SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For the Fiscal Year ended December 31, 2001 No. 0-422
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MIDDLESEX WATER COMPANY
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(Exact name of registrant as specified in its charter)
New Jersey 22-1114430
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 Ronson Road, Iselin, New Jersey 08830-3020
(Address of principal executive offices) (Zip Code)
(732) 634-1500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
- ------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par Value
--------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ]. NO [ ] .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant at March 15, 2002 was $177,847,191 based on the closing market price
of $23.22 per share.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 15, 2002
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Common Stock, No par Value 7,659,224
Documents Incorporated by Reference
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Proxy Statement to be filed in connection with the Registrant's Annual Meeting
of Shareholders to be held on May 22, 2002 as to Part III.
MIDDLESEX WATER COMPANY
FORM 10-K
INDEX
PAGE
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PART I
Item 1. Business: 1
General 1
Retail Sales 1
Contract Sales 2
Contract Services 2
Financial Information 3
Water Supplies and Contracts 3
Competition 5
Regulation 5
Regulation of Rates and Services 5
Water Quality and Environmental Regulations 6
Employees 6
Executive Officers of Middlesex Water Company 6
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote
of Security Holders 10
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters: 10
Price Range of Common Stock
Approximate Number of Equity Security 10
Holders as of December 31, 2001
Dividends
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 7a. Qualitative and Quantitative Disclosure About
Market Risk 17
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 18
PART III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners
and Management 18
Item 13. Certain Relationships and Related Transactions 18
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 19
Signatures 41
Exhibit Index 42-45
PART I
Item 1. Business
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Overview
Middlesex Water Company (together with its subsidiaries, the "Company") has
operated as a water utility in New Jersey since 1897, and in Delaware, through
its wholly-owned subsidiary, Tidewater Utilities, Inc. (Tidewater), since 1992.
The Company is in the business of collecting, treating and distributing and
selling water for domestic, commercial, municipal, industrial and fire
protection purposes. The Company also operates a New Jersey municipal water and
sewer system under contract. In addition, the Company provides wastewater
services in New Jersey.
Prior to 1995, the Company provided water services to customers primarily
located in eastern Middlesex County, New Jersey and New Castle, Kent and Sussex
Counties in Delaware. In April 1995, the Company, through two wholly-owned New
Jersey subsidiaries, Pinelands Water Company and Pinelands Wastewater Company
(jointly "Pinelands") completed an asset purchase of a 2,300-customer water
utility and a 2,300-customer wastewater utility in Burlington County, New
Jersey. In December 1998, the Company and another of its wholly-owned New Jersey
subsidiaries, Utility Service Affiliates (Perth Amboy) Inc. ("USA-PA"), jointly
entered into a twenty-year contract with the City of Perth Amboy, New Jersey to
operate and maintain the City's 9,300-customer water and 9,300-customer
wastewater system. See Contract Services below. In April 2001, the Company,
through another of its wholly-owned New Jersey subsidiaries, Bayview Water
Company, completed an asset purchase of a 300-customer water utility in
Cumberland County, New Jersey. Most recently, in August 2001, the Company,
through Tidewater, completed the acquisition of Southern Shores Water Company,
L.L.C. (which formerly known as Sea Colony Water Company L.L.C.), a
2,100-customer system in Southern Delaware.
The Company (including each of its subsidiaries with the exception of Utility
Service Affiliates, Inc. and USA-PA) is regulated as to rates charged to
customers for water and wastewater services, as to the quality of water provided
and as to other matters. The operating results of the Company are materially
affected by the timing and amount of rate increases approved by the regulatory
authorities to offset the cost of capital and increasing costs of operation and
construction.
The Company's principal executive offices are located at 1500 Ronson Road,
Iselin, New Jersey 08830 (telephone (732) 634-1500).
Retail Sales
------------
Retail sales produced approximately 72% of the Company's total revenue in 2001.
Middlesex System:
The Company's Middlesex System provides water services to retail customers
primarily in eastern Middlesex County, New Jersey and, as described below, also
provides water under contract, on a wholesale basis. See Contract Sales below.
The Middlesex System, through its retail and contract sales operations, produced
1
approximately 75% of the Company's total revenue in 2001. Water services are
currently furnished to approximately 57,000 retail customers located in an area
of approximately 55 square miles of New Jersey 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.
Pinelands System:
The Company's Pinelands System, which produced approximately 2% of the Company's
total revenue in 2001, currently provides water and wastewater services to
approximately 2,300 retail customers in Burlington County, New Jersey.
Bayview System:
The Company's newly-acquired Bayview System, which produced less than 1% of the
Company's total revenue in 2001, currently provides water services to
approximately 300 retail customers in Cumberland County, New Jersey.
Tidewater System:
The Company's Tidewater System, which produced approximately 10% of the
Company's total revenue in 2001, currently provides water services to
approximately 19,000 (including Southern Shores) retail customers for domestic,
commercial and fire protection purposes in over 150 community water systems
located in Kent, Sussex and New Castle Counties in Delaware.
Contract Sales
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Contract sales produced approximately 15% of the Company's total revenue in
2001.
As alluded to above, the Company's Middlesex System also provides water on a
wholesale basis in New Jersey to the Township of Edison (Edison), the Borough of
Highland Park (Highland Park), the Old Bridge Municipal Utilities Authority (Old
Bridge), the Borough of Sayreville (Sayreville) and the Marlboro Township
Municipal Utilities Authority (Marlboro). Under special contract, the Middlesex
System also provides water treatment and pumping services to the Township of
East Brunswick (East Brunswick). These municipal contract customers comprise an
area of approximately 141 square miles and have a total population of
approximately 267,000. The contract sales to Edison, Old Bridge, Sayreville and
Marlboro are supplemental to the existing water systems of these customers. The
State of New Jersey in the mid-1980's approved plans to increase available
surface water supply to the South River Basin area of the State to permit a
reduced use of ground water in this area. The Middlesex System provides treated
surface water under long-term agreements to East Brunswick, Marlboro, Old Bridge
and Sayreville consistent with the State approved plan.
Contract Services
-----------------
Contract services produced approximately 12% of the Company's total revenue in
2001.
Since January 1, 1999, USA-PA, along with Middlesex Water Company, has operated
and maintained the City of Perth Amboy's water system and wastewater system
under a 20-year contract. Middlesex Water Company has guaranteed the performance
of USA-PA under the contract. USA-PA is paid a fixed fee and a variable fee
2
based on increased system billings. Pursuant to the contract, fixed fee payments
to USA-PA were $7.1 million in 2001 and will increase to $9.7 million by year
20. The agreement also requires USA-PA to lease from Perth Amboy all of Perth
Amboy's employees who work on Perth Amboy's water system or wastewater system.
In connection with the agreement, Perth Amboy, through the Middlesex County
Improvement Authority, issued $68.0 million in three series of bonds. One of
those series of bonds, in the principal amount of $26.3 million, was guaranteed
by the Company. Perth Amboy guaranteed the two other series of bonds. USA-PA
entered into a subcontract with a wastewater contracting firm for the operation
and maintenance of Perth Amboy's wastewater system. USA-PA subleases to the
subcontractor those Perth Amboy employees who work on Perth Amboy's wastewater
system.
In May 1995, USA and Middlesex Water Company entered into two contracts with the
City of South Amboy (South Amboy) to operate, manage and maintain the city's
2,600-customer water system and to provide water to city on a wholesale basis.
In December 1999, the Company and South Amboy entered into a franchise agreement
to provide water service and install water system facilities in South Amboy.
Following the execution of the franchise agreement, all that survived of the
original 1995 contracts was a management services contract, which was extended
through 2045. However, in consideration for the franchise agreement, the Company
forgave certain advances made by USA to South Amboy at the commencement of the
management services contract and eliminated the fixed fee revenues that were to
be recognized under such contract in lieu of revenues that were to be derived
from providing water to South Amboy's 2,600 customers.
Financial Information
Consolidated operating revenues and operating income relating primarily to
operating water utilities are as follows:
(000's)
Years Ended December 31,
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2001 2000 1999
Operating Revenues $59,638 $54,477 $53,497
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Operating Income $11,493 $ 9,938 $10,665
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Operating revenues were earned from the following sources:
Years Ended December 31,
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2001 2000 1999
Residential 38.4% 37.9% 36.9%
Commercial 10.2 10.4 10.2
Industrial 12.6 13.1 12.1
Fire Protection 10.4 10.7 10.2
Contract Sales 14.8 14.3 15.6
Contract Operations 12.2 12.6 14.0
Other 1.4 1.0 1.0
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TOTAL 100.0% 100.0% 100.0%
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Water Supplies and Contracts
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The Company's water utility plant consists of source of supply, pumping, water
treatment, transmission, distribution and general facilities located in New
Jersey and Delaware. The Company's New Jersey and Delaware water supply systems
3
are physically separate and are not interconnected. In addition, the Pinelands
System and Bayview System are not interconnected to the Middlesex System or each
other. In the opinion of management, the Company has adequate sources of water
supply to meet the current and anticipated future service requirements of its
present customers in New Jersey and Delaware.
Middlesex System:
The Company's Middlesex System obtains water from both surface and groundwater
sources. In 2001, surface sources of water provided approximately 72% of the
Middlesex System's water supply, groundwater from wells provided approximately
21% and the balance of 7% was purchased from Elizabethtown Water Company
(Elizabethtown), 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 supply for the Middlesex System is the Delaware
and Raritan Canal (D&R Canal), owned by the State of New Jersey and operated as
a water resource by the New Jersey Water Supply Authority (NJWSA). The Company
has contracts with the NJWSA to divert a maximum of 20 million gallons per day
(mgd) of untreated water from the D&R Canal as augmented by the Round
Valley/Spruce Run Reservoir System. In addition, the Company has a one-year
agreement for an additional 5 mgd renewed through April 30, 2002. The Company
also has an agreement with Elizabethtown, effective through December 31, 2005,
which provides for the minimum purchase of 3 mgd of treated water with
provisions for additional purchases.
The Company's Middlesex System also derives water from groundwater sources
equipped with electric motor-driven deep-well turbine type pumps. The Middlesex
System has 31 wells, which provide a pump capacity of approximately 27 mgd.
The Middlesex System's groundwater sources are:
2001
Maximum Use
No.of Per Day Pumpage Pump
Source Wells (millions of gallons) Capacity (mgd) Location
------ ----- --------------------- -------------- --------
Park Avenue 15 8.8 15.2 South Plainfield
Tingley Lane North 4 1.9 2.8 Edison
Tingley Lane South 5 1.9 2.6 Edison
Spring Lake 4 0.8 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 0.8 0.9 South Plainfield
---
Total 31
Pinelands System:
The Pinelands System obtains its water supply from four (4) wells drilled into
the Mt. Laurel aquifer. The wells are equipped with three electric motor driven,
deep well turbine pumps and one is equipped with an electric motor driven
submersible pump. Treatment (disinfection only) is done at individual well
sites. Water production in 2001 amounted to 217 million gallons (mg)
4
The Pinelands System's groundwater sources are:
2001
Maximum Use
No. of Per Day Pumpage Pump
Source Wells (millions of gallons) Capacity (mgd) Location
------ ----- --------------------- -------------- --------
Leisuretowne / Hampton Southampton Township
Lakes 4 2.0 2.2
The Pinelands wastewater system discharges into the south branch of the Rancocas
Creek through a tertiary treatment plant. The total capacity of the plant is 0.5
mgd. Current average flow is 0.3 mgd. Pinelands has a current valid NJPDES
permit issued by the New Jersey Department of Environmental Protection (DEP).
Bayview System:
Water Supply to Bayview customers is derived from two wells, which provided an
overall system delivery of 10 mg in 2001. Each well has treatment facilities.
Bayview is currently replacing its entire distribution system with approximately
16,000 feet of mains, valves and hydrants.
