender Value & Other Investments (273,837) (466,290) (4,438) Restricted Cash (9,431,686) 2,321,158 2,843,996 Proceeds from Real Estate Dispositions -- 532,922 -- Preliminary Survey & Investigation Charges 348,589 (282,303) (154,846) Other Assets -- (47,264) (68,179) -------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (38,235,510) (15,518,411) (13,639,333) -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of Long-term Debt (1,067,258) (884,427) (6,443,836) Proceeds from Issuance of Long-term Debt 18,995,153 11,205,723 6,067,350 Net Short-term Bank Borrowings (Repayments) (1,500,000) (5,150,000) 4,425,000 Deferred Debt Issuance Expenses (65,219) (194,484) (510,818) Common Stock Issuance Expense (379,534) (103,284) (3,688) Restricted Cash -- 121 219,588 Proceeds from Issuance of Common Stock 15,055,874 3,609,859 3,214,548 Payment of Common Dividends (7,375,629) (6,791,254) (6,510,494) Payment of Preferred Dividends (254,786) (254,786) (254,786) Construction Advances and Contributions-Net 297,045 (99,768) 640,976 -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 23,705,646 1,337,700 843,840 -------------------------------------------------------------------------------------------------------------------- NET CHANGES IN CASH AND CASH EQUIVALENTS 1,029,158 67,716 (1,596,490) -------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,005,610 2,937,894 4,534,384 -------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,034,768 $ 3,005,610 $ 2,937,894 -------------------------------------------------------------------------------------------------------------------- *Excludes Allowance for Funds Used During Construction. SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: Utility Plant received as Construction Advances and Contributions $ 2,722,121 $ 3,753,037 $ 1,042,529 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash Paid During the Year for: Interest $ 5,409,803 $ 5,061,878 $ 5,103,787 Interest Capitalized $ (606,019) $ (315,919) $ (269,668) Income Taxes $ 3,074,513 $ 2,472,000 $ 4,237,000 ---------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 30 MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND LONG-TERM DEBT
December 31, 2004 2003 ====================================================================================================== Common Stock, No Par Value Shares Authorized - 20,000,000 Shares Outstanding - 2004 - 11,358,772 $ 71,979,902 $ 56,924,028 2003 - 10,566,937 Retained Earnings 23,103,908 22,668,348 Accumulated Other Comprehensive Income, net of tax 44,841 50,808 ------------------------------------------------------------------------------------------------------ TOTAL COMMON EQUITY 95,128,651 79,643,184 ------------------------------------------------------------------------------------------------------ Cumulative Preference Stock, No Par Value: Shares Authorized - 100,000 Shares Outstanding - None Cumulative Preferred Stock, No Par Value Shares Authorized - 140,497 Convertible: Shares Outstanding, $7.00 Series - 14,881 1,562,505 1,562,505 Shares Outstanding, $8.00 Series - 12,000 1,398,857 1,398,857 Nonredeemable: Shares Outstanding, $7.00 Series - 1,017 101,700 101,700 Shares Outstanding, $4.75 Series - 10,000 1,000,000 1,000,000 ------------------------------------------------------------------------------------------------------ TOTAL PREFERRED STOCK 4,063,062 4,063,062 ------------------------------------------------------------------------------------------------------ Long-term Debt 8.05%, Amortizing Secured Note, due December 20, 2021 3,063,389 3,136,531 6.25%, Amortizing Secured Note, due May 22, 2028 9,835,000 10,255,000 4.22%, State Revolving Trust Note, due December 31, 2022 784,000 192,281 3.60%, State Revolving Trust Note, due May 1, 2025 2,348,316 580,792 4.00% to 5.00%, State Revolving Trust Bond, due September 1, 2021 790,000 820,000 0.00%, State Revolving Fund Bond, due September 1, 2021 652,306 690,833 First Mortgage Bonds: 5.20%, Series S, due October 1, 2022 12,000,000 12,000,000 5.25%, Series T, due October 1, 2023 6,500,000 6,500,000 6.40%, Series U, due February 1, 2009 15,000,000 15,000,000 5.25%, Series V, due February 1, 2029 10,000,000 10,000,000 5.35%, Series W, due February 1, 2038 23,000,000 23,000,000 0.00%, Series X, due September 1, 2018 755,006 807,956 4.25% to 4.63%, Series Y, due September 1, 2018 920,000 965,000 0.00%, Series Z, due September 1, 2019 1,679,979 1,792,435 5.25% to 5.75%, Series AA, due September 1, 2019 2,085,000 2,175,000 0.00%, Series BB, due September 1, 2021 2,048,095 2,168,277 4.00% to 5.00%, Series CC, due September 1, 2021 2,275,000 2,360,000 5.10%, Series DD, due January 1, 2032 6,000,000 6,000,000 0.00%, Series EE, due September 1, 2024 7,715,909 -- 3.00% to 5.50%, Series FF, due September 1, 2024 8,920,000 -- ------------------------------------------------------------------------------------------------------ SUBTOTAL LONG-TERM DEBT 116,372,000 98,444,105 ------------------------------------------------------------------------------------------------------ Less: Current Portion of Long-term Debt (1,091,351) (1,067,258) ------------------------------------------------------------------------------------------------------ TOTAL LONG-TERM DEBT $ 115,280,649 $ 97,376,847 ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 31 MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated Common Common Other Stock Stock Retained Comprehensive Shares Amount Earnings Income Total =========== =========== =========== ============= =========== Balance at January 1, 2002 10,168,002 $50,099,621 $22,190,691 $ -- $72,290,312 Net Income 7,765,353 7,765,353 Dividend Reinvestment & Common Stock Purchase Plan 176,320 2,990,712 2,990,712 Restricted Stock Awards - Net 12,167 223,836 223,836 Cash Dividends on Common Stock (6,510,494) (6,510,494) Cash Dividends on Preferred Stock (254,786) (254,786) Common Stock Expenses (3,688) (3,688) ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2002 10,356,489 $53,314,169 $23,187,076 $ -- $76,501,245 Net Income 6,630,596 6,630,596 Change in Value of Equity Investments, net of $26,000 Income Tax 50,808 50,808 ----------- Comprehensive Income 6,681,404 ----------- Dividend Reinvestment & Common Stock Purchase Plan 192,515 3,263,569 3,263,569 Restricted Stock Awards - Net 17,933 346,290 346,290 Cash Dividends on Common Stock (6,791,254) (6,791,254) Cash Dividends on Preferred Stock (254,786) (254,786) Common Stock Expenses (103,284) (103,284) ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2003 10,566,937 $56,924,028 $22,668,348 $ 50,808 $79,643,184 Net Income 8,445,509 8,445,509 Change in Value of Equity Investments, net of $3,000 Income Tax (5,967) (5,967) ----------- Comprehensive Income 8,439,542 Dividend Reinvestment & Common Stock Purchase Plan 76,935 1,533,507 1,533,507 Issuance of Common Stock 700,000 13,257,000 13,257,000 Restricted Stock Awards - Net 14,900 265,367 265,367 Cash Dividends on Common Stock (7,375,629) (7,375,629) Cash Dividends on Preferred Stock (254,786) (254,786) Common Stock Expenses (379,534) (379,534) ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2004 11,358,772 $71,979,902 $23,103,908 $ 44,841 $95,128,651 =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements. 32 Middlesex Water Company Notes to Consolidated Financial Statements (as Restated) Note 1 - Summary of Significant Accounting Policies (a) Organization - Middlesex Water Company (Middlesex) is the parent company and sole shareholder of Tidewater Utilities, Inc. (Tidewater), Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), Utility Service Affiliates, Inc. (USA), Utility Service Affiliates (Perth Amboy) Inc. (USA-PA) and Bayview Water Company (Bayview). Southern Shores Water Company, LLC (Southern Shores) and White Marsh Environmental Systems, Inc. (White Marsh), are wholly-owned subsidiaries of Tidewater. The financial statements for Middlesex and its wholly-owned subsidiaries (the Company) are reported on a consolidated basis. All significant intercompany accounts and transactions have been eliminated. Middlesex Water Company has operated as a water utility in New Jersey since 1897, and in Delaware, through our wholly-owned subsidiary, Tidewater, since 1992. We are in the business of collecting, treating, distributing and selling water for domestic, commercial, municipal, industrial and fire protection purposes. We also operate a New Jersey municipal water and wastewater system under contract and provide wastewater services in New Jersey and Delaware through our subsidiaries. We are regulated as to rates charged to customers for water and wastewater services in New Jersey and for water services in Delaware, as to the quality of water service we provide and as to certain other matters. Our Tidewater Environmental Services, Inc. subsidiary will commence operations during 2005 as a regulated wastewater utility in Delaware. Only our USA, USA-PA and White Marsh subsidiaries are not regulated utilities. (b) System of Accounts - Middlesex, Pinelands Water, Pinelands Wastewater and Bayview maintain their accounts in accordance with the Uniform System of Accounts prescribed by the Board of Public Utilities of the State of New Jersey (BPU). Tidewater and Southern Shores maintain their accounts in accordance with the Public Service Commission of Delaware (PSC) requirements. (c) Utility Plant is stated at original cost as defined for regulatory purposes. Property accounts are charged with the cost of betterments and major replacements of property. Cost includes direct material, labor and indirect charges for pension benefits and payroll taxes. The cost of labor, materials, supervision and other expenses incurred in making repairs and minor replacements and in maintaining the properties is charged to the appropriate expense accounts. At December 31, 2004, there was no event or change in circumstance that would indicate that the carrying amount of any long-lived asset was not recoverable. (d) Depreciation is computed by each regulated member of the Company utilizing a rate approved by the applicable regulatory authority. The Accumulated Provision for Depreciation is charged with the cost of property retired, less salvage. The following table sets forth the range of depreciation rates for the major utility plant categories used to calculate depreciation for the years ended December 31, 2004, 2003 and 2002. These rates have been approved by either the BPU or PSC: Source of Supply 1.15% - 3.44% Transmission and Distribution (T&D): Pumping 2.87% - 5.04% T&D - Mains 1.10% - 3.13% Water Treatment 2.71% - 7.64% T&D - Services 2.12% - 2.81% General Plant 2.08% - 17.84% T&D - Other 1.61% - 4.63% Non-regulated fixed assets consist primarily of an office building, furniture and fixtures, and transportation equipment. These assets are recorded at original cost and depreciation is calculated based on the estimated useful lives, ranging from 3 to 40 years. 