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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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, 1998 No. 0-422
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MIDDLESEX WATER COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-1114430
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 Ronson Road, Iselin, New Jersey 08830-3020
- ------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(732) 634-1500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
- ------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par Value
--------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant at March 19, 1999 was $122,103,067 based on the closing market price
of $24.875 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 19, 1999
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Common Stock, No par Value 4,908,666
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Documents Incorporated by Reference
Proxy Statement to be filed in connection with the Registrant's Annual Meeting
of Shareholders to be held on May 26, 1999 as to Part III.
MIDDLESEX WATER COMPANY
FORM 10-K
INDEX
PART I
Item 1. Business:
General
Retail Sales
Contract Sales
Contract Services
Financial Information
Water Supplies and Contracts
Competition
Regulation
Regulation of Rates and Services
Water Quality and Environmental Regulations
Employees
Executive Officers of Middlesex Water Company
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote
of Security Holders
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters:
Price Range of Common Stock
Approximate Number of Equity Security
Holders as of December 31, 1997
Dividends
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 7a. Qualitative and Quantitative Disclosures
About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
Signatures
Exhibit Index
PART I
Item 1. Business
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Middlesex Water Company was incorporated as a water utility company in
1897 and operates water utility systems in central and southern New Jersey and
in Delaware as well as a wastewater utility in southern New Jersey. The water
utility system in central New Jersey, which we call the "Middlesex System,"
produced 87.8% of the Company's 1998 revenues. The Middlesex System treats,
stores and distributes water for residential, commercial, industrial and fire
prevention purposes.
Our Middlesex System provides water services to approximately 54,000
retail customers, primarily in eastern Middlesex County, New Jersey and provides
water on a contracted basis to the Township of Edison, the Boroughs of Highland
Park and Sayreville, the City of South Amboy and both the Old Bridge and the
Marlboro Township Municipal Utilities Authorities. Under a special contract, the
Middlesex System also provides water treatment and pumping services to the
Township of East Brunswick.
The Middlesex System's retail customers are located in an area of
approximately 55 square miles in Woodbridge Township, the Boroughs of Metuchen
and Carteret, portions of Edison Township and the Borough of South Plainfield in
Middlesex County and a portion of the Township of Clark in Union County. The
retail customers include a mix of residential customers, large industrial
concerns and commercial and light industrial facilities. These retail customers
are located in generally well developed areas of central New Jersey. The
contract customers of the Middlesex System comprise an area of approximately 141
square miles with a population of approximately 267,000. Contract sales to
Edison, Sayreville, Old Bridge and Marlboro are supplemental to the existing
water systems of these customers. The State of New Jersey in the mid-1980's
approved plans to increase available surface water supply to these and other
municipalities in the South River Basin area of the State through contracts with
water suppliers outside the South River Basin. The State saw this as a way to
reduce the use of ground water and depletion of acquifers. Our long-term
contracts to pump treated surface water to East Brunswick, Marlboro, Old Bridge,
Sayreville and South Amboy are consistent with the State approved plan.
We have five wholly-owned subsidiaries:
o Tidewater Utilities, Inc. ("Tidewater"), together with Tidewater's
wholly-owned subsidiary, Public Water Supply Company, Inc.
("Public"), provide water services to 11,300 retail customers for
residential, commercial and fire protection purposes in over 100
separate community water systems in Kent, Sussex and New Castle
Counties, Delaware. We refer to our Delaware operations as the
"Tidewater Systems". The Tidewater Systems produced approximately
8.8% of our total revenues in 1998. Tidewater has another
wholly-owned subsidiary, White Marsh Environmental Systems, Inc.,
which owns the office building that Tidewater uses as its business
office.
o Pinelands Water Company services 2,200 residential customers in
Burlington County, New Jersey. We refer to this water utility as
the "Pinelands System." The Pinelands System produced approximately
0.8% of our total revenues in 1998.
-1
o Pinelands Wastewater Company services approximately 2,200 primarily
residential retail customers and, under contract, one municipal
wastewater system in Burlington County, New Jersey with about 200
residential customers. We refer to this wastewater utility as the
"Pinelands Wastewater System." The Pinelands Wastewater System
produced approximately 1.5% of our total revenues in 1998.
o Utility Service Affiliates, Inc., along with Middlesex Water
Company, entered into a five-year contract with the City of South
Amboy, New Jersey to operate and maintain the city's 2,600 customer
water system in May 1995. The contract is renewable for up to three
additional five-year periods. We refer to this subsidiary as "USA."
USA produced approximately 1.1% of our total revenues in 1998.
Middlesex Water Company has negotiated the acquisition, subject to
Board of Public Utilities (BPU) approval, of a franchise to provide
water service and to install water system facilities in South
Amboy. Assuming BPU approval is obtained, Middlesex Water Company
will operate and maintain the system on a retail basis.
o Utility Service Affiliates (Perth Amboy) Inc., which we refer to as
"USA-PA," along with Middlesex Water Company, signed an agreement
on December 8, 1998 with the City of Perth Amboy (the City) and the
Middlesex County Improvement Authority (MCIA). Under that
agreement, USA-PA will operate and maintain the City's water system
and the wastewater system for 20 years. USA-PA will be paid a fixed
fee and a variable fee based on increased system billings. Fixed
fee payments to USA-PA in the agreement rise from $6.4 million in
the first year to $9.7 by year 20. The agreement also requires
USA-PA to lease from the City all of the City's employees who
currently work on the City's water system or wastewater system. In
connection with the agreement, the City of Perth Amboy, through the
MCIA issued $68.0 million in three series of bonds. One of those
series of bonds, in principal amount of $26.3 million, is
guaranteed by the Company. The City guaranteed the two other series
of bonds. The Company also guaranteed the performance of our
subsidiary, USA-PA. USA-PA entered into a subcontract with a sewer
contracting firm for the operation and maintenance of the City's
wastewater system. City employees who now work on the City's
wastewater system are subleased by the subcontractor from USA-PA.