Tidewater System:
Water supply to Delaware customers is derived from Tidewater's 180 wells, which
provided overall system delivery of 1,025 mg during 2001 (such figures include
Southern Shores, which was acquired in late August 2001). The Tidewater System
does not have a central treatment facility. Several of its water systems in
Sussex County and New Castle County have interconnected transmission systems.
Tidewater currently has applications before the Delaware regulatory authorities
for the approval of additional wells. Treatment is by chlorination and, in some
cases, pH correction and filtration.
Competition
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The business of the Company in its franchised service areas is substantially
free from direct competition with other public utilities, municipalities and
other entities; however, its 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 Delaware Public Service Commission's (PSC) awarding franchises
to other regulated water purveyors.
Regulation
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The Company is subject to regulation as to its rates, services and other matters
by the States of New Jersey and Delaware with respect to utility service within
those states and with respect to environmental and water quality matters. The
Company is also subject to regulation as to environmental and water quality
matters by the United States Environmental Protection Agency ("EPA"). In
addition, the issuance of securities by the Company, including the Bonds issued
herewith, is subject to the prior approval of the New Jersey Board of Public
Utilities (BPU).
5
Regulation of Rates and Services
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The Company's New Jersey operations are subject to regulation by the BPU.
Similarly, the Company's Delaware operations are subject to regulation by the
PSC. These regulatory authorities have jurisdiction with respect to rates,
service, accounting procedures, the issuance of securities and other matters of
utility companies operating within the States of New Jersey and Delaware,
respectively. The Company, for ratemaking purposes, accounts separately for each
of its operations in New Jersey and in Delaware so as to facilitate independent
ratemaking by the BPU for its New Jersey operations and the PSC for its Delaware
operations.
In determining rates for the Company, 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 the Company for its New Jersey operations nor do rate
determinations by the PSC guarantee particular rates of return for Tidewater's
Delaware operations. Thus, the Company may not achieve the rates of return
permitted by the BPU or the PSC.
Water Quality and Environmental Regulations
- -------------------------------------------
Both the EPA and the DEP regulate the Company's operation in New Jersey with
respect to water supply, treatment and distribution systems and the quality of
the water, as do the EPA, the Delaware Department of Natural Resources and
Environmental Control (DNREC), and the Delaware Department of Health with
respect to operations in Delaware.
Federal, Delaware and New Jersey regulations adopted over the past five years
relating to water quality require expanded types of testing by the Company to
insure that its water meets State and Federal water quality requirements.
In addition, the environmental regulatory agencies are reviewing current
regulations governing the limits of certain organic compounds found in the water
as by-products of treatment. The Company, as do many other water companies,
participates 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. The Company
believes the CJO Plant capabilities puts the Company in a strong position to
meet any such future standards with regard to its Middlesex System. The Company
uses regular testing of the Company's water to determine compliance with
existing Federal, New Jersey and Delaware primary water quality standards.
The DEP and the Delaware Department of Health monitor the activities of the
Company and review the results of water quality tests performed by the Company
for adherence to applicable regulations. Other regulations applicable to the
Company 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.
Employees
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As of December 31, 2001, we had a total of 139 employees in New Jersey, and a
total of 45 employees in Delaware. No employees are represented by a union.
Management considers its relations with its employees to be satisfactory. Wages
and benefits are reviewed annually and are considered competitive within the
industry.
6
Executive Officers of Middlesex Water Company
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Walter J. Brady - age 60; Senior Vice President-Administration; term expires May
2002. Mr. Brady, who joined the Company in 1962, was elected Assistant
Secretary-Assistant Treasurer in 1979, Assistant Vice President in 1982, Vice
President-Human Resources in 1987, Vice President-Administration in 1989 and
Senior Vice President of Administration in 1998. He serves as Plan Administrator
of the Pension Plan. He is a Director of Tidewater Utilities, Inc., White Marsh
Environmental Systems, Inc., Pinelands Water Company, Pinelands Wastewater
Company and Utility Service Affiliates, Inc., and Vice President Administration
and Director of Utility Service Affiliates (Perth Amboy) Inc.
A. Bruce O'Connor - age 43; Vice President and Controller; term expires May
2002. 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 assumed the designated title of Vice President and Controller and Chief
Financial Officer in May 1996. He is responsible for financial reporting,
customer service, rate cases, cash management and financings. He was formerly
employed by Deloitte & Touche LLP, a certified public accounting firm from 1984
to 1990. He is Treasurer of White Marsh Environmental Systems, Inc., and Utility
Service Affiliates, Inc., Vice President and Treasurer and Director of Tidewater
Utilities, Inc., Pinelands Water Company and Pinelands Wastewater Company and
Vice President Finance and Treasurer of Utility Service Affiliates (Perth Amboy)
Inc.
Marion F. Reynolds - age 62; Vice President, Secretary and Treasurer; term
expires May 2002. Ms. Reynolds, who had been Secretary-Treasurer since 1987 was
elected Vice President, Secretary and Treasurer in 1993. Prior to her election
she had been employed by Public Service Electric and Gas Company, Newark, New
Jersey since 1958, and was elected Assistant Corporate Secretary in 1976. She is
Secretary of Tidewater Utilities, Inc. White Marsh Environmental Systems, Inc.
and Utility Service Affiliates (Perth Amboy) Inc., Pinelands Water Company and
Pinelands Wastewater Company and Secretary and a Director of Utility Service
Affiliates, Inc.
Dennis G. Sullivan - age 60; President and General Counsel; term expires May
2002. Mr. Sullivan has been a Director of Middlesex since October 1999. Mr.
Sullivan was hired in 1984 as Corporate Attorney, responsible for general
corporate internal legal matters. He was elected Assistant Secretary-Assistant
Treasurer in 1988 and Vice President and General Counsel in 1990. He is
Assistant Secretary and Assistant Treasurer and a Director of Tidewater
Utilities, Inc., Director of White Marsh Environmental Systems, Inc., Chairman
and Director of Pinelands Water Company and Pinelands Wastewater Company, and
Director of Utility Service Affiliates, Inc., and of Utility Service Affiliates
(Perth Amboy) Inc.
J. Richard Tompkins - age 63; Chairman of the Board; term expires May 2002. Mr.
Tompkins was elected President of the Company in 1981 and was elected Chairman
of the Board in 1990. In 1979 he was employed by Associated Utility Services, an
independent utility consulting firm in New Jersey, as Vice President. From 1962
to 1979 he was employed by Buck, Seifert & Jost, Incorporated, consulting
engineers in New Jersey and was appointed Vice President in 1973. He is Chairman
and President and Director of Tidewater Utilities, Inc., Chairman and Director
of White Marsh Environmental Systems, Inc., Pinelands Water Company and
Pinelands Wastewater Company; and Director and President of Utility Service
Affiliates, Inc. and Utility Service Affiliates (Perth Amboy) Inc. He is also a
Director of New Jersey Utilities Association and Raritan Bay Healthcare
Foundation.
Ronald F. Williams - age 53; Vice President-Operations; term expires May 2002.
Mr. Williams was hired in March 1995 as Assistant Vice President-Operations,
responsible for the Company's Engineering and Distribution Departments. He was
elected Vice President-Operations in October 1995. He was formerly employed with
the Garden State Water Company as President and Chief Executive Officer since
1991. He is Director and Vice President of Utility Service Affiliates, Inc., and
Director and Vice President-Operations of Utility Service Affiliates (Perth
Amboy) Inc.
7
Item 2. Properties
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The water utility plant of the Company's systems consists of source of supply,
pumping, water treatment, transmission and distribution and general facilities.
Middlesex System:
Middlesex System's principal source of surface supply is the D&R Canal owned by
the State of New Jersey and operated as a water resource by the NJWSA.
Water is withdrawn from the D&R Canal at New Brunswick, New Jersey through the
Company's intake and pumping station located on State-owned land bordering the
Canal. It is transported through a 54-inch supply main for treatment and
distribution at the Company's Carl J. Olsen Water Treatment Plant ("CJO Plant")
in Edison, New Jersey, which has been in service since 1969. Facilities at the
CJO Plant consist of source of supply, pumping, water treatment, transmission,
storage, laboratory and general facilities. The Company is completing the
construction of the upgrade and expansion of the CJO Plant, begun in 1997, at
project cost of $37.0 million. The Company monitors water quality at the CJO
Plant, at each well field and throughout the distribution system to determine
that federal and state water quality standards are met. See "Water Quality and
Environmental Regulations."
The design capacity of the intake and pumping station in New Brunswick, New
Jersey, and the raw water supply main located there is 80 mgd. The four electric
motor-driven vertical turbine pumps presently installed have an aggregate design
capacity of 82 mgd. The design capacity of the Company's raw water supply main
is 55 mgd. Associated facilities are the 4,900 feet of 54-inch reinforced
concrete water main connecting the intake and pumping station with the CJO
Plant, 23,200 feet of 48-inch reinforced concrete transmission main connecting
the CJO Plant to the Company's distribution pipe network, and related storage
pumping, control, laboratory and other facilities. The Company also has a 58,600
foot transmission main, a 38,800 foot transmission main, and a long term
non-exclusive "wheeling agreement" with the East Brunswick system, all used to
transport water to several of the Company's contract customers.
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 concrete chlorine contact tanks,
twelve rapid filters containing gravel, sand and anthracite for water treatment
and a steel washwater tank. The Plant also includes a computerized Supervisory
Control and Data Acquisition (SCADA) system to monitor and control the CJO Plant
and the water supply and distribution system in the Middlesex System. The firm
design capacity of the CJO Plant is now 45 mgd (60 mgd maximum capacity). The
main pumping station at the CJO Plant has a design capacity of 90 mgd. The four
electric motor driven vertical turbine pumps presently installed have an
aggregate capacity of 72 mgd.
In addition to the main pumping station at the CJO Plant, there is a 15 mgd
auxiliary pumping station located in a separate building. It has a dedicated
substation and emergency power supply provided by a diesel-driven generator. It
pumps from the 10 million gallon distribution storage reservoir directly into
the distribution system.
8
Middlesex System's storage facilities consist of a 10 mg reservoir at the CJO
Plant, 5 mg and 2 mg reservoirs in Edison (Grandview), a 5 mg reservoir in
Carteret (Eborn) and a 2 mg reservoir at the Park Avenue Well Field.
The Company owns the properties in New Jersey on which Middlesex System's 31
wells are located. The Company also owns its two-building headquarters complex
at 1500 Ronson Road, Iselin, New Jersey, consisting of a 27,000 square foot,
two-story office building and a 16,500 square foot maintenance facility.
Main Cleaning and Lining Program (RENEW)
The Company has a RENEW Program in the Middlesex System to rehabilitate sections
of the distribution system which contain unlined mains. These sections are
generally in the older areas of the system. The rehabilitation includes the
cleaning and lining of unlined cast iron mains; the replacement and/or upgrading
of some selected mains; and the replacement of valves and hydrants. In the
Middlesex System, there are approximately 150 miles of unlined mains of the
total 730 miles. Since the RENEW Program was initiated in 1995, 40.1 miles of
mains have been rehabilitated.
Pinelands System:
Pinelands Water owns the well site properties, which are located in Southampton
Township, New Jersey. Pinelands Wastewater owns a 12-acre site on which its 0.5
mgd capacity tertiary treatment plant is located. Pinelands Water storage
facility is a 1.2 mg standpipe.
Bayview System:
Bayview owns two well site properties, which are located in Cumberland County,
New Jersey.
Tidewater System:
Tidewater's storage facilities include 30 ground level storage tanks with the
following capacities; 21 - 30,000 gallons, 2 - 25,000 gallons, 3 - 125,000
gallons, 1 - 132,000 gallons, 1 - 80,000 gallons, 1 - 35,000 gallons, 1 - 85,000
gallons. Tidewater also has two elevated storage tanks with capacities of
300,000 and 350,000 gallons.