33 (e) Customers' Advances for Construction - Water utility plant and/or cash advances are contributed to the Company by customers, real estate developers and builders in order to extend water service to their properties. These contributions are recorded as Customers' Advances for Construction. Refunds on these advances are made by the Company in accordance with agreements with the contributing party and are based on either additional operating revenues related to the utility plant or as new customers are connected to and take service from the utility plant. After all refunds are made, any remaining balance is transferred to Contributions in Aid of Construction. Contributions in Aid of Construction - Contributions in Aid of Construction include direct non-refundable contributions of water utility plant and/or cash and the portion of Customers' Advances for Construction that become non-refundable. (f) Allowance for Funds Used During Construction (AFUDC) - Middlesex, Tidewater, Pinelands Water, Pinelands Wastewater and Bayview capitalize AFUDC, which represents the cost of financing projects during construction. AFUDC is added to the construction costs of individual projects exceeding specific cost and construction period thresholds established for each company and then depreciated along with the rest of the utility plant's costs over its estimated useful life. For the years ended December 31, 2004, 2003 and 2002 approximately $0.6 million, $0.3 million and $0.3 million of AFUDC was added to the cost of construction projects. AFUDC is calculated using each company's weighted cost of debt and equity as approved in their most recent respective regulatory rate order. The average AFUDC rate for the years ended December 31, 2004, 2003 and 2002 for Middlesex, Tidewater and Bayview were 7.42%, 8.77% and 3.11%, respectively. Pinelands Water and Pinelands Wastewater did not incur AFUDC during the periods covered by this report. (g) Accounts Receivable - We record bad debt expense based on historical accounts receivable write-offs. The allowance for doubtful accounts at December 31, 2004, 2003 and 2002 was $0.2 million, $0.2 million and $0.1 million, respectively. The corresponding expense for the year ended December 31, 2004, 2003 and 2002 was $0.1 million, $0.2 million and $0.1 million, respectively. (h) Revenues - General metered customer's bills typically are broken down into two components; a fixed service charge and a volumetric or consumption charge. Revenues from general metered service customers, except Tidewater, include amounts billed in arrears on a cycle basis and unbilled amounts estimated from the last meter reading date to the end of the accounting period. The estimated unbilled amounts are determined by utilizing factors which include historical consumption usage and current climate conditions. Actual billings may differ from our estimates. Revenues are adjusted in the period that the difference is identified. Tidewater customers are billed in advance for their fixed service charge and these revenues are recognized as the service is provided to the customer. Bayview and Southern Shores are unmetered systems. Customers are billed a fixed service charge in accordance with the approved tariff. Southern Shore service charges are billed in advance at the beginning of each month and are recognized as earned. Bayview service charges are billed in advance at the beginning of each calendar quarter and are recognized in revenue ratably over the quarter. Revenues from the City of Perth Amboy management contract are comprised of fixed and variable fees. Fixed fees, which have been set for the life of the contract, are billed monthly and recorded as earned. Variable fees, which are not significant, are recorded upon approval of the amount by the City of Perth Amboy. (i) Deferred Charges and Other Assets - Unamortized Debt Expense is amortized over the lives of the related issues. Restricted Cash represents proceeds from loans entered into through state financing programs and is held in trusts. The proceeds are restricted for specific capital expenditures and debt service requirements. 34 (j) Income Taxes - Middlesex files a consolidated federal income tax return for the Company and income taxes are allocated based on the separate return method. Investment tax credits have been deferred and are amortized over the estimated useful life of the related property. (k) Statements of Cash Flows - For purposes of reporting cash flows, the Company considers all highly liquid investments with original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents represent bank balances and money market funds with investments maturing in less than 90 days. (l) Use of Estimates - Conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from those estimates. (m) Recent Accounting Pronouncements - In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No.123(R) "Share-Based Payment", which replaces SFAS No.123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. The Statement also establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans. This statement is effective for quarters beginning after June 15, 2005. The Company currently recognizes compensation expense at fair value for stock-based payment awards in accordance with SFAS No. 123 "Accounting for Stock-Based Compensation," and does not anticipate adoption of this standard will have a material impact on its financial position, results of operations, or cash flows. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS 153 is effective for nonmonetary asset exchanges occurring in quarters beginning after June 15, 2005. The Company does not anticipate adoption of this standard will have a material impact on its financial position, results of operations, or cash flows. In May 2004, the FASB issued FASB Staff Position (FSP) 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FSP 106-2). FSP 106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Medicare Drug Act) for employers who sponsor postretirement health care plans that provide prescription drug benefits. FSP 106-2 also requires those employers to provide certain disclosures regarding the effect of the federal subsidy provided by the Medicare Drug Act. The Medicare Drug Act generally permits plan sponsors that provide retiree prescription drug benefits that are "actuarially equivalent" to the benefits of Medicare Part D to be eligible for a non-taxable federal subsidy. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. FSP 106-2 provides that if the effect of the Medicare Drug Act is not considered a significant event, the measurement date for the adoption of FSP 106-2 is delayed until the next regular measurement date. Based on Management's discussions with its Actuary, Management determined the effect of the Medicare Drug Act is not considered a significant event and thus the Company will account for the effects of FSP 106-2 at its next measurement date (January 1, 2005). The adoption of FSP 106-2 will not have a material effect on the Company's financial statements. In March 2004, the Emerging Issues Task Force (EITF) reached consensus on EITF No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" (EITF 03-1). EITF 03-1 further defines the meaning of an "other-than-temporary impairment" and its application to debt and equity securities. Impairment occurs when the fair value of a security is less than its cost basis. When such a 35 condition exists, the investor is required to evaluate whether the impairment is other-than-temporary as defined in EITF 03-1. When an impairment is other-than-temporary, the security must be written down to its fair value. EITF 03-1 also requires additional annual quantitative and qualitative disclosures for available for sale and held to maturity impaired investments that are not other-than temporarily impaired. On September 30, 2004, the FASB issued FSP EITF 03-1-1, "Effective date of Paragraph's 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" (FSP EITF 03-1-1). FSP EITF 03-1-1 delayed the effective date for the measurement and recognition guidance contained in EITF 03-1 until further implementation guidance is issued. The Company does not expect any material effects from the adoption of EITF 03-1 on its financial statements. (n) Other Comprehensive Income - Total comprehensive income includes changes in equity that are excluded from the consolidated statements of income and are recorded into a separate section of capitalization on the consolidated balance sheets. The Company's accumulated other comprehensive income shown on the consolidated balance sheets consists of unrealized gains on investment holdings. (o) Regulatory Accounting - We maintain our books and records in accordance with accounting principles generally accepted in the United States of America. Middlesex and certain of its subsidiaries, which account for 86% of Operating Revenues and 99% of Total Assets, are subject to regulation in the state in which they operate. Those companies are required to maintain their accounts in accordance with regulatory authorities' rules and guidelines, which may differ from other authoritative accounting pronouncements. In those instances, the Company follows the guidance provided SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." (p) Pension Plan - We maintain a noncontributory defined benefit pension plan which covers substantially all employees with more than 1,000 hours of service. The discount rate utilized for determining pension costs decreased from 7.25% for the year ended December 31, 2002 to 6.75% for the year ended December 