Of the $6.4 million fixed fee payable to USA-PA in the first year
of the agreement, $3.0 million will be payable to the
subcontractor. The variable fee payable by USA-PA to the
subcontractor would be based on a portion of the increased billings
attributable to the wastewater system. USA-PA began to operate and
maintain the City's systems on January 1, 1999.
-2-
Financial Information
---------------------
Consolidated operating revenues and operating income relating
primarily to operating water utilities are as follows:
(000's)
Years Ended December 31,
------------------------
1998 1997 1996
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Operating Revenues ............. $43,058 $40,294 $38,025
======= ======= =======
Operating Income ............... $ 9,149 $ 8,768 $ 8,222
======= ======= =======
Operating revenues were derived from the following sources:
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Residential ................. 41.4% 40.3% 39.7%
Commercial .................. 11.4 11.4 11.4
Industrial .................. 15.8 16.5 17.4
Fire Protection ............. 11.5 11.6 12.2
Contract Sales .............. 17.5 18.3 17.8
Other ....................... 2.4 1.9 1.5
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TOTAL .................. 100.0% 100.0% 100.0%
===== ===== =====
Water Supplies and Contracts
----------------------------
Our water utility plant consists of sources of supply, pumping, water
treatment, transmission, distribution and general facilities located in New
Jersey and Delaware. Our New Jersey and Delaware water supply systems are
physically separate and are not interconnected. In addition, in New Jersey, the
Pinelands System is not interconnected with the Middlesex System. In the opinion
of management, we have adequate sources of water supply to meet the current and
anticipated future service requirements of our present customers in New Jersey
and Delaware.
Middlesex System:
Our Middlesex System obtains water from both surface sources and from
wells which we call groundwater sources. In 1998, surface sources of water
provided approximately 68.1% of the Middlesex System's water supply, groundwater
from wells provided approximately 25.0% and the balance of 6.9% 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.
-3
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").
Under a multistate compact, the NJWSA is entitled to divert water from the
Delaware River through the D&R Canal. This supply, together with water in the
Round Valley and Spruce Run Reservoir System, provide a safe yield of 225
million gallons per day (mgd), which supplies our Middlesex System and other
large water purveyors contractually regulated by the NJWSA. We have contracts
with the NJWSA to divert a minimum of 20 mgd of untreated water from the D&R
Canal. In addition, we have a one year agreement for an additional 5 mgd,
renewed through April 30, 1999. We also have 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. This contract
also allows us to purchase additional water from Elizabethtown on an emergency
basis.
Our Middlesex System also derives water from groundwater sources
equipped with electric motor driven deep well turbine type pumps. The Middlesex
System has 32 wells, which provide an aggregate pump capacity of approximately
27 mgd.
The Middlesex System's groundwater sources are:
1998 Maximum Daily
Pumpage Pump
No. of (millions of Capacity
Middlesex System Wells gallons) (mgd) Location
---------------- ----- -------- ----- --------
Park Avenue 15 10.8 15.2 South Plainfield
Tingley Lane North 4 3.2 2.8 Edison
Tingley Lane South 5 2.9 2.6 Edison
Spring Lake 4 1.2 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 1.0 0.9 South Plainfield
Thermal Well 1 0.2 0.2 Edison
--
Total 32
Tidewater Systems:
Water supply to Delaware customers is derived from the Tidewater
Systems' 119 wells which provided overall system delivery of 523 million gallons
during 1998. The Tidewater Systems do not have a central treatment facility.
Several of its water systems in Sussex County and New Castle County, Delaware
have interconnected transmission systems. Treatment is by chlorination and, in
some cases, pH correction and filtration.
-4-
Pinelands System:
The Pinelands System obtains its water supply from four 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 a electric motor driven
submersible pump. Disinfection is done at individual well sites, which are
located in Southampton Township, New Jersey. The wells have an aggregate pump
capacity of 2.2 mgd. In 1998, the maximum daily pumpage was 2.1 million gallons.
Pinelands Wastewater System:
The Pinelands Wastewater System discharges into the South Branch of the
Rancocas Creek through a tertiary treatment plant that provides clarification,
sedimentation, filtration and disinfection. The total capacity of the plant is
0.5 mgd. Current average flow is 0.3 mgd. Pinelands has a current valid
discharge permit issued by the New Jersey Department of Environmental Protection
("DEP").
Competition
-----------
Our business in our franchised service areas is substantially free from
direct competition with other public utilities, municipalities and other
entities. However, our ability to provide some contract water supply and
wastewater services and operations and maintenance services is subject to
competition from other public utilities, municipalities and other entities.