The Company's Delaware operations are managed from Tidewater's leased offices in
Odessa, Delaware and Millsboro, Delaware. Tidewater's Odessa office property,
located on property owned by White Marsh Environmental Systems, Inc., a
wholly-owned subsidiary of Tidewater, consists of a 2,400 square foot building
situated on a one (1) acre lot. White Marsh owns two future office sites. A
ten-acre site located in Dover is intended to be the future location of
Tidewater's primary business office. The Company is exploring several options
for the other future office site and the existing Odessa property.
Item 3. Legal Proceedings
-----------------
A motel in the Company's Middlesex service area in 1994, and again in 1997,
suffered outbreaks of Legionella. Claims resulting from the death of a motel
guest from Legionella in 1997 and claims by two other patrons alleging illness
as a result of their stay at the motel in 1997 have been brought against the
motel and against the Company. The Company has substantial insurance coverage,
which the Company believes will be sufficient for all claims in this matter
other than for punitive damages. While the outcome of this case remains
uncertain, the Company believes that the final resolution will not have a
significant effect on its financial condition or results of operations.
9
The Company has been notified of a potential claim in excess of $10.0 million
involving the break of both a Company water line and an underground electric
power cable in close proximity to it. The power cable contained both electric
lines and petroleum based insulating fluid. The Company is insured for damages
except for damages resulting from pollution discharge, which the Company is
advised is approximately $0.2 million. Causation and liability have not been
established. Management is unable to determine the outcome of the litigation and
its impact on the financial conditions or results of operations.
A claim is pending involving a construction subcontractor, the Company's general
contractor and the Company concerning a major construction project. The dispute
relates to work required to be performed under a construction contract and
related subcontracts and includes payment issues and timing/delay issues. The
matter was instituted in 2001 and is pending in Superior Court, Middlesex
County, New Jersey. The full amount at issue is not fully known at this stage of
the litigation. At this time, management is unable to determine the impact, if
any, on the financial statements.
A claim has been made by multiple plaintiffs for damages resulting from personal
injury, including death, and property damage alleged to have been caused by the
delivery in Delaware of inadequate quality water and related claims. While the
Company has little detail about the claim at this time, the Company has
substantial insurance coverage, which it believes will be sufficient for all
claims in this matter other than for punitive damages.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
-----------------------------------------------------------------
Matters Price Range of Common Stock
-----------------------------------
The following table shows the range of closing prices for the Common Stock on
the NASDAQ Stock Market for the calendar quarter indicated.
2001 High Low Dividend
---- ---- --- --------
First Quarter $22.6667 $19.5833 $20.6667
Second Quarter 24.9667 20.0000 20.6667
Third Quarter 22.8267 20.6667 20.6667
Fourth Quarter 22.9667 20.9667 21.0000
2000 High Low Dividend
---- ---- --- --------
First Quarter $21.3333 $16.6667 $20.0333
Second Quarter 19.8333 18.1667 20.0333
Third Quarter 20.0000 17.9583 20.0333
Fourth Quarter 22.6250 18.0000 20.6667
10
Approximate Number of Equity Security Holders as of December 31, 2001
- ---------------------------------------------------------------------
Number of
Title of Class Record Holders
-------------- --------------
Common Stock, No Par Value 2,051
Cumulative Preferred Stock, No Par Value:
$7.00 Series 15
$4.75 Series 1
Cumulative Convertible Preferred Stock, No Par Value:
$7.00 Series 4
$8.00 Series 3
Dividends
- ---------
The Company has paid dividends on its Common Stock each year since 1912.
Although it is the present intention of the Board of Directors of the Company to
continue to pay regular quarterly cash dividends on its Common Stock, the
payment of future dividends is contingent upon the future earnings of the
Company, its financial condition and other factors deemed relevant by the Board
of Directors at its discretion.
The Common Stock of the Company is traded on the NASDAQ Stock Market under the
symbol MSEX.
Item 6. Selected Financial Data
-----------------------
Consolidated Selected Financial Data, page 20.
Item 7. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
The Company's policy is to maintain its books and records in accordance with
accounting principles generally accepted in the United States of America.
Companies in the Consolidated group that account for 88% of Operating Revenues
and 99% of Total Assets are subject to regulation in the state in which they
operate. Those companies are required to maintain their accounts in accordance
with regulatory authorities' rules and guidelines, which may differ from other
authoritative accounting pronouncements. In those instances, the Company follows
the guidance provided in the Financial Accounting Standards Board (FASB)
accounting pronouncement, Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting For the Effects of Certain Types of Regulation." The companies
and accounting policies referred to herein are defined in Note 1 - Summary of
Significant Accounting Policies, in Notes to the Consolidated Financial
Statements.
Liquidity and Capital Resources
The Company's actual capital expenditures for 1999, 2000 and 2001 and projected
requirements through 2004 are detailed as follows:
(Millions of Dollars)
1999 2000 2001 2002 2003 2004
-------- -------- -------- ------- ------- -------
CJO Plant $ 12.0 $ 1.2 $ 0.3 $ 1.6 $ 2.9 $ 7.5
Delaware Systems 3.1 4.9 5.3 12.6 6.0 6.0
RENEW Program 2.1 3.1 - 2.5 2.5 2.5
Scheduled Upgrades to
Existing Systems 7.3 4.3 4.0 6.5 4.1 6.1
-------- -------- -------- ------- ------- -------
Total $ 24.5 $ 13.5 $ 9.6 $ 23.2 $ 15.5 $ 22.1
======== ======== ======== ======= ======= =======
11
The Company plans to finance its future capital program with a combination of
internal funds from Middlesex, long-term debt financing and common equity.
First, the Company expects that its cash flow from operations will be greater in
2002 than in 2001. As more fully described in the Regulatory section, Middlesex
and the Pinelands Companies will have increased base rates for a full year. Rate
relief has been filed for our Tidewater and Bayview systems with an increase
expected as early as late March 2002.
There is $2.2 million of funds remaining to be spent for the RENEW Program,
which is our program to clean and cement line unlined mains in the Middlesex
System. There is a total of approximately 150 miles of unlined mains in the
730-mile Middlesex System. These funds were borrowed in 1999 through the New
Jersey State Revolving Fund (SRF). SRF financings are for a maximum period of
twenty years with sinking fund requirements. Bayview borrowed $1.6 million under
the SRF Program in November 2001. Proceeds from this financing will be used to
replace the existing 300 customer water distribution system in Fortescue, New
Jersey in 2002. Tidewater closed on a Delaware SRF loan of $0.8 million in
August 2001. The Delaware SRF Program will allow, but does not obligate,
Tidewater to draw down against a General Obligation Note for five specific
capital projects. Tidewater expects to utilize the full amount in 2002.
The Board of Directors approved a 5% discount on shares of common stock sold to
participants of its Dividend Reinvestment and Common Stock Purchase Plan (DRP).
Purchases and dividends reinvested through the DRP between March 1 and August 1,
2002 inclusive will be at the discounted price. Previous discount periods have
provided $1.0 million in addition to the normal purchases and reinvestments of
$1.1 million received through the DRP.
Any remaining financing required for the 2002 capital program will probably be
in the form of short-term borrowings against the $28.0 million in total lines of
credit available with three commercial banks. At December 31, 2001, we had $13.2
million of loans outstanding against those lines of credit.
In November 2001, Middlesex issued $4.8 million of First Mortgage Bonds through
the SRF, which will fund the 2003 and 2004 RENEW Programs. On February 6, 2002,
Middlesex issued its $6.0 million, 5.10%, Series DD First Mortgage Bonds. The
proceeds will be used to redeem and retire the $6.0 million, 7.25%, Series R
First Mortgage Bonds in early March 2002.
Bayview expects to file in 2002 for $0.5 million of SRF loans to fund the
construction of water storage and fire protection facilities, with construction
scheduled for early 2003. Tidewater is evaluating its capital program for
additional projects that may qualify for funding under the Delaware SRF. During
2002, Middlesex expects to file a new loan application with the New Jersey
Economic Development Authority (EDA). The EDA's program allows the applicant to
submit a five-year projected capital program. Unlike the SRF Program, the EDA
allows for projects that are for system growth. In addition, the terms of
borrowing through the EDA have been for up to forty years with no sinking fund
requirements for water utility property.
The level of response from our shareholders to the DRP 5% discount will provide
management with information on how to maintain its capitalization ratios so that
debt represents on average 55% of the total capitalization ratio.
With the First Mortgage Bonds issued in November, the Company has twelve series
of First Mortgage Bonds outstanding in the aggregate principal amount of $83.6
million as of December 31, 2001. The First Mortgage Bonds have been issued under
and secured by a mortgage indenture and supplements thereto, which constitute a
direct first mortgage lien upon substantially all of the property of Middlesex.
Tidewater borrowed funds under a $3.5 million, 8.05%, Amortizing Secured Note
due December 20, 2021.
12
Approximately $3.3 million was outstanding under that note as of December 31,
2001. The Bayview bonds issued in November are unsecured, but guaranteed by
Middlesex.
Results of Operations
2001 Compared to 2000
Operating revenues grew to $59.6 million from $54.5 million amounting to a 9.36%
increase. Favorable weather patterns resulted in higher consumption in our New
Jersey service areas and provided $2.1 million of additional revenues. Delaware
enjoyed both favorable weather patterns and customer growth of 24%, which
accounted for its revenue increase of $1.1 million. Rate increases, primarily in
New Jersey, accounted for $2.0 million.
Total operating expenses rose 8.1% or $3.6 million over 2000. Under operations
expenses, purchased water increased by $0.2 million, due to higher sales in the
Middlesex System. Employee labor and benefits rose $0.4 million and rate case
expenses were $0.2 million higher than last year. Business insurances increased
by $0.2 million. Maintenance increased by almost $0.2 million with almost 40% of
the increase attributable to the two new systems, Southern Shores and Bayview,
acquired in 2001.
Depreciation expense increased by almost 7.5% or less than $0.4 million. In
addition to the increase to Utility Plant of $9.7 million during the year, an
increase in the Delaware Public Service Commission (PSC) approved composite
depreciation rate for Tidewater were the primary reasons for the increase of
this expense category.
Increases in real estate taxes of almost $0.2 million and gross receipts and
franchise taxes on higher sales for Middlesex of $0.4 million accounted for much
of the variance in other taxes. Federal income taxes grew by $1.1 million as net
income rebounded by 31% compared to 2000. Other income jumped 38% as a result of
a one-time land sale gain by a small investor-owned water utility in Southern
Delaware. Middlesex is a 23% equity owner of that water utility.
Rate relief in New Jersey, customer growth in Delaware and the return of more
typical spring and summer weather patterns to both regions, fueled higher
revenues and the resulting increased net income.
Results of Operations
2000 Compared to 1999
Operating revenues were up $1.0 million, which amounts to 1.8% over 1999.
Unusually mild and wet summer weather in New Jersey and Delaware caused
system-wide demand to be below average consumption. New Jersey revenue growth of
$1.9 million, due to rate increases, was offset by lower consumption revenues of
$1.4 million.
Our Delaware customer base grew to 15,700, which was the primary reason for the
$0.7 million increase in revenues in that system. A significant portion of the
customer growth represents the acquisition of twelve mobile home park water
systems. The small net 2.67% rate increase granted by the PSC was negated by the
below average customer consumption. In an amended base rate filing, Tidewater
had requested a 21.2% rate increase.
Revenues from operating the City of Perth Amboy's water and wastewater systems
fell $0.2 million, also due mostly to unusual weather patterns.
Total operating expenses rose almost 4.0% or $1.7 million over 1999. Under
operations expenses, the cost of water treatment grew by $0.6 million, employee
labor and benefits rose $0.6 million, uncollectible accounts written off rose
13
$0.1 million and legal and other outside services increased by $0.2 million. In
total, purchased water and power fell $0.2 million due to lower production. The
decline of less than $0.1 million in maintenance expenses would have been
greater except for a large number of unanticipated repairs to the recently
acquired mobile home park water systems in Delaware.