31, 2003 to 6.00% for the year ended December 31, 2004. Future actual pension income will depend on future investment performance, changes in future discount rates and various other factors related to the population participating in the pension plans. Note 2 - Rate and Regulatory Matters Effective May 27, 2004, Middlesex received approval from the BPU for a 9.5%, or $4.3 million increase in its water rates. This increase represents a portion of Middlesex's November 2003 request for a total rate increase of 17.8% to cover the costs of its increased capital investment, as well as maintenance and operating expenses. Effective June 24, 2004, Pinelands Water and Pinelands Wastewater received approval from the BPU for rate increases of 9.2% and 9.9%, respectively, or approximately $0.13 million in the aggregate. This increase represents a portion of Pinelands' December 2003 request for a total rate increase of approximately $0.25 million to help offset the increasing costs associated with capital improvements, and the operation and maintenance of their systems. Effective June 25, 2004, Tidewater received approval from the PSC for an interim rate increase of 15%, or $1.5 million increase in its water rates, which includes 4.89% of previously implemented Distribution System Improvement Charges (DSIC). On October 19, 2004, the PSC approved a settlement between Tidewater and interveners in the matter. The settlement allows the interim rates to become permanent. This increase represents a portion of Tidewater's April 2004 request for a 24% rate increase to accommodate the growth of Tidewater's customer base, improvements to water treatment, fire protection and to interconnect systems for service reliability and back-up. As part of the settlement, Tidewater will be eligible to apply for a second phase rate increase of $0.5 million, provided it completes a number of capital projects within a specified time schedule. Tidewater must file an application for this increase no earlier than March 2005 or later than May 2005. Upon 36 verification of project completion, new rates will become effective 30 days after the filing date. Tidewater also agreed to waive its right to file DSIC applications over the next three six-month cycles (January and July 2005, and January 2006) and to defer making an application for a general rate increase until after April 1, 2006. In accordance with the tariff established for Southern Shores, an annual rate increase of 2.8% was implemented on January 1, 2004. The increase cannot exceed the lesser of the regional Consumer Price Index or 3%. Other than rates for the Southern Shores system, there can be no assurance that any rate increases will be granted or, if granted, that they will be in the amounts we requested. In the fall of 2002, the BPU approved a 76.7% base rate increase for the Bayview. This translates into additional revenues of less than $0.1 million. Two-thirds of the increase was implemented on January 1, 2003 and the balance became effective July 1, 2003. The new rates are designed to allow for the recovery of operating costs and capital costs incurred to replace the entire water distribution system on Fortescue Island in Southern New Jersey. We have recorded certain costs as regulatory assets because we believe we will be allowed full recovery of or are currently recovering these costs in the rates that we charge customers. These deferred costs have been excluded from rate base and, therefore, we are not earning a return on the unamortized balances. Years Ended December 31, (Thousands of Dollars) Remaining Recovery Regulatory Assets 2004 2003 Periods ----------------- ------ ------ ------- Income Taxes $6,535 $6,786 Various Post-retirement Benefits 697 783 8 years Tank Painting 426 198 3-10 years Rate Cases and Other 541 449 Up to 3 years ------ ------ Total $8,199 $8,216 ====== ====== The recovery period for income taxes is dependent upon when the temporary differences between tax and book will reverse. The Company uses the composite deprecation method for its regulated utility operations, which is currently an acceptable method of accounting under generally accepted accounting principles and is widely used in the utility industry. Historically, under the composite deprecation method, the anticipated costs of removing assets upon retirement are provided for over the life of those assets as a component of depreciation expense. However, FASB Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143), precludes the recognition of expected future costs of removal as a component of depreciation expense unless they are legal obligations under SFAS 143. The Company recovers certain asset retirement costs through rates charged to customers as an approved component of deprecation expense. As of December 31, 2004 and 2003, the Company has approximately $5.4 million and $4.8 million, respectively, of cost of removal recovered in rates in excess of actual costs incurred. These amounts are included in regulatory liabilities. Bayview, Pinelands Water and Pinelands Wastewater are recovering the acquisition premium of $0.9 million over the remaining life of their Utility Plant. These deferred costs have been included in their rate bases as utility plant and are earning a return on the unamortized costs during the recovery periods. 37 Note 3 - Income Taxes Income tax expense differs from the amount computed by applying the statutory rate on book income subject to tax for the following reasons: Years Ended December 31, (Thousands of Dollars) 2004 2003 2002 ------------------------------------------------------------------------------- Income Tax at Statutory Rate of 34% $ 4,168 $ 3,355 $ 4,000 Tax Effect of: Utility Plant Related (500) (171) (123) State Income Taxes - Net 167 106 80 Employee Benefits (25) (67) 25 Other 4 14 17 ------------------------------------------------------------------------------- Total Income Tax Expense $ 3,814 $ 3,237 $ 3,999 ------------------------------------------------------------------------------- Income tax expense is comprised of the following: Current: Federal $ 3,128 $ 2,835 $ 3,730 State 83 95 82 Deferred: Federal 512 321 227 State 170 65 39 Investment Tax Credits (79) (79) (79) ------------------------------------------------------------------------------- Total Income Tax Expense $ 3,814 $ 3,237 $ 3,999 ------------------------------------------------------------------------------- The statutory review period for income tax returns for the years prior to 2001 has been closed. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax purposes. The components of the net deferred tax liability are as follows: Years Ended December 31, (Thousands of Dollars) 2004 2003 ------------------------------------------------------------------------------- Utility Plant Related $ 21,293 $ 20,522 Customer Advances (4,263) (4,218) Employee Benefits (2,568) (2,209) Other 94 31 -------------------------------------------------------------------------------- Total Deferred Tax Liability $ 14,556 $ 14,126 ------------------------------------------------------------------------------- The Company is required to set up deferred income taxes for all temporary differences regardless of the regulatory ratemaking treatment. Because management believes that it is probable that these additional taxes will be passed on to ratepayers, an offsetting regulatory asset of $6.5 million and $6.8 million has been recorded at December 31, 2004 and 2003 respectively. 38 Note 4 - Commitments and Contingent Liabilities Guarantees - USA-PA operates the City of Perth Amboy's (Perth Amboy) water and wastewater systems under a service contract agreement through June 30, 2018. The agreement was effected under New Jersey's Water Supply Public/Private Contracting Act and the New Jersey Wastewater Public/Private Contracting Act. Under the agreement, USA-PA receives a fixed fee and a variable fee based on increased system billing. Scheduled fixed fee payments for 2004, 2003 and 2002 were $7.4 million, $7.2 million and $6.9 million, respectively. The fixed fees will increase over the term of the contract to $10.2 million. In connection with the agreement, Perth Amboy, through the Middlesex County Improvement Authority, issued approximately $68.0 million in three series of bonds. Middlesex guaranteed one of those series of bonds, designated the Series C Serial Bonds, in the principal amount of approximately $26.3 million. Perth Amboy guaranteed the two other series of bonds. The Series C Serial Bonds have various maturity dates with the final maturity date on September 1, 2015. As of December 31, 2004, approximately $23.9 million of the Series C Serial Bonds remained outstanding. We are obligated to perform under the guarantee in the event notice is received from the Series C Serial Bonds trustee of an impending debt service deficiency. If Middlesex funds any debt service obligations as guarantor, there is a provision in the agreement that requires Perth Amboy to reimburse us. There are other provisions in the agreement that we believe make it unlikely that we will be required to perform under the guarantee, such as scheduled annual rate increases for water and wastewater services as well as rate increases due to unforeseen circumstances. In the event revenues from customers could not satisfy the reimbursement requirements, Perth Amboy has Ad Valorem taxing powers, which could be used to raise the needed amount. Franchise Agreement/Service Agreement - In 1999, Middlesex implemented a franchise agreement with the City of South Amboy (South Amboy) to provide water service and install water system facilities in South Amboy. The agreement between Middlesex and South Amboy was approved by the BPU. The implementation of the franchise agreement had significantly impacted two existing agreements entered into by the parties. The first agreement was for the sale of water to South Amboy on a wholesale basis. The second agreement, which included Middlesex's wholly-owned subsidiary USA, was a contract to provide management services for a fixed fee. In conjunction with the franchise agreement, the water sales contract was eliminated. In addition, the management services contract was extended through May 2045 and significantly modified to correspond with the terms and conditions of the franchise agreement. Fixed fee revenues recognized under the original contract have been eliminated effective December 1999, in lieu of revenues earned from providing water to South Amboy's 2,900 customers. Water Supply - Middlesex revised and extended its agreement with the New Jersey Water Supply Authority (NJWSA) for the purchase of untreated water, effective January 1, 2004. The agreement now expires November 30, 2023 and provides an average purchase of 27 million gallons a day (mgd) up from 20 mgd. Pricing has been modified to include a two tier pricing schedule for the original 20 mgd and the additional 7 mgd. In addition, the agreement has provisions for additional pricing in the event Middlesex overdrafts or exceeds certain monthly and annual thresholds. Middlesex also has an agreement with a nonaffiliated water utility for the purchase of treated water. This agreement, which expires December 31, 2005, provides for the minimum purchase of 3 mgd of treated water with provisions for additional purchases. 