Although the Tidewater System has been granted an exclusive franchise for each
of its existing community water systems, its ability to expand service areas has
been affected by the Delaware Department of Natural Resources and Environmental
Control (DNREC) awarding franchises to other regulated water purveyors,
including franchises granted to community water systems around and in between
the Tidewater Systems service areas.
Regulation
----------
We are subject to regulation as to our 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.
We are also subject to environmental and water quality regulation by the United
States Environmental Protection Agency ("EPA").
Regulation of Rates and Services
--------------------------------
New Jersey operations are subject to regulation by the BPU. Similarly,
our Delaware operations are subject to regulation by the Public Service
Commission (PSC). These regulatory authorities have jurisdiction with respect to
rates, service, accounting procedures, the issuance of securities and other
matters. In determining our rates, the BPU and the PSC consider the income,
expenses, rate base of property used and useful in providing service to the
public and a fair rate of return on that property. Rate determinations by the
BPU do not guarantee particular rates of return to the Company for our New
Jersey operations nor do rate determinations by the PSC guarantee particular
rates of return for our Delaware operations. Thus, we may not achieve the rates
of return allowed by the BPU or the PSC.
-5-
We filed a petition with the BPU on September 17, 1998 for a 21.9% rate
increase to include the $38 million costs of the CJO Plant Project in our rate
base and to recover certain other of our costs which have increased. The Company
anticipates that a BPU determination with respect to this petition may not be
made until the summer of 1999. There can be no assurance that the rate increase
will be granted or, if granted, that it will be in the amount we requested.
We anticipate that we may file with the PSC during 1999 for a rate
increase for the Tidewater Systems, which may also include a request to combine
Tidewater and Public into a single entity.
Water Quality and Environmental Regulations
-------------------------------------------
Both the EPA and the DEP regulate our operations in New Jersey with
respect to water supply, treatment and distribution systems and the quality of
the water, as do the EPA, the 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, environmental regulatory agencies are reviewing current regulations
governing the limits of certain organic compounds found in the water as
byproducts of treatment. The Company believes the Carl J. Olsen Water Treatment
Plant (CJO Plant) upgrade and expansion will allow the Company to be in a
stronger position to meet any such future regulations with regard to its
Middlesex System. Regular testing of our water demonstrates that we are in
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
---------
As of December 31, 1998, we had a total of 144 employees in New Jersey,
and a total of 30 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. As part of USA-PA's agreement with the City of Perth Amboy, 40
employees currently working in the City's water and wastewater systems are
leased by USA-PA. The City employees are represented by several unions and are
subject to contract negotiations with the City.
Executive Officers of Middlesex Water Company
---------------------------------------------
Walter J. Brady - age 57; Senior Vice President-Administration; term expires May
1999. 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 an Officer and Director of
Utility Service Affiliates (Perth Amboy) Inc.
-6-
A. Bruce O'Connor - age 40; Vice President and Controller; term expires May
1999. 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 an Officer and Director of Tidewater Utilities, Inc., Public
Water Supply Company, Inc., Pinelands Water Company, Pinelands Wastewater
Company and an Officer of White Marsh Environmental Systems, Inc., Utility
Service Affiliates, Inc. and Utility Service Affiliates (Perth Amboy) Inc.
Marion F. Reynolds - age 59; Vice President, Secretary and Treasurer; term
expires May 1999. 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
an Officer of Tidewater Utilities, Inc., Utility Service Affiliates (Perth
Amboy) Inc., Pinelands Water Company and Pinelands Wastewater Company and a
Director of Utility Service Affiliates, Inc.
Richard A. Russo - age 53; Executive Vice President; term expires May 1999. Mr.
Russo, who had been Vice President-Operations since 1989 was elected Executive
Vice President in 1995 and is responsible for engineering, water production,
water treatment and distribution maintenance. He was formerly employed by
Trenton Water Works as General Superintendent and Chief Engineer since 1979. He
is President and Director of Tidewater Utilities, Inc., White Marsh
Environmental Systems, Inc., Public Water Supply Company, Inc., Pinelands Water
Company and Pinelands Wastewater Company. He is also Executive Vice President
and Director of Utility Service Affiliates, Inc. and Utility Service Affiliates
(Perth Amboy) Inc.
Dennis G. Sullivan - age 57; Vice President and General Counsel, Assistant
Secretary-Assistant Treasurer; term expires May 1999. Mr. Sullivan was hired in
1984 as Corporate Attorney, responsible for general corporate internal legal
matters. He was elected Assistant Secretary-Assistant Treasurer in 1988 and Vice
President and General Counsel in 1990. He was employed in a private law practice
from 1981 to 1984 as a staff attorney. He is an Officer and Director of
Tidewater Utilities Inc., White Marsh Environmental Systems, Inc., Public Water
Supply Company, Inc., Utility Service Affiliates, Inc., and Utility Service
Affiliates (Perth Amboy) Inc. and a Director of Pinelands Water Company and
Pinelands Wastewater Company.
J. Richard Tompkins - age 60; Chairman of the Board and President; term expires
May 1999. 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 Director of Tidewater Utilities, Inc.,
White Marsh Environmental Systems, Inc., Pinelands Water Company and Pinelands
Wastewater Company; Director of Public Water Supply Company, Inc. 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.
-7-
Ronald F. Williams - age 50; Vice President-Operations; term expires May 1999.
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 an Officer and Director of Utility Service Affiliates, Inc., and
Utility Service Affiliates (Perth Amboy) Inc.