Depreciation expense jumped 21.0% or $0.8 million. In addition to the increase
to Utility Plant of $12.2 million during the year, also included is a full year
of depreciation on the $35.0 million upgrade to the Carl J. Olsen Water
Treatment Plant (CJO Plant).
Other Income's decrease of $1.5 million represents the net financing activities
associated with the CJO Plant construction program reported in 1999. Allowance
for Funds Used During Construction (AFUDC) dropped $1.2 million, while interest
income on excess cash fell by $0.3 million.
The increase in total interest charges of $0.3 million represents a full-year
impact of the First Mortgage Bonds issued during 1999, plus an increase in
short-term bank borrowings of $4.0 million.
Net Income fell 32.7% to $5.3 million. Although we expected that replicating
1999 results would be a challenge, clearly, three factors made that earnings
level untenable in 2000. Unusually mild summer weather in New Jersey and
Delaware caused system-wide production to drop by 2.7% or 0.5 billion gallons.
Inadequate rate relief in Delaware reduced expected revenues by $0.6 million.
Also in Delaware, unanticipated higher operating costs for labor, purchased
water, water treatment, customer service and maintenance reduced profitability.
Regulatory Matters
On January 25, 2002, Tidewater filed for a 24.0% or $1.5 million phased-in rate
increase. Although the financial information submitted in its petition supports
a 30.8% increase, Tidewater has requested the lower amount and a three-phase
increase in an attempt to reduce potential rate shock to its customers. The
first phase increase of 8.0% would be implemented under the interim rate rules
on or about March 29, 2002. Under the assumption the full rate increase request
of 24.0% is approved by the PSC, the second phase of 7.41% would be implemented
upon the issuance of the PSC Order and the final phase of 6.9% would be placed
into effect by the end of March 2003.
The primary reasons driving the need for rate relief is an increase in the
calculated rate base since the last rate case of $11.3 million or 88.8% and
higher operations and maintenance expenses, particularly for water treatment and
production.
Bayview filed for a 123% or $0.1 million base rate increase with the Board of
Public Utilities (BPU) on December 13, 2001. This rate increase is needed to
support the cost for replacement of the entire water distribution system in
Fortescue, New Jersey. Middlesex had operated this 300-customer system as an
interim custodial receiver from September 1997, until it was purchased on April
9, 2001.
The Bayview rate case has been assigned to the Office of Administrative Law, and
a public hearing has been scheduled for early March 2002. Because of the limited
number of issues in the case, the Company believes that a decision may be
rendered in the second quarter of 2002.
Tidewater completed the PSC approved acquisition and assignment of all of the
membership interest in Sea Colony Water Company, LLC, a 2,200 customer water
system located in Sussex County, Delaware, for $2.1 million on August 24, 2001.
Included in the approval was authorization to maintain the existing rate tariff
under which Sea Colony customers are billed for water service. The name of the
entity was changed to Southern Shores Water Company.
14
Three base rate increase petitions were approved by the BPU.
Pinelands Pinelands
Middlesex Water Wastewater
--------- ----- ----------
Date Approved June 6, 2001 August 1, 2001 August 1, 2001
Amount $3.3 million $0.1 million $0.1 million
% Increase 8.10% 26.92% 11.81%
Return on Equity 10.50% 10.50% 10.50%
Rate of Return 7.95% 9.10% 9.20%
Last Increase May 13, 1999 January 23, 1999 January 23, 1999
The increases are necessary to cover higher operations and maintenance costs,
depreciation and taxes. In addition, continued significant plant investment in
the Middlesex System also contributed to the rate request. The last base rate
increase for Middlesex was in May 1999, when the BPU approved an 11.5% or $4.3
million increase. The last base rate increase for the Pinelands Companies was in
January 1999 and represented the final stage of a three-phase implementation.
The first increase was effective January 23, 1997.
Tidewater was granted a 2.67% rate increase in December 2000. Included in the
PSC Order approving the increase was a 0.75% credit against the allowed return
of equity of 10.0% due to quality of service issues. Upon receipt of
satisfactory evidence that Tidewater had resolved the quality issues that arose
during the course of that rate proceeding, the PSC removed the credit on August
23, 2001. This will result in additional annual revenues of less than $0.1
million for Tidewater.
USA-PA operates the City of Perth Amboy's (Perth Amboy) water and wastewater
systems under a 20-year contract. The final year of the contract is 2018.
Perth Amboy has a population of 40,000 and has approximately 9,300 customers,
most of whom are served by both systems. The agreement was effected under New
Jersey's Water Supply Public/Private Contracting Act and the New Jersey
Wastewater Public/Private Contracting Act. Under the agreement, USA-PA receives
a fixed fee and a variable fee based on increased system billing. Fixed fee
payments began at $6.4 million in the first year and will increase over the term
of the 20-year contract to $9.7 million. The agreement also requires USA-PA to
lease from Perth Amboy all of its employees who currently work on the Perth
Amboy water and wastewater systems. In connection with the agreement, Perth
Amboy, through the Middlesex County Improvement Authority, issued approximately
$68.0 million in three series of bonds. The Company guaranteed one of those
series of bonds in the principal amount of approximately $26.3 million. Perth
Amboy guaranteed the two other series of bonds.
15
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.
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. Certain advances made by USA to South Amboy at the
commencement of the management services contract have been forgiven in
consideration for the franchise agreement. Fixed fee revenues recognized under
the original contract have been eliminated in lieu of revenues earned from
providing water to South Amboy's 2,600 customers.
Accounting Standards
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts. The adoption of this Statement on January 1, 2001,
had no impact on the financial statements. In June 2001, the FASB issued SFAS
No. 141, "Business Combinations," which supersedes APB Opinion No. 16. SFAS No.
141 will require business combinations entered into after June 30, 2001, to be
accounted for using the purchase method of accounting. Adoption of this
Statement had no impact on the Company's financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill is considered a nonamortizable asset and
will be subject to an annual review for impairment and an interim review when
events or circumstances occur. SFAS No. 142 is effective for all fiscal years
beginning after December 15, 2001. Upon the adoption of SFAS No. 142 on January
1, 2002, the Company did not identify any impairment issues. Discontinuation of
amortization of goodwill had an immaterial effect on the Company's financial
statements.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." Upon adoption of SFAS No. 143, the fair value of a liability for
an asset retirement obligation is required to be recorded. Upon settlement of
the liability, an entity either settles the obligation for its recorded amount
or incurs a gain or loss upon settlement. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. Adoption of this Statement will have no
impact on the Company's financial statements.
The FASB also issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which the Company has adopted on January 1, 2002. The
adoption of SFAS No. 144 did not have an effect on our results of operations or
cash flows.
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
16
Company's interest rate risk related to existing fixed rate, long-term debt is
not material due to the term of the majority of our First Mortgage Bonds, which
have maturity dates ranging from 2009 to 2038. Over the next twelve months,
approximately $0.4 million of the current portion of three existing long-term
debt instruments will mature. Combining this amount with the $13.2 million in
short-term debt outstanding at December 31, 2001, and applying a hypothetical
change in the rate of interest charged by 10% on those borrowings, would not
have a material effect on earnings.
Outlook
Revenues are expected to continue to grow in 2002. The full impact of the
Middlesex and Pinelands rate increases approved in 2001 and the phased-in rate
relief in Delaware should provide additional revenues. Anticipated customer
growth in Delaware should enhance earnings. The Company continues to explore
viable plans to streamline operations and reduce costs, particularly in Delaware
where customer growth continues to exceed industry averages. Part of the
challenge is that our Delaware operations are a combination of over 70
stand-alone distribution systems, 115 water treatment plants and 180 wells
serving more than 150 communities. Earnings from nonregulated operations are
expected to remain constant.
The mid-Atlantic region of the country is experiencing below normal rainfall.
For the second time in three years, the potential exists for drought-related
water restrictions in our New Jersey service territories. The State of New
Jersey has issued a state-wide drought emergency, which has put in place certain
outdoor water use restrictions. The state is divided into six drought regions.
The Central Drought Region, which is where Middlesex service territory is
located, and the Northern Coastal Drought Region, which is where one of
Middlesex large contract sales customer is located, is covered by less
restrictive guidelines than the rest of the state. These restrictions will
affect sales and earnings. Continued below normal levels of precipitation could
cause the Department of Environmental Protection to increase water usage
restrictions throughout the state, which could also affect sales and earnings.
Although no restrictions are in place in our Delaware service territories, the
State of Delaware has issued a drought warning requesting that residents to
voluntarily take steps to reduce their current levels of usage. Although it is a
state-wide warning, the emphasis is for New Castle County residents. Less than
ten percent of our Delaware customers are located in that County.
Our strategy is for continued growth through acquisitions, internal expansion,
public/private partnerships and rate relief. Opportunities in both the regulated
and nonregulated sectors that are financially sound, complement existing
operations and increase shareholder value will be pursued. We are currently
pursuing opportunities in New Jersey and Delaware, which could significantly
increase our customer base.
Forward-Looking Statements
Certain matters discussed in this annual report are "forward-looking statements"
intended to qualify for safe harbors from liability established by the Private
Securities Litigation Reform Act of 1995. Such statements address future plans,
objectives, expectations and events concerning various matters such as capital
expenditures, earnings, litigation, growth potential, rates, regulatory matters,
liquidity, capital resources and accounting matters.
Actual results in each case could differ materially from those currently
anticipated in such statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
17
Item 7a. Qualitative and Quantitative Disclosure About Market Risk
---------------------------------------------------------
This information is incorporated herein by reference to Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Page 16.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Consolidated Financial Statements and Supplementary Financial Data:
Consolidated Balance Sheet at December 31, 2001 and 2000, Pages 21-22.
Consolidated Statements of Income for the years ended December 31, 2001, 2000
and 1999, Page 23.
Consolidated Statements of Capital Stock and Long-term Debt at December 31, 2001
and 2000, Page 24.
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999, Page 25.
Consolidated Statements of Retained Earnings for the years ended December 31,
2001, 2000 and 1999, Page 26.
Notes to Consolidated Financial Statements, Pages 27-39.
Independent Auditors' Report, Page 40.
Item 9. Changes in and Disagreements with Accountants on Accounting
-----------------------------------------------------------
and Financial Disclosures
-------------------------
None.
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 2002 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 1 of this Form 10-K.
Item 11. Executive Compensation
----------------------
This Information for Middlesex Water Company is included in Middlesex Water
Company's Proxy Statement for the 2002 Annual Meeting of Stockholders and is
incorporated herein by reference.
18
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 2002 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 2002 Annual Meeting of Stockholders and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) 1. The following Financial Statements and supplementary data are
included in Part II, Item 8:
Management's Discussion and Analysis, Pages 11-17.
Consolidated Balance Sheets at December 31, 2001 and 2000, Pages
21-22.
Consolidated Statements of Income for each of the three years in
the period ended December 31, 2001, 2000 and 1999, Page 23.
Consolidated Statements of Capital Stock and Long-term Debt at
December 31, 2001, and 2000, Page 24.
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2001, 2000 and 1999, Page 25.
Consolidated Statements of Retained Earnings for each of the three
years in the period ended December 31, 2001, 2000 and 1999, Page
26.
Notes to Consolidated Financial Statements, Pages 27-39.
Independent Auditors' Report, Page 40.
(a) 2. Financial Statement Schedules
-----------------------------
All Schedules are omitted because of the absence of the conditions
under which they are required or because the required information
is shown in the financial statements or notes thereto.
(a) 3. Exhibits
--------
See Exhibit listing on Pages 42- 45.