39 Purchased water costs are shown below: (Millions of Dollars) Years Ended December 31, Purchased Water 2004 2003 2002 --------------- ----- ----- ----- Untreated $ 2.2 $ 2.0 $ 1.9 Treated 2.0 1.8 1.8 ----- ----- ----- Total Costs $ 4.2 $ 3.8 $ 3.7 ===== ===== ===== Construction - Based on its capital budget, the Company plans to spend approximately $28.5 million in 2005, $29.5 million in 2006 and $16.4 million in 2007 on its construction program. Litigation - A lawsuit was filed in 1998 against the Company for damages involving the break of both a Company water line and an underground electric power cable containing both electric lines and petroleum based insulating fluid. The electric utility also asserted claims against the Company. The lawsuit was settled in 2003, and by agreement, the electric utility's counterclaim for approximately $1.1 million in damages was submitted to binding arbitration, in which the agreed maximum exposure of the Company is $0.3 million, which the Company has accrued for. While we are unable to predict the outcome of the arbitration, we believe that we have substantial defenses. A claim involving a construction subcontractor, the Company's general contractor and the Company concerning a major construction project was settled during October 2004. The matter was instituted in 2001, and related to work required to be performed under a construction contract and related subcontracts and included payment issues and timing/delay issues. The amount that was determined to be due from us for the work performed was $1.4 million and was recorded as an addition to utility plant in service during fiscal 2004. The Company is defendant in various lawsuits. 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. Note 5 - Short-term Borrowings Information regarding the Company's short-term borrowings for the years ended December 31, 2004 and 2003 is summarized below: (Millions of Dollars) 2004 2003 ---------------------------------------------------------------- Established Lines at Year-End $33.0 $25.0 Maximum Amount Outstanding 13.5 18.5 Average Outstanding 8.9 14.0 Notes Payable at Year-End 11.0 12.5 Weighted Average Interest Rate 2.37% 1.89% Weighted Average Interest Rate at Year-End 3.42% 1.64% Year-end interest rates on short-term borrowings outstanding ranged from 2.82% to 3.75% and 1.56% to 1.67% as of December 31, 2004 and 2003, respectively. The maturity dates for borrowings outstanding as of December 31, 2004 are: January 3, 2005- $7.0 million; January 21, 2005- $3.0 million; and March 14, 2005- $1.0 million. 40 The Board of Directors has authorized lines of credit for up to $40.0 million. Short-term borrowings are below the prime rate with some requirements for compensating balances not exceeding 1% of the line. Note 6 - Capitalization All the transactions discussed below related to the issuance of securities were approved by the BPU, except where noted. Common Stock In May 2004, the Company sold and issued 700,000 shares of its common stock in a public offering that was priced at $19.80. The majority of the net proceeds of approximately $12.9 million were used to repay most of the Company's short-term borrowings outstanding at that time. In August 2003, the Board of Directors approved a four-for-three stock split of its common stock, effective November 14, 2003 for shareholders of record on November 1, 2003. In October 2001, the Board of Directors approved a three-for-two common stock split effective January 2, 2002, for shareholders of record on December 14, 2001. All share, average number of shares and per share amounts of no par common stock on the financial statements have been restated to reflect the effect of both stock splits. The number of shares authorized under the Dividend Reinvestment and Common Stock Purchase Plan (DRP) is 1,700,000 shares. The cumulative number of shares issued under the DRP at December 31, 2004, is 1,316,725. In each of 2003 and 2002 for specific six month periods, DRP participants had the opportunity to purchase the Company's common stock at a 5% discount with reinvested dividends and optional cash payments. The Company also has a restricted stock plan, which is described in Note 7 - Employee Benefit Plans. In the event dividends on the preferred stock are in arrears, no dividends may be declared or paid on the common stock of the Company. At December 31, 2004, no preferred stock dividends were in arrears. Preferred Stock If four or more quarterly dividends are in arrears, the preferred shareholders, as a class, are entitled to elect two members to the Board of Directors in addition to Directors elected by holders of the common stock. At December 31, 2004 and 2003, 37,898 shares of preferred stock presently authorized were outstanding and there were no dividends in arrears. The conversion feature of the no par $7.00 Series Cumulative and Convertible Preferred Stock allows the security holders to exchange one convertible preferred share for twelve shares of the Company's common stock. In addition, the Company may redeem up to 10% of the outstanding convertible stock in any calendar year at a price equal to the fair market value of twelve shares of the Company's common stock for each share of convertible stock redeemed. The conversion feature of the no par $8.00 Series Cumulative and Convertible Preferred Stock allows the security holders to exchange one convertible preferred share for 13.714 shares of the Company's common stock. The preferred shares are convertible at the election of the security holder until 2004. After that date Middlesex also has the right to elect the conversion feature. Long-term Debt On March 24, 2004, Tidewater received approval from the PSC to borrow $0.8 million to fund a portion of its multi-year capital program. Subsequent to the PSC approval, Tidewater closed on a Delaware State Revolving Fund (SRF) loan of $0.8 million. The Delaware SRF program will allow, but does not obligate, Tidewater to 41 draw down against a General Obligation Note for three specific projects. Tidewater will be charged an annual fee, which is a combination of interest charges and administrative fees, of 3.30% on the outstanding principal amount. All unpaid principal and fees must be paid on or before March 1, 2026. Middlesex received approval from the BPU to issue up to $18.0 million of first mortgage bonds through the New Jersey Environmental Infrastructure Trust under the New Jersey SRF program. The Company closed on $16.6 million of First Mortgage Bonds designated as Series EE and FF on November 4, 2004. First Mortgage Bonds Series S through W and Series DD are term bonds with single maturity dates. The aggregate annual principal repayment obligations for all other long-term debt are shown below: (Millions of Dollars) Annual Annual Year Maturities Year Maturities ---- ---------- ---- ---------- 2005 $1.1 2008 $1.9 2006 $1.5 2009 $2.0 2007 $1.9 The weighted average interest rate on all long-term debt at December 31, 2004 and 2003 was 5.26% and 6.03%, respectively. Except for the Amortizing Secured Note and Series U First Mortgage Bonds, all of the Company's outstanding debt has been issued through the New Jersey Economic Development Authority ($57.5 million), the New Jersey Environmental Infrastructure Trust program ($27.9 million) and the SRF program ($3.1 million). Restricted cash includes proceeds from the Series Y, AA, BB, CC, EE and FF First Mortgage Bonds and State Revolving Trust Bonds issuances. These funds are held in trusts and restricted for specific capital expenditures and debt service requirements. Series BB and CC proceeds can only be used for the 2004 main cleaning and cement lining programs. Series EE and FF proceeds can only be used for the construction of a raw water pipeline and the 2005 and 2006 main cleaning and cement lining programs. Substantially all of the Utility Plant of the Company is subject to the lien of its mortgage, which also includes debt service and capital ratio covenants, certain restrictions as to cash dividend payments and other distributions on common stock. The Company is in compliance with all of its mortgage covenants and restrictions. Earnings Per Share The following table presents the calculation of basic and diluted earnings per share (EPS) for the three years ended December 31, 2004. Basic EPS are computed on the basis of the weighted average number of shares outstanding. Diluted EPS assumes the conversion of both the Convertible Preferred Stock $7.00 Series and $8.00 Series. All share and per share amounts reflect the three-for-two common stock split, effective January 2, 2002 and the four-for-three common stock split, effective November 14, 2003. 42
(In Thousands of Dollars, Except per Share Amounts) 2004 2003 2002 Basic: Income Shares Income Shares Income Shares -------------------------------------------------------------------------------------------------------------------- Net Income $ 8,446 11,080 $ 6,631 10,475 $ 7,765 10,280 Preferred Dividend (255) (255) (255) ------------------------------------------------------------------- Earnings Applicable to Common Stock $ 8,191 11,080 $ 6,376 10,475 $ 7,510 10,280 Basic EPS $ 0.74 $ 0.61 $ 0.73 Diluted: -------------------------------------------------------------------------------------------------------------------- Earnings Applicable to Common Stock $ 8,191 11,080 $ 6,376 10,475 $ 7,510 10,280 $7.00 Series Dividend 104 178 104 178 104 178 $8.00 Series Dividend 96 165 96 165 96 165 ------------------------------------------------------------------- Adjusted Earnings Applicable to Common Stock $ 8,391 11,423 $ 6,576 10,818 $ 7,710 10,623 Diluted EPS $ 0.73 $ 0.61 $ 0.73
Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments for which it is practicable to estimate that value. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, marketable securities, and trade receivables and payables approximate their respective fair values due to the short-term maturities of these instruments. The fair value of the Company's long-term debt relating to first mortgage bonds is based on quoted market prices for similar issues. The carrying amount and fair market value of the Company's bonds were as follows: (Thousands of Dollars) At December 31, 2004 2003 Carrying Fair Carrying Fair Amount Value Amount Value -------------------------------------------------------------------------------- First Mortgage Bonds $98,899 $101,968 $82,769 $85,734 State Revolving Bonds $ 1,442 $ 1,476 $ 1,511 $ 1,539 For other long-term debt for which there was no quoted market price, it was not practicable to estimate their fair value. The carrying amount of these instruments at December 31, 2004 and 2003 was $16.0 million and $14.2 million, respectively. Customer advances for construction have a carrying amount of $12.4 million and $11.7 million at December 31, 2004 and 2003, respectively. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases. Note 7 - Employee Benefit Plans Pension The Company has a noncontributory defined benefit pension plan, which covers substantially all employees with more than 1,000 hours of service. In addition, the Company maintains an unfunded supplemental pension 43 plan for its executives. The Accumulated Benefit Obligation for all pension plans at December 31, 2004 was $20.9 million. Postretirement Benefits Other Than Pensions The Company has a postretirement benefit plan other than pensions for substantially all of its retired employees. Coverage includes healthcare and life insurance. Retiree contributions are dependent on credited years of service. Accrued retirement benefit costs are recorded each year. The Company has recognized a deferred regulatory asset relating to the difference between the accrued retirement benefit costs and actual cash paid for plan premiums in years prior to 1998. Included in the regulatory asset is a transition obligation from adopting SFAS No.106 on January 1, 1993. In addition to the recognition of annual accrued retirement benefit costs in rates, Middlesex is also recovering the transition obligation over 15 years. The regulatory assets at December 31, 2004 and 2003, respectively were $0.7 million and $0.8 million. The Company uses a December 31 measurement date for all of its employee benefit plans. The following table sets forth information relating to the Company's pension plans and other postretirement benefits:
(Thousands of Dollars) Years Ended December 31, Pension Benefits Other Benefits 2004 2003 2004 2003 ------------------------------------------------------------------------------------------------------------ Reconciliation of Projected Benefit Obligation Beginning Balance $ 23,671 $ 19,677 $ 9,498 $ 7,437 Service Cost 746 684 426 263 Interest Cost 1,387 1,356 580 485 Actuarial (Gain)/Loss 1,516 3,039 1,028 1,645 Benefits Paid (1,221) (1,085) (399) (332) ------------------------------------------------------------------------------------------------------------ Ending Balance $ 26,099 $ 23,671 $ 11,133 $ 9,498 ------------------------------------------------------------------------------------------------------------ Reconciliation of Plan Assets at Fair Value Beginning Balance $ 18,587 $ 15,846 $ 2,582 $ 2,065 Actual Return on Plan Assets 1,497 2,768 190 15 Employer Contributions 647 1,058 1,057 834 Benefits Paid (1,221) (1,085) (399) (332) ------------------------------------------------------------------------------------------------------------ Ending Balance $ 19,510 $ 18,587 $ 3,430 $ 2,582 ------------------------------------------------------------------------------------------------------------ Funded Status $ (6,589) $ (5,084) $ (7,703) $(6,916) Unrecognized Net Transition Obligation -- -- 1,082 1,217 Unrecognized Net Actuarial (Gain)/Loss 2,655 1,144 4,835 4,076 Unrecognized Prior Service Cost 173 264 (3) (3) ------------------------------------------------------------------------------------------------------------ Accrued Benefit Cost $ (3,761) $ (3,676) $ (1,789) $(1,626) ------------------------------------------------------------------------------------------------------------
44
(Thousands of Dollars) Years Ended December 31, Pension Benefits Other Benefits 2004 2003 2002 2004 2003 2002 --------------------------------------------------------------------------------------------------------------------- Components of Net Periodic Benefit Cost Service Cost $ 746 $ 684 $ 724 $ 426 $ 263 $ 222 Interest Cost 1,387 1,356 1,300 580 485 463 Expected Return on Plan Assets (1,492) (1,272) (1,281) (213) (175) (125) Amortization of Net Transition Obligation -- -- 2 135 135 135 Amortization of Net Actuarial (Gain)/Loss -- -- -- 292 143 111 Amortization of Prior Service Cost 92 92 92 -- -- -- --------------------------------------------------------------------------------------------------------------------- Net Periodic Benefit Cost $ 733 $ 860 $ 837 $ 1,220 $ 851 $ 806 --------------------------------------------------------------------------------------------------------------------- 2004 2003 2002 2004 2003 2002 ------- ------- ------- ------- ------- ------- Actual Return on Plan Assets 8.18% 17.48% (9.47%) 6.53% 0.77% 1.38% Weighted Average Assumptions: Expected Return on Plan Assets 8.00% 8.00% 8.00% 7.50% 7.50% 7.50% Discount Rate for: Benefit Obligation 5.875% 6.00% 6.75% 5.875% 6.00% 6.75% Benefit Cost 6.00% 6.75% 7.25% 6.00% 6.75% 7.25% Compensation Increase for: Benefit Obligation 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% Benefit Cost 3.50% 3.50% 4.25% 3.50% 3.50% 4.25%
For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2004 and declining by 1.0% per year through 2007 and 0.5% per year to 5% by year 2009. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plan. A one-percentage point change in assumed healthcare cost trend rates would have the following effects:
(Thousands of Dollars) 1 Percentage Point Increase Decrease --------------------------------------------------------------------------------------- Effect on Current Year's Service and Benefit Cost $ 230 $ (173) Effect on Benefit Obligation 1,714 (1,338)
The following benefit payments, which reflect expected future service, are expected to be paid: Year Pension Benefits Other Benefits ---- ---------------- -------------- 2005 $ 1,282 $ 354 2006 1,269 367 2007 1,457 388 2008 1,509 414 2009 1,528 452 2010-2014 8,075 2,565 ------- ------ Totals $15,120 $4,540 ======= ====== Benefit Plans Assets The benefit plans asset allocations at December 31, 2004 and 2003, by asset category are as follows:
Pension Plan Other Benefits --------------- --------------- Asset Category 2004 2003 2004 2003 Target Range ----- ----- ----- ----- ------ ----- Equity Securities 62.8% 63.1% 54.0% -0- % 60% 30-65% Debt Securities 34.5 33.4 36.9 -0- % 38% 25-70% Cash 2.7 3.5 9.1 100.0% 2% 0-10% ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
45 Middlesex utilizes two investment firms to manage its pension plan asset portfolio. One of those investment firms manages the other post-retirement benefits assets. Quarterly meetings are held between the Company's Pension Committee and the investment managers to review their performance and asset allocation. If the current asset allocation is outside the targeted range, the Pension Committee reviews current market conditions and advice provided by the investment managers to determine the appropriateness of rebalancing the portfolio. The investment objective of the Company is to maximize its long-term return on benefit plan assets, relative to a reasonable level of risk, maintain a diversified investment portfolio and invest in compliance with the Employee Retirement Income Security Act of 1974. The expected long-term rate of return is based on the various asset categories in which it invests and the current expectations and historical performance for these categories. Equity securities include Middlesex common stock in the amounts of $0.7 million (3.8 percent of total plan assets) and $0.8 million (4.2 percent of total plan assets) at December 31, 2004 and 2003, respectively. For the pension plan, Middlesex made total cash contributions of $0.6 million in 2004 and expects to make cash contributions of approximately $0.8 million in 2005. For the other benefit plan, Middlesex made total cash contributions of $1.1 million in 2004 and expects to make cash contributions of approximately $1.2 million in 2005. 401(k) Plan The Company has a 401(k) defined contribution plan, which covers substantially all employees with more than 1,000 hours of service. Under the terms of the Plan, the Company matches 100% of a participant's contributions, which do not exceed 1% of a participant's compensation, plus 50% of a participant's contributions exceeding 1% but not more than 6%. The Company's matching contributions were $0.3 million in 2004, $0.3 million in 2003 and $0.2 million in 2002. Stock Based Compensation The Company maintains a Restricted Stock Plan, under which 65,233 shares of the Company's common stock are held in escrow by the Company for key employees. Such stock is subject to an agreement requiring forfeiture by the employee in the event of termination of employment within five years of the award other than as a result of retirement, death or disability. The maximum number of shares authorized for grant under this plan is 240,000 shares. Compensation expense is determined by the market value of the stock on the date of the award and is being amortized over a five-year period. Compensation expense for each of the years ended December 31, 2004, 2003 and 2002 was $0.3 million, $0.3 million and $0.2 million, respectively. The Company recognizes compensation expense at fair value for the restricted stock awards in accordance with SFAS No. 123 "Accounting for Stock-Based Compensation." 