Item 2. Properties
----------
The water and wastewater utility properties of our systems consist of
source of supply, pumping, water treatment, transmission and distribution,
wastewater collection and treatment and general facilities.
Middlesex System:
The 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 our intake and pumping station located on State owned land bordering the
Canal. It is transported through our 54 inch supply main for treatment and
distribution at the CJO Plant. Facilities at the CJO Plant consist of source of
supply, pumping, water treatment, transmission, storage, laboratory and general
facilities. We monitor water quality at the CJO Plant, at each well field and
throughout the distribution system to determine that federal and state water
quality standards are met.
The design capacity of the intake and pumping station in New Brunswick,
New Jersey, is 80 mgd. The four electric motor driven vertical turbine pumps
presently installed have an aggregate design capacity of 65 mgd. The station is
designed to permit its pumping capacity to be increased to 80 mgd by the
installation of additional pumping units. The design capacity of our raw water
supply main is 55 mgd. We also have a 58,600 foot transmission main; a long term
lease agreement with the City of Perth Amboy for the use of a 38,800 foot
transmission main; and a long term, nonexclusive "wheeling agreement" with the
East Brunswick system, all used to transport water to several of our contract
customers. The lease agreement with the City of Perth Amboy includes an option
to purchase the transmission main at the end of the lease term.
The CJO Plant includes chemical storage and chemical feed equipment,
dual rapid mixing basins, four reinforced concrete mechanical flocculation
compartments, four underground reinforced concrete settling basins, eight rapid
filters containing gravel, sand and anthracite for water treatment and a steel
washwater tank. The firm design capacity of the CJO Plant is now 30 mgd (45 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 65 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-
In November 1997 construction began on the upgrade, expansion and
addition of facilities at the CJO Plant and related water intake station, which
we refer to as "The Project." The Project includes the installation of new flash
mixers and new chemical storage and feed facilities. The existing conventional
sedimentation basins are being replaced by high rate upflow clarifiers that are
intended to remove turbidity more effectively . The chlorine application point
is being relocated from preclarification to postclarification. The existing
sedimentation basins are to be used as chlorine contact basins. Four additional
filters are being added to the CJO Plant, a new laboratory is being constructed,
and a computerized Supervisory Control and Data Acquisition (SCADA) system is
being added to monitor and control the CJO Plant and our water supply and
distribution system in central New Jersey. Upgrades are also being made to the
heating, ventilating, air conditioning and the electrical system at the CJO
Plant and to the pumping equipment at our raw water pump station.
The Project will upgrade the CJO Plant to meet the new and anticipated
regulatory changes concerning water quality, as well as increase capacity to
meet peak-day demands. The firm capacity of the CJO Plant is being increased
from about 30 mgd to 45 mgd (we define firm capacity as the capacity when the
largest unit is out of service).
The Project also involves changes to the raw water pump station which
delivers water from the D&R Canal to the CJO Plant, a distance of about one
mile. The station capacity is being increased by replacing one existing pump
with a larger pump. The firm capacity of the raw water pump station is being
increased from about 35 mgd to 45 mgd. Functional completion of the Project (by
which we mean the ability to produce water) is scheduled for June, 1999, with
final completion set for October, 1999.
The total cost of the Project, including design, engineering and
capitalized interest, will be approximately $38 million. Of this amount, we
expended $7.9 million through March 31, 1998 from operations of our central New
Jersey system. In March, 1998, we issued our 5.35% Series W Mortgage Bonds which
provided an additional $23 million. The remainder of the cost of the Project
will be funded from proceeds of our December 1998 common stock offering.
We have a RENEW Program in the Middlesex System to clean and line with
cement previously unlined cast iron mains. There are approximately 170 miles of
unlined cast iron mains in the 670 mile Middlesex System. In 1999, we will clean
and line approximately nine miles of unlined mains.
Middlesex System's storage facilities consist of a 10 mg reservoir at
the CJO Plant, 5 mg and 2 mg reservoirs in Edison, a 5 mg reservoir in Carteret
and a 2 mg reservoir at the Park Avenue Well Field.
We own the properties in New Jersey on which Middlesex System's 32
wells are located. We also own our headquarters complex at 1500 Ronson Road,
Iselin, New Jersey, consisting of a 27,000 square foot, two story office
building and an adjacent 16,500 square foot maintenance facility.
Tidewater Systems:
The Tidewater Systems' storage facilities include 21 ground level
storage tanks with the following capacities: eleven 30,000 gallon tanks, five
25,000 gallon tanks, three 120,000 gallon tanks, one 135,000 gallon tank, one
82,000 gallon tank and one elevated storage tank with a capacity of 250,000
gallons.
-9-
Our Delaware operations are managed from Tidewater's leased offices in
Odessa, Delaware and from Public's leased offices in Millsboro, Delaware.
Tidewater's office property, which is owned by its wholly-owned subsidiary,
White Marsh Environmental Systems, Inc., consists of a 2,400 square foot
building situated on a one (1) acre lot.
Pinelands System:
Pinelands Water Company owns well site properties which are located in
Southampton Township, New Jersey. Pinelands Water storage facility is a 1.2 mg
standpipe.
Pinelands Wastewater System:
Pinelands Wastewater Company owns a 12 acre site on which its 0.5 mgd
capacity tertiary treatment plant is located.