(b) Reports on Form 8-K
-------------------
Filed: December 27, 2001
19
CONSOLIDATED SELECTED FINANCIAL DATA
(Thousands of Dollars Except per Share Data)
2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Operating Revenues $ 59,638 $ 54,477 $ 53,497 $ 43,058 $ 40,294
- ---------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operations and Maintenance 31,740 30,269 28,887 21,523 19,513
Depreciation 5,051 4,701 3,885 3,285 3,071
Other Taxes 7,640 6,932 6,871 6,102 5,782
Income Taxes 3,714 2,637 3,189 2,999 3,135
- ---------------------------------------------------------------------------------------------------------------
Total Operating Expenses 48,145 44,539 42,832 33,909 31,501
- ---------------------------------------------------------------------------------------------------------------
Operating Income 11,493 9,938 10,665 9,149 8,793
Other Income 503 364 1,911 1,795 405
- ---------------------------------------------------------------------------------------------------------------
Income Before Interest Charges 11,996 10,302 12,576 10,944 9,198
- ---------------------------------------------------------------------------------------------------------------
Interest Charges 5,043 4,997 4,695 4,423 3,337
- ---------------------------------------------------------------------------------------------------------------
Net Income 6,953 5,305 7,881 6,521 5,861
Preferred Stock Dividend 255 255 301 319 226
- ---------------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 6,698 $ 5,050 $ 7,580 $ 6,202 $ 5,635
- ---------------------------------------------------------------------------------------------------------------
Earnings per Share:*
Basic $ 0.88 $ 0.67 $ 1.03 $ 0.95 $ 0.89
Diluted $ 0.88 $ 0.67 $ 1.01 $ 0.94 $ 0.89
Average Shares Outstanding:*
Basic 7,598,181 7,533,222 7,390,340 6,530,819 6,352,623
Diluted 7,855,536 7,790,577 7,722,229 6,870,458 6,573,518
Dividends Declared and Paid* $ 0.83 $ 0.82 $ 0.79 $ 0.77 $ 0.75
Total Assets $ 236,373 $ 219,400 $ 215,036 $ 203,501 $ 159,761
Convertible Preferred Stock $ 2,961 $ 2,961 $ 2,961 $ 3,894 $ 3,894
Long-term Debt $ 88,140 $ 82,109 $ 82,330 $ 78,032 $ 52,918
- ---------------------------------------------------------------------------------------------------------------
*All share and per share amounts reflect the three-for-two common stock split,
effective January 2, 2002.
20
MIDDLESEX WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS December 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------
UTILITY PLANT: Water Production $ 69,636,415 $ 69,363,626
Transmission and Distribution 145,409,761 136,545,596
General 20,797,621 20,189,182
Construction Work in Progress 3,890,406 1,036,498
---------------------------------------------------------------------------------------------
TOTAL 239,734,203 227,134,902
Less Accumulated Depreciation 43,670,744 38,856,591
---------------------------------------------------------------------------------------------
UTILITY PLANT - NET 196,063,459 188,278,311
---------------------------------------------------------------------------------------------
NONUTILITY ASSETS - NET 2,996,119 2,918,133
- ------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS: Cash and Cash Equivalents 4,534,384 2,497,154
Temporary Cash Investments - Restricted 9,210,283 2,819,661
Accounts Receivable 6,665,720 5,282,796
Unbilled Revenues 2,801,015 2,969,043
Materials and Supplies (at average cost) 1,027,920 1,009,956
Prepayments 869,693 694,111
---------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 25,109,015 15,272,721
- ------------------------------------------------------------------------------------------------------------------------
DEFERRED CHARGES: Unamortized Debt Expense 2,873,976 2,950,276
Preliminary Survey and Investigation Charges 943,622 573,128
Regulatory Assets:
Income Taxes (Note 3) 6,038,474 6,012,748
Postretirement Costs (Note 7) 955,468 1,041,676
Other (Note 2) 1,393,540 2,352,966
---------------------------------------------------------------------------------------------
TOTAL DEFERRED CHARGES 12,205,080 12,930,794
---------------------------------------------------------------------------------------------
TOTAL $ 236,373,673 $ 219,399,959
---------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
21
CAPITALIZATION AND LIABILITIES
December 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION Common Stock $ 50,099,621 $ 48,838,486
(See Accompanying Retained Earnings 22,190,691 21,796,707
Statements and Note 6): TOTAL COMMON EQUITY 72,290,312 70,635,193
---------------------------------------------------------------------------------------------
Cumulative Preferred Stock 4,063,062 4,063,062
Long-term Debt 88,140,459 82,109,297
---------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION 164,493,833 156,807,552
- ------------------------------------------------------------------------------------------------------------------------
CURRENT Current Portion of Long-term Debt 358,836 215,859
LIABILITIES: Notes Payable 13,225,000 6,050,000
Accounts Payable 2,396,335 2,438,664
Taxes Accrued 6,330,877 6,050,322
Interest Accrued 1,813,896 1,797,520
Other 1,845,642 1,454,276
---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 25,970,586 18,006,641
- ------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4)
- ------------------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS: Customer Advances for Construction 10,789,513 11,364,818
Accumulated Deferred Investment Tax Credits (Note 3) 1,932,416 2,011,033
Accumulated Deferred Federal Income Taxes (Note 3) 12,716,171 12,371,473
Employee Benefit Plans (Note 7) 5,262,676 4,658,364
Other 1,084,590 1,203,051
---------------------------------------------------------------------------------------------
TOTAL DEFERRED CREDITS 31,785,366 31,608,739
---------------------------------------------------------------------------------------------
CONTRIBUTIONS IN AID OF CONSTRUCTION 14,123,888 12,977,027
---------------------------------------------------------------------------------------------
TOTAL $ 236,373,673 $ 219,399,959
---------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
22
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES (Note 2) $59,638,145 $54,476,543 $53,497,153
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Operations (Note 4) 29,020,790 27,713,224 26,268,347
Maintenance 2,718,589 2,555,237 2,618,679
Depreciation 5,051,399 4,700,934 3,884,650
Other Taxes 7,640,406 6,931,961 6,871,105
Federal Income Taxes (Note 3) 3,713,645 2,637,058 3,188,893
- -----------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 48,144,829 44,538,414 42,831,674
- -----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 11,493,316 9,938,129 10,665,479
- -----------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Allowance for Funds Used During Construction 139,609 135,161 1,350,016
Other - Net 362,351 228,792 560,991
- -----------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 501,960 363,953 1,911,007
- -----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES 11,995,276 10,302,082 12,576,486
- -----------------------------------------------------------------------------------------------------------------------
INTEREST CHARGES:
Interest on Long-term Debt 4,521,084 4,555,379 4,469,709
Amortization of Debt Expense 140,604 139,320 136,290
Other Interest Expense 380,604 302,323 89,446
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST CHARGES 5,042,292 4,997,022 4,695,445
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME 6,952,984 5,305,060 7,881,041
- -----------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK DIVIDEND REQUIREMENTS 254,786 254,786 300,786
- -----------------------------------------------------------------------------------------------------------------------
EARNINGS APPLICABLE TO COMMON STOCK $6,698,198 $5,050,274 $7,580,255
- -----------------------------------------------------------------------------------------------------------------------
EARNINGS AND DIVIDENDS PER SHARE OF COMMON STOCK:*
Earnings per Share (Note 6):
Basic $ 0.88 $ 0.67 $ 1.03
Diluted $ 0.88 $ 0.67 $ 1.01
Average Number of Shares Outstanding (Note 6):
Basic 7,598,181 7,533,222 7,390,340
Diluted 7,855,536 7,790,577 7,722,229
Dividends Paid per Share $ 0.83 $ 0.82 $ 0.79
- -----------------------------------------------------------------------------------------------------------------------
*All share and per share amounts reflect the three-for-two common stock split,
effective January 2, 2002.
See Notes to Consolidated Financial Statements.
23
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
Years Ended December 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------
Common Stock, No Par Value (Note 6):
Shares Authorized - 10,000,000
Shares Outstanding* - 2001 - 7,626,002 $ 50,663,701
2000 - 7,572,801 $ 49,484,640
Restricted Stock Plan (Note 7) (564,080) (646,154)
- ------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK 50,099,621 48,838,486
- ------------------------------------------------------------------------------------------------------------
Cumulative Preference Stock, No Par Value:
Shares Authorized - 100,000
Shares Outstanding - None
Cumulative Preferred Stock, No Par Value (Note 6):
Shares Authorized - 140,497
Convertible:
Shares Outstanding, $7.00 Series - 14,881 1,562,505 1,562,505
Shares Outstanding, $8.00 Series - 12,000 1,398,857 1,398,857
Nonredeemable:
Shares Outstanding, $7.00 Series - 1,017 101,700 101,700
Shares Outstanding, $4.75 Series - 10,000 1,000,000 1,000,000
- ------------------------------------------------------------------------------------------------------------
TOTAL CUMULATIVE PREFERRED STOCK 4,063,062 4,063,062
- ------------------------------------------------------------------------------------------------------------
Long-term Debt (Note 6):
8.05%, Amortizing Secured Note, due December 20, 2021 3,264,536 3,320,428
4.00%, State Revolving Trust Bond, due September 1, 2021 850,000 -
0.00%, State Revolving Fund Bond, due September 1, 2021 750,000 -
First Mortgage Bonds:
7.25%, Series R, due July 1, 2021 6,000,000 6,000,000
5.20%, Series S, due October 1, 2022 12,000,000 12,000,000
5.25%, Series T, due October 1, 2023 6,500,000 6,500,000
6.40%, Series U, due February 1, 2009 15,000,000 15,000,000
5.25%, Series V, due February 1, 2029 10,000,000 10,000,000
5.35%, Series W, due February 1, 2038 23,000,000 23,000,000
0.00%, Series X, due September 1, 2018 917,363 970,667
4.25%, Series Y, due September 1, 2018 1,055,000 1,095,000
0.00%, Series Z, due September 1, 2019 2,022,396 2,089,061
5.25%, Series AA, due September 1, 2019 2,350,000 2,350,000
0.00%, Series BB, due September 1, 2021 2,350,000 -
4.00%, Series CC, due September 1, 2021 2,440,000 -
- ------------------------------------------------------------------------------------------------------------
SUBTOTAL LONG-TERM DEBT 88,499,295 82,325,156
- ------------------------------------------------------------------------------------------------------------
Less: Current Portion of Long-term Debt (358,836) (215,859)
- ------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 88,140,459 $ 82,109,297
- ------------------------------------------------------------------------------------------------------------
*Outstanding share amounts reflect the three-for-two common stock split,
effective January 2, 2002.
See Notes to Consolidated Financial Statements.
24
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,952,984 $ 5,305,060 $ 7,881,041
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 5,303,536 4,944,701 4,303,192
Provision for Deferred Income Taxes 318,972 201,319 (124,315)
Allowance for Funds Used During Construction (139,609) (135,161) (1,350,016)
Changes in Assets and Liabilities:
Accounts Receivable (1,382,924) 686,749 (1,083,479)
Accounts Payable (42,327) (953,770) (459,227)
Accrued Taxes 280,555 691,584 138,068
Accrued Interest 16,376 37,050 59,140
Unbilled Revenues 168,028 (341,180) (329,715)
Employee Benefit Plans 604,312 1,788 894,059
Other-Net 253,579 (442,577) 111,068
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,333,482 9,995,563 10,039,816
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (12,747,032) (13,639,291) (23,281,735)
Notes Receivable 97,500 (40,500) 2,806,102
Preliminary Survey & Investigation Charges (370,494) (100,841) (196,085)
Other-Net 503,003 (854,691) (158,596)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (12,517,023) (14,635,323) (20,830,314)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (215,859) (206,357) (71,730)
Proceeds from Issuance of Long-term Debt 6,390,000 - 4,500,000
Short-term Bank Borrowings 7,175,000 4,050,000 1,000,000
Deferred Debt Issuance Expenses (11,440) (41,617) (22,268)
Temporary Cash Investments-Restricted (6,390,622) 2,912,166 4,044,245
Proceeds from Issuance of Common Stock-Net 1,261,135 1,244,972 1,104,469
Payment of Common Dividends (6,304,214) (6,149,411) (5,857,405)
Payment of Preferred Dividends (254,786) (254,786) (300,786)
Construction Advances and Contributions-Net 571,557 412,175 2,174,923
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,220,771 1,967,142 6,571,448
- ---------------------------------------------------------------------------------------------------------------------
NET CHANGES IN CASH AND CASH EQUIVALENTS 2,037,230 (2,672,618) (4,219,050)
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,497,154 5,169,772 9,388,822
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,534,384 $ 2,497,154 $ 5,169,772
- ---------------------------------------------------------------------------------------------------------------------
*Excludes Allowance for Funds Used During Construction.