46 Note 8 - Business Segment Data The Company has identified two reportable segments. One is the regulated business of collecting, treating and distributing water on a retail and wholesale basis to residential, commercial, industrial and fire protection customers in parts of New Jersey and Delaware. It also operates a regulated wastewater system in New Jersey. The Company is subject to regulations as to its rates, services and other matters by the states of New Jersey and Delaware with respect to utility service within these states. The other segment is non-regulated contract services for the operation and maintenance of municipal and private water and wastewater systems in New Jersey and Delaware. Inter-segment transactions relating to operational costs are treated as pass-through expenses. Finance charges on inter-segment loan activities are based on interest rates that are below what would normally be charged by a third party lender. (Thousands of Dollars) Twelve Months Ended December 31, Operations by Segments: 2004 2003 2002 ------------------------------------------------------------------------------- Revenues: Regulated $ 60,745 $ 55,707 $ 54,398 Non - Regulated 10,366 8,500 7,576 Inter-segment Elimination (120) (96) (41) ------------------------------------------------------------------------------- Consolidated Revenues $ 70,991 $ 64,111 $ 61,933 ------------------------------------------------------------------------------- Operating Income: Regulated $ 12,569 $ 11,013 $ 12,032 Non - Regulated 550 487 435 ------------------------------------------------------------------------------- Consolidated Operating Income $ 13,119 $ 11,500 $ 12,467 ------------------------------------------------------------------------------- Depreciation: Regulated $ 5,762 $ 5,308 $ 4,925 Non - Regulated 84 55 38 ------------------------------------------------------------------------------- Consolidated Depreciation $ 5,846 $ 5,363 $ 4,963 ------------------------------------------------------------------------------- Other Income, Net: Regulated $ 892 $ 506 $ 474 Non - Regulated (1) (33) 22 Inter-segment Elimination (96) (116) (54) ------------------------------------------------------------------------------- Consolidated Other Income, Net $ 795 $ 357 $ 442 ------------------------------------------------------------------------------- Interest Expense: Regulated $ 5,469 $ 5,227 $ 5,143 Non - Regulated 96 116 54 Inter-segment Elimination (96) (116) (54) ------------------------------------------------------------------------------- Consolidated Interest Charges $ 5,469 $ 5,227 $ 5,143 ------------------------------------------------------------------------------- Net Income: Regulated $ 7,993 $ 6,292 $ 7,361 Non - Regulated 453 339 404 ------------------------------------------------------------------------------- Consolidated Net Income $ 8,446 $ 6,631 $ 7,765 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Capital Expenditures: Regulated $ 28,669 $ 17,005 $ 15,827 Non - Regulated 210 572 429 ------------------------------------------------------------------------------- Total Capital Expenditures $ 28,879 $ 17,577 $ 16,256 ------------------------------------------------------------------------------- As of As of December 31, December 31, 2004 2003 -------------------------------------------------------------------------------- Assets: Regulated $302,765 $264,453 Non - Regulated 4,943 5,223 Inter-segment Elimination (2,074) (1,720) -------------------------------------------------------------------------------- Consolidated Assets $305,634 $267,956 -------------------------------------------------------------------------------- 47 Note 9 - Quarterly Operating Results - Unaudited Quarterly operating results for 2004 and 2003 are as follows: (Thousands of Dollars, Except per Share Data) 1st 2nd 3rd 4th Total 2004 -------------------------------------------------------------------------------- Operating Revenues $15,876 $17,770 $19,856 $17,489 $70,991 Operating Income 2,220 3,110 4,497 3,292 13,119 Net Income 1,034 1,890 3,362 2,160 8,446 Basic Earnings per Share $ 0.09 $ 0.17 $ 0.29 $ 0.19 $ 0.74 Diluted Earnings per Share $ 0.09 $ 0.16 $ 0.29 $ 0.19 $ 0.73 2003 -------------------------------------------------------------------------------- Operating Revenues $14,981 $15,998 $17,586 $15,546 $64,111 Operating Income 2,376 3,108 3,500 2,516 11,500 Net Income 1,225 1,804 2,393 1,209 6,631 Basic Earnings per Share $ 0.11 $ 0.17 $ 0.22 $ 0.11 $ 0.61 Diluted Earnings per Share $ 0.11 $ 0.17 $ 0.22 $ 0.11 $ 0.61 The information above, in the opinion of the Company, includes all adjustments consisting only of normal recurring accruals necessary for a fair presentation of such amounts. The business of the Company is subject to seasonal fluctuation with the peak period usually occurring during the summer months. Note 10 - Restatement of Consolidated Financial Statements On November 5, 2005 and subsequent to the issuance of the Company's Form 10-K for the year ended December 31, 2004, management determined that the previously filed Consolidated Balance Sheets and Statements of Cash Flows needed to be restated. The Consolidated Balance Sheets as of December 31, 2004 and 2003, reflect the non-cash contributions of utility plant from developers and the related construction advance or contributions as of the date the Company took ownership of the property. Previously, the Company recorded the contributions as of the date the cost information regarding the contributed property was received from the developer. The Consolidated Statements of Cash Flows for the three years ended December 31, 2004 reflect only the related cash activity for construction advances and contributions of utility plant. Additionally, the Company has included supplemental non-cash disclosure related to utility plant contributions by developers. Previously, the Company incorrectly included non-cash activity for construction advances and contributions of utility plant as cash outflows from investing activities and cash inflows from financing activities. The restatement does not have any effect on net income, earnings applicable to common stock, cash flow from operations, or liquidity. A summary of the significant effects of the restatement is as follows: Consolidated Balance Sheet Effects:
December 31, 2004 December 31, 2003 ----------------- ----------------- As Previously As As Previously As Reported Restated Reported Restated -------- -------- -------- -------- Utility Plant - Transmission and Distribution $188,026,091 $194,531,035 $174,455,437 $179,219,783 Total Assets 299,129,098 305,634,042 263,191,935 267,956,281 Customer Advances for Construction 12,366,060 14,018,006 11,711,846 12,838,342 Contributions in Aid of Construction 16,597,918 21,450,916 15,973,563 19,611,413 Total Capitalization and Liabilities 299,129,098 305,634,042 263,191,935 267,956,281 48 Consolidated Statement of Cash Flows Effects: Year Ended Year Ended Year Ended December 31, 2004 December 31, 2003 December 31, 2002 ----------------- ----------------- ----------------- As Previously As As Previously As As Previously As Reported Restated Reported Restated Reported Restated -------- -------- -------- -------- -------- -------- Utility Plant Expenditures $(29,860,100) $(28,878,576) $(19,574,205) $(17,576,634) $(16,489,095) $(16,255,866) Net Cash Used in Investing Activities (39,217,034) (38,235,510) (17,515,982) (15,518,411) (13,872,562) (13,639,333) Construction Advances and Contributions - Net 1,278,569 297,045 1,897,803 (99,768) 874,205 640,976 Net Cash Provided by Financing Activities 24,687,170 23,705,646 3,335,271 1,337,700 1,077,069 843,840 Supplemental Disclosure of Non-Cash Activity: Utility Plant received as Construction Advances and Contributions $ -- $ 2,722,121 $ -- $ 3,753,037 $ -- $ 1,042,529
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures (1) The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of the end of the period covered by this annual report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, solely due to the material weakness described below under (2) Management's Report on Internal Control Over Financial Reporting, the Company's disclosure controls and procedures were not effective as of the end of the period covered by this annual report. This matter and its resolution has been discussed with the Audit Committee of the Company's Board of Directors. Based on the foregoing, in connection with this Annual Report on Form 10-K/A, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's internal controls over financial reporting were not effective as of the period covered by this annual report. Subsequent to the period covered by this report, in connection with the discovery of errors related to recording and reporting construction advances and contributions for utility plant, and conclusion that the Company had a material weakness in its internal control over financial reporting, the Company implemented procedures related to recording non-cash contributions of utility assets from developers, expanded its periodic review process of non-cash activities and expanded its review of the presentation of non-cash transactions. Management believes these changes will remediate the material weakness that led to the restatement and enhance the reliability and effectiveness of the financial reporting process. Accordingly, management believes that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented. 