Item 3. Legal Proceedings
-----------------
A motel in our Middlesex service area originally filed claims against
us in 1990 alleging financial losses due to improper water pressure and service
and also seeking punitive damages. Subsequently in 1994, and again in 1997, the
motel suffered outbreaks of legionella, resulting in the 1997 shutdown of the
motel by the New Jersey Department of Health. The motel amended its claims to
assert that we provided water containing the legionella bacteria. The motel is
in bankruptcy. A bank creditor of the motel has joined in the motel's claim
against us. We believe that the motel's claims are not supportable. 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 us. We have substantial
insurance coverage, which we believe will be sufficient for all claims in this
matter other than for punitive damages. We do not believe the motel's claims for
punitive damages will prevail. While the outcome of this case remains uncertain,
we believe that the final resolution will not have a significant effect on our
financial condition or results of operation.
A 1995 fire at a warehouse in our service territory resulted in
multiple party claims brought forth in the Superior Court for Middlesex County,
New Jersey, as well as, with the financial collapse of the principal tenant, in
the Federal Bankruptcy Court. The claims in the State court action are for
unspecified amounts but include claims against us for insufficient water
pressure and supply. The Bankruptcy Court has stayed all claims against the
tenant except, to the extent the tenant is insured, claims brought by us arising
from claims made against us by other tenants and the landlord. Under New Jersey
case law, we will not have financial responsibility to parties to the extent
they receive payments under their own insurance policies. We do not know either
the total amount of claims against us or how much of that amount will be covered
by the parties' own insurance policies. Our counsel in the litigation advises us
that the case is unlikely to be resolved rapidly. We believe we have substantial
defenses to the claims against us, although we do not have insurance coverage
for them.
-10-
The Company has been notified of a potential claim of $1.5 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 a petroleum based insulating fluid. The Company is insured for damages
except for damages resulting from pollution discharge. Causation and liability
has not been established.
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.
1998 High Low Dividend
---- ---- --- --------
First Quarter $22 1/2 $19 7/8 $0.28 1/2
Second Quarter 21 1/4 19 1/4 0.28 1/2
Third Quarter 22 20 1/8 0.28 1/2
Fourth Quarter 25 3/4 21 1/4 0.29 1/2
1997 High Low Dividend
---- ---- --- --------
First Quarter $18 $17 $0.28
Second Quarter 17 7/8 16 3/8 0.28
Third Quarter 19 1/4 16 3/8 0.28
Fourth Quarter 22 1/2 18 0.28 1/2
Approximate Number of Equity Security Holders as of December 31, 1998
---------------------------------------------------------------------
Number of
Title of Class Record Holders
-------------- --------------
Common Stock, No Par Value 2,305
Cumulative Preferred Stock, No Par Value:
$7 Series 17
$4.75 Series 1
Cumulative Convertible Preferred Stock, No Par Value:
$7 Series 4
$8 Series 5
-11-
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
-----------------------------------
The companies referred to herein are defined in Note 1(a), Notes to the
Consolidated Financial Statements, included in Item 8 in Part II of this Form
10-K.
Liquidity and Capital Resources
The Company's actual capital expenditures for 1997 and 1998 and
projected requirements through 2001 are detailed as follows:
(in millions)
1997 1998 1999 2000 2001
------- ------- ------- ------- ------
CJO Plant ..................... $ 3.1 $ 18.6 $ 15.0 $ -- $ --
Delaware Systems .............. 1.4 3.2 5.8 3.3 1.1
RENEW Program ................. 1.8 2.1 2.0 2.0 2.0
Scheduled upgrades to
existing systems ............ 4.4 3.4 3.8 5.1 6.7
------- ------- ------- ------- ------
Total ...................... $ 10.7 $ 27.3 $ 26.6 $ 10.4 $ 9.8
------- ------- ------- ------- ------
Our plan to finance these projects is underway. Net proceeds from the
$23.0 million Series W First Mortgage Bonds and the December 1998, $12.7 million
common stock offering will be used to finance the Carl J. Olsen Water Treatment
Plant (CJO Plant) expenditures in 1999. Middlesex issued $2.2 million of First
Mortgage Bonds through the New Jersey State Revolving Fund to cover the cost of
the 1999 RENEW Program, which is our program to clean and cement line
approximately nine miles of unlined mains in the Middlesex System. There is a
total of approximately 170 miles of unlined mains in the 670 mile Middlesex
System. We expect to apply for similar funds in 1999 for the years 2000 and 2001
RENEW Programs. The financing of our Delaware subsidiaries' capital program may
be a combination of a capital contribution from Middlesex and long-term debt
financing from either a financial institution or the Company. The debt financing
decision will be based upon the terms of financing available to our Delaware
subsidiaries. We expect to be able to cover the costs of scheduled upgrades to
the existing systems with the cash flow generated from our utility operations
through the year 2001.
-12-
The Company currently has eight series of First Mortgage Bonds
outstanding in the aggregate principal amount of $74.7 million. 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. Approximately
$3.4 million was outstanding under that note as of December 31, 1998.
From time to time it may be necessary to utilize all or part of the
$28.0 million in total lines of credit we have available with three commercial
banks for working capital purposes or to provide interim funds until long-term
financing is arranged. At December 31, 1998, we had $1.0 million of loans
outstanding against those lines of credit.