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Interest (net of amounts capitalized) $ 4,780,209 $ 4,643,135 $ 3,137,411
Income Taxes $ 3,674,792 $ 1,981,450 $ 3,728,700
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
25
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Years Ended December 31,
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 21,796,707 $ 22,895,844 $ 21,222,294
NET INCOME 6,952,984 5,305,060 7,881,041
- ---------------------------------------------------------------------------------------------------------------------
TOTAL 28,749,691 28,200,904 29,103,335
- ---------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS:
Cumulative Preferred Stock 254,786 254,786 300,786
Common Stock 6,304,214 6,149,411 5,857,405
COMMON STOCK EXPENSES - - 49,300
- ---------------------------------------------------------------------------------------------------------------------
TOTAL DEDUCTIONS 6,559,000 6,404,197 6,207,491
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 22,190,691 $ 21,796,707 $ 22,895,844
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
(a) Organization - Middlesex Water Company (Middlesex) is the parent company and
sole shareholder of Tidewater Utilities, Inc. (Tidewater), Pinelands Water
Company, Pinelands Wastewater Company, 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., 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 intercompany accounts and
transactions have been eliminated.
(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, 2001, 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, together with
removal costs, less salvage.
(e) 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 thresholds
established for each company and then depreciated along with the rest of the
utility plant's costs over its estimated useful life. AFUDC is calculated using
each company's weighted cost of debt and equity.
(f) Accounts Receivable - Provision for allowance for doubtful accounts at
December 31, 2001, 2000 and 1999 was $0.1 million. The corresponding expense and
deduction for December 31, 2001, 2000 and 1999 was $0.2 million, $0.1 million
and less than $0.1 million, respectively.
(g) Revenues from regulated activities are recorded as service is rendered and
include estimates for amounts unbilled at the end of the period for services
provided subsequent to the last billing cycle. Fixed service charges are billed
in advance by Tidewater and are recognized in revenue as the service is
provided. Bayview and Southern Shores are unmetered systems. Service charges are
billed in advance and are recognized in revenue as the service is provided.
Management contract fees are recorded as earned.
(h) Deferred Charges - Unamortized Debt Expense is amortized over the lives of
the related issues. As authorized by the BPU, acquisition adjustments, main
cleaning and lining costs, tank painting, and regulatory expenses are deferred
and amortized over 1.5 to 33-year periods. For expenses incurred in connection
27
with the 1999 rate case, Tidewater was authorized by the PSC to defer and
amortize rate case expenses over six years.
(i) 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.
(j) 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.
(k) 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.
(l) The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts. As the Company currently
does not engage in derivative financial instruments, the adoption of this
Statement on January 1, 2001, had no impact on the financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
supersedes APB Opinion No. 16. SFAS No. 141 will require business combinations
entered into after June 30, 2001 to be accounted for using the purchase method
of accounting. Adoption of this Statement had no impact on the Company's
financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill is considered a nonamortizable asset and
will be subject to an annual review for impairment and an interim review when
events or circumstances occur. SFAS No. 142 is effective for all fiscal years
beginning after December 15, 2001. Upon the adoption of SFAS No. 142 at January
1, 2002, the Company did not identify any impairment issues. Discontinuation of
amortization of goodwill had an immaterial effect on the Company's financial
statements.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." Upon adoption of SFAS No. 143, the fair value of a liability for
an asset retirement obligation is required to be recorded. Upon settlement of
the liability, an entity either settles the obligation for its recorded amount
or incurs a gain or loss upon settlement. SFAS No.143 is effective for fiscal
years beginning after June 15, 2002. Adoption of this Statement will have no
impact on the Company's financial statements.
The FASB also issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which the Company has adopted on January 1, 2002. The
adoption of SFAS No. 144 did not have an effect on our results of operations or
cash flows.
(m) Certain prior year amounts have been reclassified to conform to the current
year reporting.
Note 2 - Rates and Revenues
On January 25, 2002, Tidewater filed for a 24.0% or $1.5 million phased-in rate
increase. Although the financial information submitted in its petition supports
a 30.8% increase, Tidewater has requested the lower amount and a three-phase
28
increase in an attempt to reduce potential rate shock to its customers. The
first phase increase of 8.0% would be implemented under the interim rate rules
on or about March 29, 2002. Under the assumption the full rate increase request
of 24.0% is approved by the PSC, the second phase of 7.41% would be implemented
upon the issuance of the PSC Order. The final phase of 6.9% would be placed into
effect by the end of March 2003.
The primary reasons driving the need for rate relief are increased utility plant
investment and higher operations and maintenance expenses. Tidewater's proposed
rate base has increased since its last rate case by $11.3 million or 88.8%.
Tidewater's program to address quality of service issues that arose in the last
rate case have helped push water treatment and production expenses up along with
the maintenance of its infrastructure.
Bayview filed for a 123% or $0.1 million base rate increase on December 13,
2001. This rate increase is needed to support the cost for replacement of the
entire water distribution system in Fortescue, New Jersey. Middlesex had
operated this 300-customer system as an interim custodial receiver from
September 1997, until it was purchased by Bayview on April 9, 2001.
The Bayview rate case has been assigned to the Office of Administrative Law, and
a public hearing has been scheduled for early March 2002. Because of the limited
number of issues in the case, the Company believes that a decision may be
rendered by the BPU in the second quarter of 2002.
Three base rate increase petitions were approved by the BPU:
Pinelands Pinelands
Middlesex Water Wastewater
--------- ----- ----------
Date Approved June 6, 2001 August 1, 2001 August 1, 2001
Amount $3.3 million $0.1 million $0.1 million
% Increase 8.10% 26.92% 11.81%
Return on Equity 10.50% 10.50% 10.50%
Rate of Return 7.95% 9.10% 9.20%
Last Increase May 13, 1999 January 23, 1999 January 23, 1999
The increases are necessary to cover higher operations and maintenance costs,
depreciation and taxes. In addition, continued significant plant investment in
the Middlesex System also contributed to the rate request. The last base rate
increase for Middlesex was in May 1999, when the BPU approved an 11.5% or $4.3
million increase. The last base rate increase for the Pinelands Companies in
January 1999 represented the final stage of a three-phase implementation. The
first increase was effective January 23, 1997.
Tidewater was granted a 2.67% rate increase in December 2000. Included in the
PSC Order approving the increase was a 0.75% credit against the allowed return
of equity of 10.0% due to quality of service issues. Upon receipt of
satisfactory evidence that Tidewater had resolved the quality issues that arose
during the course of that rate proceeding, the PSC removed the credit on August
23, 2001. This will result in additional annual revenues of less than $0.1
million for Tidewater.
Included in Other Deferred Charges are $1.7 million of deferred costs at
December 31, 2001, which Middlesex, Tidewater, Pinelands Water and Pinelands
Wastewater are recovering through rates over periods of 1.5 to 10 years. These
deferred costs have been excluded from their rate bases and, therefore, they are
29
not earning a return on the unamortized costs during the recovery periods.
Pinelands Water and Pinelands Wastewater are recovering the acquisition premium
of $0.7 million over the remaining life of its Utility Plant. These deferred
costs have been included in their rate bases and are earning a return on the
unamortized costs during the recovery periods.
In 2001, Tidewater completed the PSC approved acquisition and assignment of all
of the membership interest in Sea Colony Water Company, LLC, a 2,200 customer
water system located in Sussex County, Delaware, for $2.1 million on August 24,
2001. Included in the approval was authorization to maintain the existing rate
tariff under which Sea Colony customers are billed for water service. The name
of the entity was changed to Southern Shores Water Company.
Note 3 - Income Taxes
Federal 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)
2001 2000 1999
- -------------------------------------------------------------------------------------------------
Income Tax at Statutory Rate of 34% $ 3,627 $ 2,700 $ 3,764
Tax Effect of:
AFUDC (47) (46) (459)
Other 134 (17) (116)
- -------------------------------------------------------------------------------------------------
Total Federal Income Tax Expense $ 3,714 $ 2,637 $ 3,189
- -------------------------------------------------------------------------------------------------
Federal income tax expense is comprised of the following:
Current $ 3,499 $ 2,554 $ 3,432
Deferred:
Customer Advances 84 40 45
Accelerated Depreciation 550 519 234
Employee Benefit Plans (359) (355) (304)
Investment Tax Credit (79) (79) (76)
Other 19 (42) (142)
- -------------------------------------------------------------------------------------------------
Total Federal Income Tax Expense $ 3,714 $ 2,637 $ 3,189
- -------------------------------------------------------------------------------------------------
The statutory review period for income tax returns for the years prior to 1998
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)
2001 2000
- ---------------------------------------------------------------------------------------
Utility Plant Related $19,014 $18,417
Customer Advances (4,481) (4,578)
Employee Benefits (1,810) (1,427)
Other (7) (41)
- ---------------------------------------------------------------------------------------
Total Deferred Tax Liability $12,716 $12,371
- ---------------------------------------------------------------------------------------
30
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 $6.0 million has been
recorded.
Note 4 - Commitments and Contingent Liabilities
Service Agreement - USA-PA operates the City of Perth Amboy's water and
wastewater systems under a 20-year contract. The final year of the contract is
2018.
Perth Amboy has a population of 40,000 and has approximately 9,300 customers,
most of whom are served by both systems. The agreement was effected under New
Jersey's Water Supply Public-Private Contracting Act and the New Jersey
Wastewater Public/Private Contracting Act. Under the agreement, USA-PA receives
a fixed fee and a variable fee based on increased system billing. Fixed fee
payments began at $6.4 million in the first year and will increase over the term
of the 20-year contract to $9.7 million. The agreement also requires USA-PA to
lease from Perth Amboy all of its employees who currently work on the Perth
Amboy water and wastewater systems. In connection with the agreement, Perth
Amboy, through the Middlesex County Improvement Authority, issued approximately
$68.0 million in three series of bonds. The Company guaranteed one of those
series of bonds in the principal amount of approximately $26.3 million. Perth
Amboy guaranteed the two other series of bonds.
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.
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. Certain advances made by USA to South Amboy at the
commencement of the management services contract have been forgiven in
consideration for the franchise agreement. Fixed fee revenues recognized under
the original contract have been eliminated in lieu of revenues earned from
providing water to South Amboy's 2,600 customers.
Water Supply - Middlesex has an agreement with the Elizabethtown Water Company
for the purchase of treated water. This agreement, which expires December 31,
2005, provides for the minimum purchase of 3 million gallons daily (mgd) of
treated water with provisions for additional purchases. The 2001, 2000 and 1999
costs under this agreement were $1.7 million, $1.6 million and $1.7 million,
respectively. Middlesex also has an agreement with the New Jersey Water Supply
Authority (NJWSA), which expires November 1, 2013, and provides for the minimum
purchase of 20 mgd of untreated water from the Delaware and Raritan Canal and
the Raritan River. In addition, the Company has a supplemental one-year
agreement for an additional 5 mgd through April 30, 2002. This agreement is
renewable on an annual basis. The total costs under this agreement in 2001, 2000
and 1999 were $2.0 million, $1.9 million and $2.0 million, respectively.
31
Construction - The Company plans to spend approximately $23.2 million in 2002,
$15.5 million in 2003 and $22.1 million in 2004 on its construction program.