49 There were no other changes in the Company's internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the quarter ended December 31, 2004, that have materially affected or that are reasonably likely to materially affect the Company's internal control over financial reporting. (2) Management's Report on Internal Control Over Financial Reporting (as revised) The management of Middlesex Water Company (Middlesex or the Company) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13A-15(f) and 15d-15(f). Middlesex's internal control system was designed to provide reasonable assurance to the Company's management and Board of Directors regarding the adequate preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the adequacy of financial statement preparation and presentation. In the Company's 2004 annual report on Form 10-K, filed on March 16, 2005, management of the Company included Management's Report on Internal Control Over Financial Reporting, which expressed a conclusion by management that as of December 31, 2004, the Company's internal control over financial reporting was effective. As of result of the restatement of its financial statements, as described further in Note 10 of the Notes to Consolidated Financial Statements, management has concluded that a material weakness in internal control over financial reporting existed as of December 31, 2004 and, accordingly, has revised its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004. A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Due to the circumstances described in Note 10 of the Notes to Consolidated Financial Statements, the management of Middlesex Water Company has concluded that a material weakness existed in the Company's internal control over financial reporting as of December 31, 2004 as defined under standards established by the Public Company Accounting Oversight Board. Specifically, there were ineffective controls to record non-cash contributions of utility plant from developers and disclosure of these non-cash transactions in the statement of cash flows. These errors resulted in the restatement of the Company's Consolidated Balance Sheets as of December 31, 2004 and 2003 and Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002. In making this revised assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control- Integrated Framework. Based on those criteria and management's revised assessment, management concludes that the Company did not maintain effective internal control over financial reporting as of December 31, 2004, solely as a result of the material weakness described above. Subsequent to December 31, 2004, the Company completed a comprehensive review of the recording of non-cash contributions of utility plant from developers and disclosure of these non-cash transactions in the statement of cash flows. As a result of this remediation effort, in the Company's best judgment, it has remediated the aforementioned material weakness. 50 Middlesex's independent registered public accounting firm has issued their report on our revised assessment of the Company's internal control over financial reporting. This report appears on pages 51 through 53. /s/ Dennis G. Sullivan /s/ A. Bruce O'Connor --------------------------- -------------------------- Dennis G. Sullivan A. Bruce O'Connor President Vice President and Chief Financial Officer Iselin, New Jersey November 18, 2005 (3) Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Middlesex Water Company: We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting (as revised), that Middlesex Water Company and subsidiaries (the Company) did not maintain effective internal control over financial reporting as of December 31, 2004, because of the effect of the material weakness identified in management's assessment based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. 51 Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our report dated March 15, 2005, we expressed an unqualified opinion on management's assessment that the Company maintained effective internal control over financial reporting and an unqualified opinion on the effectiveness of internal control over financial reporting. As described in the following paragraph, the Company subsequently identified material misstatements in its 2002, 2003, and 2004 annual financial statements and 2004 interim financial statements, which caused such annual financial statements to be restated. Management subsequently revised its assessment due to the identification of a material weakness, described in the following paragraph, in connection with the financial statement restatement. Accordingly, our opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 expressed herein is different from that expressed in our previous report. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management's revised assessment: there were ineffective controls to record non-cash contributions of utility plant from developers and disclosure of these non-cash transactions in the statement of cash flows. This material weakness resulted in the restatement of the Company's previously issued annual financial statements as described more fully in Note 10 of the Notes to Consolidated Financial Statements. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2004 (as restated), of the Company and this report does not affect our report on such restated financial statements. In our opinion, management's revised assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weakness described above on the achievement of objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We do not express an opinion or any other form of assurance on management's statements regarding the remediation of the material weakness included in paragraph six of Management's Report on Internal Control Over Financial Reporting (as revised). 52 We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and consolidated statements of capital stock and long-term debt of the Company as of December 31, 2004, and the related consolidated statements of income, common stockholders' equity and comprehensive income, and cash flows for the year ended December 31, 2004 and our report dated March 15, 2005 (November 14, 2005 as to the effects of the restatement described in Note 10 of the Notes to Consolidated Financial Statements) expressed an unqualified opinion on those consolidated financial statements and includes an explanatory paragraph relating to the restatement described in Note 10. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey March 15, 2005 (November 14, 2005 as to the effect of the material weakness described in Management's Report on Internal Control Over Financial Reporting (as revised)) Item 9B. Other Information. None. 53 PART III Item 10. Directors and Executive Officers of the Registrant. Information with respect to Directors of Middlesex Water Company is included in Middlesex Water Company's Proxy Statement for the 2005 Annual Meeting of Stockholders and is incorporated herein by reference. Information regarding the Executive Officers of Middlesex Water Company is included under Item 1. in Part I of this annual report. Item 11. Executive Compensation. This Information for Middlesex Water Company is included in Middlesex Water Company's Proxy Statement for the 2005 Annual Meeting of Stockholders and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. This information for Middlesex Water Company is included in Middlesex Water Company's Proxy Statement for the 2005 Annual Meeting of Stockholders and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. This information for Middlesex Water Company is included in Middlesex Water Company's Proxy Statement for the 2005 Annual Meeting of Stockholders and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services. This information for Middlesex Water Company is included in Middlesex Water Company's Proxy Statement for the 2005 Annual Meeting of Stockholders and is incorporated herein by reference. 54 PART IV Item 15. Exhibits and Financial Statement Schedules. 1. The following Financial Statements and Supplementary Data are included in Part II- Item 8. of this annual report: Consolidated Balance Sheets at December 31, 2004 and 2003 (as restated). Consolidated Statements of Income for each of the three years in the period ended December 31, 2004, 2003 and 2002. Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2004, 2003 and 2002 (as restated). Consolidated Statements of Capital Stock and Long-term Debt at December 31, 2004 and 2003. Consolidated Statements of Common Stockholders Equity and Comprehensive Income for each of the three years in the period ended December 31, 2004, 2003 and 2002. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules ----------------------------- All Schedules are omitted because of the absence of the conditions under which they are required or because the required information is shown in the financial statements or notes thereto. 3. Exhibits -------- See Exhibit listing immediately following the signature page. 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIDDLESEX WATER COMPANY By: /s/ Dennis G. Sullivan ----------------------------------------------- Dennis G. Sullivan President, Chief Executive Officer and Director Date: November 18, 2005 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrant and in the capacities on November 18, 2005. By: /s/ A. Bruce O'Connor ----------------------------------------------- A. Bruce O'Connor Vice President and Chief Financial Officer By: /s/ J. Richard Tompkins ----------------------------------------------- J. Richard Tompkins Chairman of the Board and Director By: /s/ Dennis G. Sullivan ----------------------------------------------- Dennis G. Sullivan President, Chief Executive Officer and Director By: /s/ Annette Catino ----------------------------------------------- Annette Catino Director By: /s/ John C. Cutting ----------------------------------------------- John C. Cutting Director By: /s/ John R. Middleton ----------------------------------------------- John R. Middleton Director By: /s/ John P. Mulkerin ----------------------------------------------- John P. Mulkerin Director By: /s/ Walter G. Reinhard ----------------------------------------------- Walter G. Reinhard Director By: /s/ Jeffries Shein ----------------------------------------------- Jeffries Shein Director 56 EXHIBIT INDEX Exhibits designated with an asterisk (*) are filed herewith. The exhibits not so designated have heretofore been filed with the Commission and are incorporated herein by reference to the documents indicated in the previous filing columns following the description of such exhibits. Exhibits designated with a dagger (t) are management contracts or compensatory plans.