Results of Operations
1998 Compared to 1997
Operating Revenues were up $2.8 million or 6.9% over 1997. The increase
was attributable to several factors. Rate increases accounted for $1.7 million
of additional revenues. In January 1998, Middlesex implemented a BPU approved
rate increase of 4.4%, and Pinelands Water and Wastewater Companies implemented
the second part of a three phase rate increase. The final phase was put in place
in January 1999. In addition, $0.5 million was added to revenues by the
inclusion of Public for the entire year of 1998 compared to five months in 1997.
Public was acquired on July 31, 1997. The continued double-digit growth of 11.5%
in Tidewater's customer base also contributed $0.5 million in revenues.
Higher revenues were partially offset by increased operating expenses
of $2.4 million or 7.6%. The increases were related primarily to the following
factors. Purchased water and water treatment expenses reflected a combined
increase of $0.2 million as a result of Middlesex changing the composition of
the water sources it uses to supply its customers. Purchased power increased
$0.2 million due in part to a large credit Middlesex received in 1997 from its
power provider. Mandated recognition of postretirement benefit costs other than
pensions and amortization of BPU approved regulatory deferrals added $0.5
million and $0.2 million, respectively, to expenses. Labor costs were higher by
$0.5 million, and the inclusion of Public's expenses for a full year accounted
for $0.3 million of the increase.
Depreciation expense increased $0.2 million or 7.0% based on newly
constructed utility plant placed in service in 1998 and utility plant acquired
through the acquisition of Public.
Other Taxes increased $0.3 million and related mostly to
revenue-related taxes and employers' payroll taxes. The decrease in Federal
income taxes is due to a lower amount of deferred taxes, which offset an
increased amount of current taxable income.
Other income increased $1.4 million compared to 1997. An increase of
$0.9 million in Allowance for Funds Used During Construction was related to the
capital expenditures incurred in connection with the upgrade of the CJO Plant.
Interest income rose $0.5 million as a result of the unexpended proceeds
available for investment from the Series W Mortgage Bonds issued in March 1998.
-13-
Total interest charges rose $1.1 million. This increase reflects $0.9
million of interest expense related to the Series W Mortgage Bonds and increased
interest of $0.2 million on a higher level of short-term borrowings under
existing lines of credit incurred to finance the capital program on an interim
basis.
The $0.1 million increase in preferred stock dividend requirements
reflects the issuance on July 31, 1997, of the $8.00 preferred stock series to
complete the acquisition of Public. Basic and diluted earnings per share
increased $0.09 and $0.08, respectively over 1997. The $0.01 per share dilution
in 1998 is the result of the two series of convertible preferred stock currently
outstanding.
Results of Operations
1997 Compared to 1996
Net income increased 13.4% to $5.9 million in 1997 compared with $5.2
million in the prior year. Operating revenues increased by $2.3 million to $40.3
million due to favorable weather conditions in New Jersey and Delaware,
continued growth in Tidewater's customer base of 12%, rate increases implemented
by the Pinelands Companies, increased contract revenues from USA and the
inclusion of Public's operating results since August 1997.
Somewhat offsetting the effect of increased revenues were higher
operations and maintenance expenses of $0.7 million or 3.7%, which reflected
increased purchased water of $0.3 million; transmission and distribution
expenses of $0.3 million; administrative and general expenses of $0.2 million
and the inclusion of operating expenses for Public of $0.2 million. These
increases were offset by reductions in purchased power and water treatment
expenses of $0.3 million.
Depreciation expense increased 4.8% due to a higher level of
depreciable plant in service. Other taxes increased $0.2 million and were
related primarily to revenue-related taxes. A higher level of taxable income
resulted in a $0.6 million increase in federal taxes.
Regulatory Matters
On December 8, 1998, the Company's newly formed subsidiary, USA-PA,
entered into a 20-year agreement with the City of Perth Amboy, New Jersey (Perth
Amboy) and the Middlesex County Improvement Authority (MCIA) to operate and
maintain the water and wastewater systems of Perth Amboy. USA-PA began operating
the City's systems on January 1, 1999.
Perth Amboy has a population of 40,000 and has approximately 9,500
customers, most of whom are served by both systems. The agreement is being
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 will receive a fixed fee and a variable fee based on increased system
billing. Fixed fee payments begin at $6.4 million in the first year and increase
to $9.7 in year 20. 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 MCIA, issued
approximately $68.0 million in three series of bonds on January 28, 1999. The
Company guaranteed one of those series of bonds, in principal amount of
approximately $26.3 million. Perth Amboy guaranteed the two other series of
bonds.
-14-
In addition to the agreement with Perth Amboy, effective January 1,
1999, USA-PA entered into a 20-year subcontract with a sewer contracting firm
for the operation and maintenance of the Perth Amboy wastewater system. The
subcontract requires the sharing of certain fixed and variable fees and
operating expenses.
In December 1998, Middlesex filed a petition with the Board of Public
Utilities of the State of New Jersey (BPU) for approval of a franchise ordinance
to provide retail water service and install water system facilities in the City
of South Amboy (South Amboy). A favorable decision by the BPU will result in the
elimination of an existing wholesale water sales contract and a significant
modification to an existing management service contract between the Company and
South Amboy. A decision from the BPU is expected in the second quarter of 1999.