Litigation - A motel in the Company's Middlesex service area in 1994, and again
in 1997, suffered outbreaks of Legionella. Claims resulting from the death of a
motel guest from Legionella in 1997 and claims by two other patrons alleging
illness as a result of their stay at the motel in 1997 have been brought against
the motel and against the Company. The Company has substantial insurance
coverage, which the Company believes will be sufficient for all claims in this
matter other than for punitive damages. While the outcome of this case remains
uncertain, the Company believes that the final resolution will not have a
significant effect on its financial condition or results of operations.
The Company has been notified of a potential claim in excess of $10.0 million
involving the break of both a Company water line and an underground electric
power cable in close proximity to it. The power cable contained both electric
lines and petroleum based insulating fluid. The Company is insured for damages
except for damages resulting from pollution discharge, which the Company is
advised is approximately $0.2 million. Causation and liability have not been
established. Management is unable to determine the outcome of the litigation and
its impact on the financial conditions or results of operations.
A claim is pending involving a construction subcontractor, the Company's general
contractor and the Company concerning a major construction project. The dispute
relates to work required to be performed under a construction contract and
related subcontracts and includes payment issues and timing/delay issues. The
matter was instituted in 2001 and is pending in Superior Court, Middlesex
County, New Jersey. The full amount at issue is not fully known at this stage of
the litigation. At this time, management is unable to determine the impact, if
any, on the financial statements.
A claim has been made by multiple plaintiffs for damages resulting from personal
injury, including death, and property damage alleged to have been caused by the
delivery in Delaware of inadequate quality water and related claims. While the
Company has little detail about the claim at this time, the Company has
substantial insurance coverage, which it believes will be sufficient for all
claims in this matter other than for punitive damages.
Note 5 - Lines of Credit, Notes Payable and Restricted Cash
(Thousands of Dollars)
2001 2000 1999
- -------------------------------------------------------------------------------------------------------
Established Lines at Year-End $28,000 $18,000 $18,000
Maximum Amount Outstanding 13,225 6,050 3,000
Average Outstanding 8,800 3,900 1,100
Notes Payable at Year-End 13,225 6,050 2,000
Weighted Average Interest Rate 4.76% 6.82% 5.37%
The Board of Directors has authorized lines of credit for up to $30.0 million.
Short-term borrowings are below the prime rate with some requirements for
compensating balances not exceeding 1% of the line.
Restricted temporary cash investments at December 31, 2001, include $9.2 million
balance of proceeds from the Series Z, AA, BB and CC First Mortgage Bonds and
State Revolving Trust and Fund Bonds issuances. These funds are held in trusts
and restricted for specific capital expenditures and debt service requirements.
Series Z, AA, BB and CC proceeds can only be used for the 2002 through 2004 main
cleaning and cement lining programs. The State Revolving Trust and Fund Bond
proceeds can only be used to fund the construction of the replacement water
system in Fortescue, New Jersey.
32
Note 6 - Capitalization
All the transactions discussed below related to the issuance or redemption of
securities were approved by the BPU, except where noted.
Common Stock
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 average number and per share amounts of no par common stock on the
financial statements have been restated to reflect the effect of the stock
split.
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, 2001, is 957,470. During 2001, 2000 and 1999,
37,917 shares ($1.1 million), 47,945 shares ($1.3 million) and 48,664 shares
($1.3 million) of common stock were issued under DRP and the Restricted Stock
Plan, respectively. Under the Company's Restricted Stock Plan, 2,450 common
shares were returned and cancelled during 2001.
In January 2002, the Board of Directors approved a 5% discount on common stock
sold to participants of the Company's DRP between the period of March 1, 2002
and August 1, 2002. The offer is limited to the first 100,000 shares sold during
the discount period.
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, 2001, no
restrictions were placed on common dividends.
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. In 1999, the
number of authorized preferred stock, without par value, was reduced from
149,980 shares to 140,497 shares to account for the conversion of 8,000 shares
of the $8.00 Series into 82,284 shares of the Company's common shares in 1999
and the cancellation of 1,483 shares of the nonredeemable $7.00 Series
previously redeemed. At December 31, 2001 and 2000, 37,898 shares of preferred
stock presently authorized were outstanding. There were no dividends in arrears.
The conversion feature of the no par $7.00 Series Cumulative and Convertible
Preferred Stock allows the security holders to exchange one convertible
preferred share for nine 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 nine 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 10.2855 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 November 8, 2001, the Company issued $2.350 million, designated as Series BB,
and $2.440 million, designated as Series CC, First Mortgage Bonds through the
New Jersey State Revolving Fund (SRF). Series BB has a zero interest cost, while
Series CC has a coupon rate that varies from 4.0% to 5.0%. The SRF Program,
which is administered by the New Jersey Environmental Infrastructure Trust,
evolved from the Federal Environmental Protection Agency's (EPA) regulations
issued under the Safe Drinking Water Act. Under this program, investor-owned
33
public water utilities can apply for construction loans, which are funded by the
participating state and the EPA through the State's environmental agency. In New
Jersey, initial project approval must be granted by the New Jersey Department of
Environmental Protection. Funds from the EPA, which can equal up to 50% of
construction costs, are loaned at a zero interest cost; the interest rate on the
state portion of the loan is based upon the prevailing market conditions at time
of issuance. Interest paid to the bondholders is exempt from federal and New
Jersey income taxes. However, the interest is subject to the Alternative Minimum
Tax. The proceeds of the bonds are being used to fund the 2003 and 2004 capital
project to clean and cement line previously unlined pipes and mains.
Bayview issued unsecured bonds guaranteed by Middlesex through the SRF Program
on November 8, 2001. Bayview borrowed $0.750 million of the zero interest cost
funds and $0.850 million with coupon rates from 4.0% to 5.0%. The proceeds from
this financing will be used to replace the entire water distribution and storage
facilities of the 300 customer system in Fortescue, New Jersey.
The aggregate annual maturities for the amortizing secured note and First
Mortgage Bonds issued under SRF for each of the next five years are as follows:
2002 - $0.4 million; 2003 and 2004 - $0.6 million; and 2005 and 2006 - $0.7
million. All other First Mortgage Bonds are term bonds with a single maturity
date, which are listed in the Consolidated Statements of Capital Stock and
Long-Term Debt.
The weighted average interest rate on all long-term debt at December 31, 2001
and 2000 was 5.63% and 5.83%, 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) and the SRF program ($12.7 million).
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.
Earnings Per Share
- ------------------
The following table presents the calculation of basic and diluted earnings per
share (EPS) for the three years ended December 31, 2001. 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.
(In Thousands Except per Share Amounts)
2001 2000 1999
Basic: Income Shares Income Shares Income Shares
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $6,953 7,598 $5,305 7,533 $7,881 7,390
Preferred Dividend (255) (255) (301)
----------------------------------------------------------------------------
Earnings Applicable to Common Stock $6,698 7,598 $5,050 7,533 $7,580 7,390
Basic EPS $ 0.88 $ 0.67 $ 1.03
Diluted:
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $6,698 7,598 $5,050 7,533 $7,580 7,390
$7.00 Series Dividend 104 134 104 134 104 134
$8.00 Series Dividend 96 123 96 123 142 198
----------------------------------------------------------------------------
Adj. Earnings Applicable to Common Stock $6,898 7,855 $5,250 7,790 $7,826 7,722
Diluted EPS $ 0.88 $ 0.67 $ 1.01
34
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. At December 31, 2001 and 2000, the carrying amount and fair
market value of the Company's bonds were as follows:
(Thousands of Dollars)
2001 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------
First Mortgage Bonds $85,395 $85,603 $79,005 $77,300
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, 2001 and 2000 was $3.3 million. Customer advances
for construction have a carrying amount of $10.8 million and $11.4 million at
December 31, 2001 and 2000, 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. The Company
makes contributions to the Plan consistent with the funding requirements of
federal laws and regulations. Plan assets consist primarily of corporate
equities, cash equivalents and stock and bond funds. In addition, the Company
maintains an unfunded supplemental pension plan for its executives.
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, 2001 and 2000 were $1.0 million.
35
The following table sets forth information relating to the Company's Pension
Plans and Other Postretirement Benefits.
(Thousands of Dollars)
Pension Benefits Other Benefits
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Reconciliation of Benefit Obligation
Beginning Balance $ 17,707 $ 16,304 $ 5,859 $ 4,346
Service Cost 722 678 173 153
Interest Cost 1,282 1,249 426 417
Actuarial (Gain)/Loss (395) 194 238 1,172
Benefits Paid (845) (718) (281) (229)
- ------------------------------------------------------------------------------------------------------------------
Ending Balance $ 18,471 $ 17,707 $ 6,415 $ 5,859
- ------------------------------------------------------------------------------------------------------------------
Reconciliation of Plan Assets at Fair Value
Beginning Balance $ 18,498 $ 17,928 $ -- $ --
Actual Return on Plan Assets 98 1,242 45 --
Employer Contributions 46 46 1,678 229
Benefits Paid (845) (718) (281) (229)
- ------------------------------------------------------------------------------------------------------------------
Ending Balance $ 17,797 $ 18,498 $ 1,442 $ --
- ------------------------------------------------------------------------------------------------------------------
Funded Status $ (674) $ 791 $ (4,973) $ (5,859)
Unrecognized Net Transition Obligation 2 16 1,488 1,623
Unrecognized Net Actuarial (Gain)/Loss (2,488) (4,098) 1,769 1,561
Unrecognized Prior Service Cost 526 535 (4) (4)
- ------------------------------------------------------------------------------------------------------------------
Accrued Benefit Cost $ (2,634) $ (2,756) $ (1,720) $ (2,679)
- ------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Pension Benefits Other
Benefits
2001 2000 1999 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost
Service Cost $ 720 $ 678 $ 669 $ 173 $ 153 $ 140
Interest Cost 1,324 1,249 1,136 426 417 310
Expected Return on Plan Assets (1,448) (1,406) (1,336) (90) -- --
Amortization of Net Transition Obligation 14 14 14 135 135 135
Amortization of Net Actuarial (Gain)/Loss (148) (139) (93) 76 69 29
Amortization of Prior Service Cost 111 111 111 (0) (1) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Periodic Benefit Cost $ 573 $ 507 $ 501 $ 720 $ 773 $ 612
- ----------------------------------------------------------------------------------------------------------------------------------
36
Pension Benefits Other Benefits
2001 2000 1999 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Average Assumptions
Discount Rate 7.25% 7.75% 7.75% 7.25% 7.75% 7.75%
Expected Return on Plan Assets 8.00% 8.00% 8.00% 7.50% - -
Actual Return on Plan Assets 0.54% 7.07% 9.00% 3.73% - -
Rate of Compensation Increase 4.25% 5.00% 5.00% 4.25% 5.00% 5.00%
For measurement purposes, a 5.0% annual rate of increase in the per capita cost
of covered healthcare benefits was assumed for 2001 and all future years.
Assumed healthcare cost trend rates have a significant effect on the amounts
reported for the healthcare plan. A one percentage point change in assumed
healthcare cost trend rates would have the following effects:
(Thousands of Dollars)
1 Percentage Point
Increase Decrease
- ----------------------------------------------------------------------------------------------
Effect on Current Year's Benefit Expense $ 108 $ (84)
Effect on Benefit Obligation 895 (647)
401(k) Plan
The Company has a 401(k) defined contribution plan, which covers substantially
all employees with more than 1,000 hours of service. Under the terms of the
Plan, the Company matches 100% of a participant's contributions, which do not
exceed 1% of a participant's compensation, plus 50% of a participant's
contributions exceeding 1% but not more than 6%. The Company's matching
contributions in 2001, 2000 and 1999 amounted to $0.2 million for each year.
Stock Based Compensation
The Company maintains a Restricted Stock Plan, under which 57,000 shares of the
Company's common stock are held in escrow by the Company for key employees. Such
stock is subject to an agreement requiring forfeiture by the employee in the
event of termination of employment within five years of the grant other than as
a result of retirement, death or disability.