Previous Filing's Registration Exhibit Exhibit No. Document Description No. No. ================================================================================================================= 3.1 Certificate of Incorporation of the Company, as amended, filed as Exhibit 3.1 of 1998 Form 10-K. 3.2 Bylaws of the Company, as amended 33-54922 3.2 3.3 Certificate of Correction of Middlesex Water Company filed with the State of New Jersey on April 30, 1999, filed as Exhibit 3.3 of 2003 Form 10-K. 3.4 Certificate of Amendment to the Restated Certificate of Incorporation Middlesex Water Company, filed with the State of New Jersey on February 17, 2000, filed as Exhibit 3.4 of 2003 Form 10-K. 3.5 Certificate of Amendment to the Restated Certificate of Incorporation Middlesex Water Company, filed with the State of New Jersey on June 5, 2002, filed as Exhibit 3.5 of 2003 Form 10-K. 4.1 Form of Common Stock Certificate. 2-55058 2(a) 4.2 Registration Statement, Form S-3, under Securities Act of 1933 filed February 3, 1987, relating to the Dividend Reinvestment and Common Stock Purchase Plan. 33-11717 4.3 Revised Prospectus relating to the Dividend Reinvestment and Common Stock Purchase Plan, Submitted to the Securities and Exchange Commission, January 20, 2000. 33-11717 4.4 Post Effective Amendments No. 7, Form S-3, under Securities Act of 1933 filed February 1, 2002, relating to the Dividend Reinvestment and Common Stock Purchase Plan. 33-11717 10.1 Copy of Purchased Water Agreement between the Company and Elizabethtown Water Company, filed as Exhibit 10.1 of 1996 Form 10-K. 10.2 Copy of Mortgage, dated April 1, 1927, between the Company and Union County Trust Company, as Trustee, as supplemented by Supplemental Indentures, dated as of October 1, 1939 and April 1, 1949. 2-15795 4(a)-4(f) 10.3 Copy of Supplemental Indenture, dated as of July 1, 1964 and June 15, 1991, between the Company and Union County Trust Company, as Trustee. 33-54922 10.4-10.9 10.4 Copy of Supply Agreement, dated as of November 17, 1986, between the Company and the Old Bridge Municipal Utilities Authority. 33-31476 10.12 10.5 Copy of Supply Agreement, dated as of July 14, 1987, between the Company and the Marlboro Township Municipal Utilities Authority, as amended. 33-31476 10.13
57 EXHIBIT INDEX
Previous Filing's Registration Exhibit Exhibit No. Document Description No. No. ================================================================================================================= 10.6 Copy of Supply Agreement, dated as of February 11, 1988, with modifications dated February 25, 1992, and April 20, 1994, between the Company and the Borough of Sayreville filed as Exhibit No. 10.11 of 1994 First Quarter Form 10-Q. 10.7 Copy of Water Purchase Contract, dated as of September 25, 2003, between the Company and the New Jersey Water Supply Authority, filed as Exhibit No. 10.7 of 2003 Form 10-K. 10.8 Copy of Treating and Pumping Agreement, dated April 9, 1984, between the Company and the Township of East Brunswick. 33-31476 10.17 10.9 Copy of Supply Agreement, dated June 4, 1990, between the Company and Edison Township. 33-54922 10.24 10.10 Copy of Supply Agreement, between the Company and the Borough of Highland Park, filed as Exhibit No. 10.15 of 1996 Form 10-K. (t)10.11 Copy of Supplemental Executive Retirement Plan, filed as Exhibit 10.13 of 1999 Third Quarter Form 10-Q. (t)10.12 Copy of 1989 Restricted Stock Plan, filed as Appendix B to the Company's Definitive Proxy Statement, dated and filed April 25, 1997. 33-31476 10.22 (t)10.13(a) Employment Agreement between Middlesex Water Company and Dennis G. Sullivan, filed as Exhibit 10.15(f) of 1999 Third Quarter Form 10-Q. (t)10.13(b) Employment Agreement between Middlesex Water Company and A. Bruce O'Connor, filed as Exhibit 10.15(c) of 1999 Third Quarter Form 10-Q. (t)10.13(d) Employment Agreement between Middlesex Water Company and Richard M. Risoldi, filed as Exhibit 10.13(d) of 2003 Form 10-K. (t)10.13(e) Employment Agreement between Middlesex Water Company and Kenneth J. Quinn, filed as Exhibit 10.13(e) of 2003 Form 10-K. (t)10.13(f) Employment Agreement between Middlesex Water Company and James P. Garrett, filed as Exhibit 10.13(f) of 2003 Form 10-K. (t)10.13(g) Employment Agreement between Tidewater Utilities, Inc. and Gerard L. Esposito, filed as Exhibit 10.13(g) of 2003 Form 10-K. (t)10.13(h) Consulting Agreement between Middlesex Water Company and J. Richard Tompkins, filed as Exhibit 10.13(h) of 2003 Form 10-K. (t)*10.13(i) Employment Agreement between Middlesex Water Company and Dennis W. Doll.
58 EXHIBIT INDEX
Previous Filing's Registration Exhibit Exhibit No. Document Description No. No. ================================================================================================================= 10.14 Copy of Transmission Agreement, dated October 16, 1992, between the Company and the Township of East Brunswick. 33-54922 10.23 10.15 Copy of Supplemental Indentures, dated September 1, 1993, (Series S & T) and January 1, 1994, (Series U & V), between the Company and United Counties Trust Company, as Trustee, filed as Exhibit No. 10.22 of 1993 Form 10-K. 10.16 Copy of Trust Indentures, dated September 1, 1993, (Series S & T) and January 1, 1994, (Series V), between the New Jersey Economic Development Authority and First Fidelity Bank (Series S & T), as Trustee, and Midlantic National Bank (Series V), as Trustee, filed as Exhibit No. 10.23 of 1993 Form 10-K. 10.17 Copy of Supplemental Indenture dated October 15, 1998 between Middlesex Water Company and First Union National Bank, as Trustee. Copy of Loan Agreement dated November 1, 1998 between the New Jersey and Middlesex Water Company (Series X), filed as Exhibit No. 10.22 of the 1998 Third Quarter Form 10-Q. 10.18 Copy of Supplemental Indenture dated October 15, 1998 between Middlesex Water Company and First Union National Bank, as Trustee. Copy of Loan Agreement dated November 1, 1998 between the State of New Jersey Environmental Infrastructure Trust and Middlesex Water Company (Series Y), filed as Exhibit No. 10.23 of the 1998 Third Quarter Form 10-Q. 10.19 Copy of Operation, Maintenance and Management Services Agreement dated January 1, 1999 between the Company City of Perth Amboy, Middlesex County Improvement Authority and Utility Service Affiliates, Inc. 333-66727 10.24 10.20 Copy of Supplemental Indenture dated October 15, 1999 between Middlesex Water Company and First Union National Bank, as Trustee and copy of Loan Agreement dated November 1, 1999 between the State of New Jersey and Middlesex Water Company (Series Z), filed as Exhibit No. 10.25 of the 1999 Form 10-K. 10.21 Copy of Supplemental Indenture dated October 15, 1999 between Middlesex Water Company and First Union National Bank, as Trustee and copy of Loan Agreement dated November 1, 1999 between the New Jersey Environmental Infrastructure Trust and Middlesex Water Company (Series AA), filed as Exhibit No. 10.26 of the 1999 Form 10-K.
59 EXHIBIT INDEX
Previous Filing's Registration Exhibit Exhibit No. Document Description No. No. ================================================================================================================= 10.22 Copy of Supplemental Indenture dated October 15, 2001 between Middlesex Water Company and First Union National Bank, as Trustee and copy of Loan Agreement dated November 1, 2001 between the State of New Jersey and Middlesex Water Company (Series BB). Filed as Exhibit No. 10.22 of the 2001 Form 10-K. 10.23 Copy of Supplemental Indenture dated October 15, 2001 between Middlesex Water Company and First Union National Bank, as Trustee and copy of Loan Agreement dated November 1, 2001 between the New Jersey Environmental Infrastructure Trust and Middlesex Water Company (Series CC). Filed as Exhibit No. 10.22 of the 2001 Form 10-K. 10.24 Copy of Supplemental Indenture dated January 15, 2002 between Middlesex Water Company and First Union National Bank, as Trustee and copy of Loan Agreement dated January 1, 2002 between the New Jersey Economic Development Authority and Middlesex Water Company (Series DD), filed as Exhibit No. 10.24 of the 2001 Form 10-K. 10.25 Copy of Supplemental Indenture dated March 1, 1998 between Middlesex Water Company and First Union National Bank, as Trustee. Copy of Trust Indenture dated March 1, 1998 between the New Jersey Economic Development Authority and PNC Bank, National Association, as Trustee (Series W), filed as Exhibit No. 10.21 of the 1998 Third Quarter Form 10-Q. *10.26 Copy of Supplemental Indenture dated October 15, 2004 between Middlesex Water Company and Wachovia Bank, as Trustee and copy of Loan Agreement dated November 1, 2004 between the State of New Jersey and Middlesex Water Company (Series EE). *10.27 Copy of Supplemental Indenture dated October 15, 2004 between Middlesex Water Company and Wachovia Bank, as Trustee and copy of Loan Agreement dated November 1, 2004 between the New Jersey Environmental Infrastructure Trust and Middlesex Water Company (Series FF). *21 Middlesex Water Company Subsidiaries. *23 Consent of Independent Registered Public Accounting Firm. *31 Section 302 Certification by Dennis G. Sullivan pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934. *31.1 Section 302 Certification by A. Bruce O'Connor pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
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Previous Filing's Registration Exhibit Exhibit No. Document Description No. No. ================================================================================================================= *32 Section 906 Certification by Dennis G. Sullivan pursuant to 18 U.S.C. ss.1350. *32.1 Section 906 Certification by A. Bruce O'Connor pursuant to 18 U.S.C. ss.1350.
61