On September 17, 1998, Middlesex filed a petition with the BPU for a
base rate increase of $8.0 million or 21.9%. Approximately 75% of the increase
is necessary to recover the investment in the upgrade and expansion of the CJO
Plant serving our central New Jersey water system. The purpose of the upgrade is
to meet the new and anticipated regulatory standards concerning water quality,
as well as to increase the plant's production capacity. A decision by the BPU is
expected in the summer of 1999.
On January 29, 1998, the BPU approved an increase in the rates of
Middlesex by 4.4% or $1.5 million. The original petition was filed in November
1996. Under the approval, the allowed return on equity is 11.0% with an overall
rate of return of 8.56%. The increase includes the recovery of postretirement
costs other than pension expenses which are mandated by the Company's compliance
with Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions."
In January 1997, the BPU approved a stipulation agreed to by the
parties to the Pinelands Water and Wastewater Companies' rate cases which were
filed in February 1996. The stipulations allow for a combined rate increase
which will result in $0.4 million additional revenues. The new rates were phased
in over a three-year period to minimize the impact on customers. The three
phases were implemented in January 1999, 1998 and 1997, respectively.
Accounting Standards
In June 1998, The Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts. The Company is currently evaluating the requirements of the
accounting standard, which is required to be adopted in the first quarter of
2000.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," revises and standardizes disclosure requirements for
pension and other post-retirement benefit plans but does not change the
measurement or recognition of those plans. Effective January 1, 1998, the
Company adopted SFAS No. 132. See Note 9 to the Consolidated Financial
Statements.
-15-
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting certain financial and
descriptive information about operating segments in complete sets of financial
statements and requires selected information about operating segments in interim
financial reports issued to shareholders. The Company has evaluated SFAS No. 131
and has determined that at December 31, 1998, there are no disclosure
requirements that would impact the Company's financial statements.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. At December 31, 1998, the Company
does not have any significant items of comprehensive income that would effect
the current reporting of the Company's financial position, results of operations
or cash flows.
Year 2000 Disclosure
- --------------------
Software used in many computer systems and computerized control devices
was designed to record only the last two digits of each year. This software,
some of which we own, may not function properly as of January 1, 2000, because
it interprets the new year as 1900. An internal Year 2000 (Y2K) Committee was
formed to evaluate the readiness of our existing computer systems and to design
contingency plans to protect against service interruption.
Under the direction of the Y2K Committee, our own computer systems were
tested to make certain that those systems will work properly when identifying
date information. All of the data processing systems serving our financial
reporting, customer billing, customer information, shareholder records and
payroll, are outsourced. Those vendors have certified that their systems have
been tested and will work properly. Certification was also received from the
vendor constructing the new automated control system at the CJO Plant as to its
Y2K readiness. This system provides centralized control over all the critical
components of the Middlesex water production, distribution and storage systems.
We believe we may rely on those certifications. We expect to spend up to $10,000
to make certain other systems, including our network of desktop personal
computers, Y2K ready. Nonetheless, it is possible that not every Y2K affected
computerized control device of ours has been identified. Even if identified, we
may not be able to reprogram or replace those devices in time to avoid date
identification problems.
More importantly, we are concerned about the failure of computer
systems and control devices used by vendors who deliver critical materials and
services that are used by us in providing water and wastewater service. Some of
these critical vendors provide us with electric power, raw water, finished
water, telecommunications, water treatment chemicals, fuel and residual removal
services. The Y2K Committee has performed the following steps to evaluate the
effect of these outside factors.
Internal information is under review regarding chemical and fuel
storage capacity, production capabilities using alternative power, manpower
requirements for manual system operations (including financial) and emergency
communication systems.
Middlesex is a member of the BPU Y2K Industry Task Force, which allows
us to monitor the Y2K progress of several of our critical utility service
providers. Task force meetings allow for the sharing of ideas with members that
offer the same utility services.
-16-
A questionnaire on Y2K readiness was sent to every vendor determined to
be critical to the uninterrupted water and wastewater service that is provided
by the Company. We expect to receive the majority of the responses before March
31, 1999, and to incorporate those responses into our contingency plan by June
1, 1999. The contingency plans must be submitted to the BPU and the Delaware
Public Service Commission.
Qualitative and Quantitative Disclosures About Market Risk
The Company is subject to the risk of fluctuating interest rates in the
normal course of business. Our policy is to manage interest rates through the
use of fixed rate long-term debt and, to a lesser extent, short-term debt. The
Company's interest rate risk related to existing fixed rate, long-term debt is
not material due to the term of the majority of our First Mortgage Bonds, which
have maturity dates ranging from 2009 to 2038. Over the next twelve months
approximately $0.1 million of the current portion of three existing long-term
debt instruments will mature. Combining this amount with the $1.0 million in
short-term debt outstanding at December 31, 1998 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 improve in 1999. USA-PA will contribute to
increased revenues generated from the 20-year service agreement with the City of
Perth Amboy to operate and manage their water and wastewater systems.
Anticipated customer growth in Delaware and the third phase of the Pinelands
rate increase should also add to revenues. The level of earnings may be impacted
by the outcome of the Middlesex base rate increase petition currently under
review by the BPU and the Company's ability to maintain costs at reasonable
levels. Revenues may also be affected by weather conditions.
Tidewater and Public are currently evaluating the need to petition the
Delaware Public Service Commission for an increase in rates to reflect
additional construction, financing and operating costs since rates were last
established in 1991 and 1992, respectively.