The maximum number of shares authorized for grant under this plan is 240,000
shares. Compensation expense is determined by the market value of the stock on
the date of the award and is being amortized over a five-year period.
Compensation expense for the years ended December 31, 2001, 2000 and 1999 was
$0.2 million, $0.2 million and $0.1 million, respectively.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS
No. 123) the Company elected to account for its stock-based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Had compensation costs for the Company's restricted stock plan been
determined based on methodology prescribed in SFAS No. 123, there would have
been no effect on its results of operations or cash flows.
37
Note 8 - Business Segment Data
The Company has identified two reportable segments. One is the regulated
business of collecting, treating and distributing water on a retail and
wholesale basis to residential, commercial, industrial and fire protection
customers in parts of New Jersey and Delaware. It also operates a regulated
wastewater system in New Jersey. The Company is subject to regulations as to its
rates, services and other matters by the states of New Jersey and Delaware with
respect to utility service within these states. The other segment is
nonregulated contract services for the operation and maintenance of municipal
and private water and wastewater systems in New Jersey and Delaware. On January
1, 1999, the Company began operating the water and wastewater systems of the
City of Perth Amboy, New Jersey under a service contract. 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: 2001 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Regulated $ 52,295 $ 47,634 $ 46,008
Non - Regulated 7,379 6,879 7,527
Inter-segment Elimination (36) (36) (38)
- --------------------------------------------------------------------------------
Consolidated Revenues $ 59,638 $ 54,477 $ 53,497
- --------------------------------------------------------------------------------
Operating Income:
Regulated $ 11,090 $ 9,525 $ 9,718
Non - Regulated 403 413 947
Inter-segment Elimination -- -- --
- --------------------------------------------------------------------------------
Consolidated Operating Income $ 11,493 $ 9,938 $ 10,665
- --------------------------------------------------------------------------------
Depreciation/Amortization:
Regulated $ 4,995 $ 4,646 $ 3,854
Non - Regulated 56 55 31
Inter-segment Elimination -- -- --
- --------------------------------------------------------------------------------
Consolidated Depreciation/Amortization $ 5,051 $ 4,701 $ 3,885
- --------------------------------------------------------------------------------
Other Income:
Regulated $ 1,773 $ 1,284 $ 3,438
Non - Regulated 62 4 (21)
Inter-segment Elimination (1,333) (924) (1,506)
- --------------------------------------------------------------------------------
Consolidated Other Income $ 502 $ 364 $ 1,911
- --------------------------------------------------------------------------------
Interest Expense:
Regulated $ 5,906 $ 5,646 $ 5,071
Non - Regulated 56 56 226
Inter-segment Elimination (920) (705) (602)
- --------------------------------------------------------------------------------
Consolidated Interest Expense $ 5,042 $ 4,997 $ 4,695
- --------------------------------------------------------------------------------
Net Income:
Regulated $ 6,957 $ 5,162 $ 8,064
Non - Regulated 409 362 721
Inter-segment Elimination (413) (219) (904)
- --------------------------------------------------------------------------------
Consolidated Net Income $ 6,953 $ 5,305 $ 7,881
- --------------------------------------------------------------------------------
Capital Expenditures:
Regulated $ 12,649 $ 13,065 $ 23,117
Non - Regulated 98 574 165
Inter-segment Elimination -- -- --
-------- -------- --------
Total Capital Expenditures $ 12,747 $ 13,639 $ 23,282
-------- -------- --------
38
As of As of
December 31, December 31,
2001 2000
- --------------------------------------------------------------------------------
Assets:
Regulated $264,601 $237,904
Non - Regulated 3,858 3,034
Inter-segment Elimination (32,085) (21,538)
- --------------------------------------------------------------------------------
Consolidated Assets $236,374 $219,400
- --------------------------------------------------------------------------------
Note 9 - Quarterly Operating Results - Unaudited
Quarterly operating results for 2001 and 2000 are as follows:
(Thousands of Dollars Except per Share Data)
1st 2nd 3rd 4th
2001 Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------
Operating Revenues $13,144 $14,754 $16,065 $15,675 $59,638
Operating Income 2,072 2,807 3,532 3,082 11,493
Net Income 884 1,918 2,373 1,778 6,953
Basic Earnings per Share* $ 0.11 $ 0.24 $ 0 .30 $ 0.23 $ 0.88
Diluted Earnings per Share* 0.11 0.24 0.30 0.23 0.88
2000
- ---------------------------------------------------------------------------------------
Operating Revenues $12,981 $14,058 $14,387 $13,051 $54,477
Operating Income 2,051 2,528 2,695 2,664 9,938
Net Income 906 1,369 1,537 1,493 5,305
Basic Earnings per Share* $ 0.11 $ 0.17 $ 0.20 $ 0.19 $ 0.67
Diluted Earnings per Share* 0.11 0.17 0.20 0.19 0.67
*All per share amounts reflect the three-for-two common stock split, effective
January 2, 2002.
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.
39
Report of Management
The consolidated financial statements and other financial information included
in this annual report have been prepared by and are the responsibility of
management. The statements have been prepared in conformity with accounting
principles generally accepted in the United States of America considered
appropriate under the circumstances and include amounts based on necessary
judgment and estimates deemed appropriate.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are protected from improper use and
loss and to provide reliable financial information.
The consolidated financial statements of the Company have been audited by its
independent auditors, Deloitte & Touche LLP, and their
report is included herein.
The Board of Directors, through its Audit Committee consisting solely of outside
Directors, is responsible for overseeing and reviewing the Company's financial
reporting and accounting practices. The Audit Committee meets periodically with
the independent auditors to review the scope of their work and discuss any
changes and developments that may impact the Company.
/s/ J. Richard Tompkins /s/ A. Bruce O'Connor
- ----------------------- ---------------------
J. Richard Tompkins A. Bruce O'Connor
Chairman of the Board Vice President and
Controller
February 22, 2002
INDEPENDENT AUDITORS' REPORT
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
its subsidiaries as of December 31, 2001 and 2000 and the related consolidated
statements of income, retained earnings and of cash flows for each of the three
years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Middlesex Water Company and its
subsidiaries at December 31, 2001 and 2000 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America.
/s/DELOITTE & TOUCHE LLP
- ------------------------
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 22, 2002
40
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.
Chairman of the Board and /s/J. Richard Tompkins/ 3/28/02
Director ---------------------- -------
J. Richard Tompkins Date
President and /s/Dennis G. Sullivan/ 3/28/02
General Counsel and ---------------------- -------
Director Dennis G. Sullivan Date
Vice President and Controller /s/A. Bruce O'Connor/ 3/28/02
Chief Financial Officer -------------------- -------
A. Bruce O'Connor Date
Director /s/John C. Cutting/ 3/28/02
------------------ -------
John C. Cutting Date
Director /s/John R. Middleton/ 3/28/02
--------------------- -------
John R. Middleton Date
Director /s/John P. Mulkerin/ 3/28/02
-------------------- -------
John P. Mulkerin Date
Director /s/Stephen H. Mundy/ 3/28/02
------------------- -------
Stephen H. Mundy Date
Director /s/Jeffries Shein/ 3/28/02
----------------- -------
Jeffries Shein Date
41
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.
Previous Filing's
Exhibit Registration Exhibit
No. Document Description No. No.
--- -------------------- --- ---
3.1 Certificate of Incorporation of the Company,
as amended, filed as Exhibit 3.1 of 1998 Form 10-K.
3.2 Bylaws of the Company, as amended. 33-54922 3.2
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 Indentures, dated as of
July 1, 1964 and June 15, 1991, between the Company
and Union County Trust Company, as Trustee. 33-54922 10.4-10.9
10.4 Copy of Supply Agreement, dated as of November
17, 1986, between the Company and the Old Bridge
Municipal Utilities Authority. 33-31476 10.12
42
Previous Filing's
Exhibit Registration Exhibit
No. Document Description No. No.
--- -------------------- --- ---
10.5 Copy of Supply Agreement, dated as of July 14,
1987, between the Company and the Marlboro
Township Municipal Utilities Authority, as amended. 33-31476 10.13
10.6 Copy of Supply Agreement, dated as of February
11, 1988, with modifications dated February 25, 1992,
and April 20, 1994, between the Company and the
Borough of Sayreville filed as Exhibit No. 10.11 of
1994 First Quarter Form 10-Q.
10.7 Copy of Water Purchase Contract and Supple-
mental Agreement, dated as of May 12, 1993,
between the Company and the New Jersey
Water Supply Authority filed as Exhibit No. 10.12 of
1993 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.
10.11 Copy of Supplemental Executive Retirement
Plan, filed as Exhibit 10.13 of 1999 Third 33-31476 10.21
Quarter Form 10-Q.
10.12 Copy of 1989 Restricted Stock Plan, filed
as Appendix B to the Company's Definitive
Proxy Statement, dated and filed April 25, 1997. 33-31476 10.22
10.13(a) Employment Agreement between Middlesex
Water Company and J. Richard Tompkins,
filed as Exhibit 10.15(a) of 1999 Third
Quarter Form 10-Q.
10.13(b) Employment Agreement between Middlesex
Water Company and Walter J. Brady,
filed as Exhibit 10.15(b) of 1999 Third
Quarter Form 10-Q.
43
Previous Filing's
Exhibit Registration Exhibit
No. Document Description No. No.
--- -------------------- --- ---
10.13(c) Employment Agreement between Middlesex
Water Company and A. Bruce O'Connor,
filed as Exhibit 10.15(c) of 1999 Third
Quarter Form 10-Q.
10.13(d) Employment Agreement between Middlesex
Water Company and Marion F. Reynolds,
Filed as Exhibit 10.15(d) of 1999 Third
Quarter Form 10-Q.
10.13(e) Employment Agreement between Middlesex
Water Company and Dennis G. Sullivan,
filed as Exhibit 10.15(f) of 1999 Third
Quarter Form 10-Q.
10.13(f) Employment Agreement between Middlesex
Water Company and Ronald F. Williams,
filed as Exhibit 10.15(g) of 1999 Third
Quarter Form 10-Q.
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.
44
Previous Filing's
Exhibit Registration Exhibit
No. Document Description No. No.
--- -------------------- --- ---
10.18 Copy of Supplemental Indenture dated October 15, 1998
between Middlesex Water Company and First Union
National Bank, as Trustee. Copy of Loan Agreement
dated November 1, 1998 between the State of New Jersey
Environmental Infrastructure Trust and Middlesex Water
Company (Series Y), filed as Exhibit No. 10.23 of the 1998
Third Quarter Form 10-Q.
10.19 Copy of Operation, Maintenance and Management Services
Agreement dated January 1, 1999 between the Company, City
Of Perth Amboy, Middlesex County Improvement Authority
And Utility Service Affiliates, Inc. 333-66727 10.24
10.20 Copy of Supplemental Indenture dated October 15, 1999
Between Middlesex Water Company and First Union
National Bank, as Trustee and copy of Loan Agreement
Dated November 1, 1999 between the State of New Jersey and
Middlesex Water Company (Series Z), filed as Exhibit No. 10.25
of the 1999 Form 10-K.
10.21 Copy of Supplemental Indenture dated October 15, 1999
between Middlesex Water Company and First Union
National Bank, as Trustee and copy of Loan Agreement dated
November 1, 1999 between the New Jersey Environmental
Infrastructure Trust and Middlesex Water Company (Series AA),
Filed as Exhibit No. 10.26 of the 1999 Form 10-K.
*10.22 Copy of Supplemental Indenture dated October 15, 2001
Between Middlesex Water Company and First Union
National Bank, as Trustee and copy of Loan Agreement
Dated November 1, 2001 between the State of New Jersey and
Middlesex Water Company (Series BB).
*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)
*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)
*23 Independent Auditors' Consent.
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