Our strategy is for continued growth through acquisitions, internal
expansion, public/private partnerships and rate relief. Opportunities in both
the regulated and non-regulated sectors that are financially sound, complement
existing operations and increase shareholder value will be pursued.
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 17.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Consolidated Financial Statements and Supplementary Financial Data:
Consolidated Balance Sheets at December 31, 1998 and 1997, Page 21.
Consolidated Statements of Income for the years ended December 31, 1998, 1997
and 1996, Page 23.
Consolidated Statements of Capital Stock and Long-term Debt at December 31, 1998
and 1997, Page 24.
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996, Page 25.
Consolidated Statements of Retained Earnings for the years ended December 31,
1998 and 1997, Page 26.
Notes to Consolidated Financial Statements, Pages 27-38.
Independent Auditors' Report, Page 39.
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 1999 Annual
Meeting of Stockholders and is incorporated herein by reference.
Information regarding the Executive Officers of Middlesex Water
Company is included in Part I, Item I 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 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
-----------------------------------------------
and Management
--------------
This information for Middlesex Water Company is included in
Middlesex Water Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.
-18-
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
This information for Middlesex Water Company is included in
Middlesex Water Company's Proxy Statement for the 1999 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 12-17.
Consolidated Balance Sheets at December 31, 1998, and 1997, Pages 21-22.
Consolidated Statements of Income for the years ended December 31, 1998, 1997
and 1996 Page 23.
Consolidated Statements of Capital Stock and Long-term Debt at December 31,
1998, and 1997, Page 24.
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996, Page 25.
Consolidated Statements of Retained Earnings for the years ended December 31,
1998, 1997 and 1996, Page 26.
Notes to Consolidated Financial Statements, Pages 27-38.
Independent Auditors' Report, Page 39.
(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 41-44.
(b) Reports on Form 8-K
-------------------
Filed December 10, 1998
Filed February 5, 1999
-19-
CONSOLIDATED SELECTED FINANCIAL DATA
(Thousands of Dollars Except per Share Data)
1998 1997 1996 1995 1994 1993 1988
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Revenues ................. $ 43,058 $ 40,294 $ 38,025 $ 37,847 $ 36,122 $ 35,479 $ 24,034
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operations and Maintenance ...... 21,523 19,513 18,817 18,057 16,975 16,783 11,247
Depreciation .................... 3,285 3,071 2,929 2,814 2,650 2,376 1,317
Other Taxes ..................... 6,102 5,782 5,569 5,479 5,343 5,222 3,869
Income Taxes .................... 2,999 3,135 2,526 2,975 2,766 3,072 1,781
- ---------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses ........ 33,909 31,501 29,841 29,325 27,734 27,453 18,214
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Income ................... 9,149 8,793 8,184 8,522 8,388 8,026 5,820
Other Income ....................... 1,795 405 288 303 151 576 351
- ---------------------------------------------------------------------------------------------------------------------------------
Income Before Interest Charge.... 10,944 9,198 8,472 8,825 8,539 8,602 6,171
- ---------------------------------------------------------------------------------------------------------------------------------
Interest Charges ................... 4,423 3,337 3,304 3,121 3,044 3,122 2,545
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income .............. 6,521 5,861 5,168 5,704 5,495 5,480 3,626
Preferred Stock Dividend ........... 319 226 159 159 188 256 175
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 6,202 $ 5,635 $ 5,009 $ 5,545 $ 5,307 $ 5,224 $ 3,451
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings per Share:
Basic ........................ $ 1.42 $ 1.33 $ 1.20 $ 1.36 $ 1.33 $ 1.33 $ 1.14
Diluted ...................... $ 1.41 $ 1.33 $ 1.20 $ 1.36 $ 1.32 $ 1.33 $ 1.14
Average Shares Outstanding:
Basic ........................ 4,353,879 4,235,082 4,169,334 4,078,890 4,003,393 3,924,363 3,030,802
Diluted ...................... 4,580,305 4,382,345 4,258,740 4,168,296 4,092,799 4,013,769 3,030,802
Dividends Declared and Paid ........ $ 1.15 $ 1.121/2 $ 1.101/2 $ 1.081/2 $ 1.053/4 $ 1.011/4 $ .863/4
Total Assets ....................... $ 203,501 $ 159,761 $ 148,660 $ 144,822 $ 132,413 $ 125,676 $ 88,827
Convertible Preferred Stock ........ $ 3,894 $ 3,894 $ 1,566 $ 1,566 $ 1,566 $ 1,566 $ --
Long-term Debt ..................... $ 78,032 $ 52,918 $ 52,961 $ 52,960 $ 49,500 $ 37,000 $ 39,350
- ---------------------------------------------------------------------------------------------------------------------------------
20
MIDDLESEX WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
UTILITY PLANT Water Production $ 28,154,961 $ 27,689,254
Transmission and Distribution 118,234,900 113,104,789
General 19,300,406 18,845,301
Construction Work in Progress 25,794,061 5,683,217
-----------------------------------------------------------------------------------------
TOTAL 191,484,328 165,322,561
Less Accumulated Depreciation 32,367,936 30,251,825
-----------------------------------------------------------------------------------------
UTILITY PLANT - NET 159,116,392 135,070,736
-----------------------------------------------------------------------------------------
NONUTILITY ASSETS - NET 3,710,437 2,038,568
- ---------------------------------------------------------------------------------------------------------------
CURRENT ASSETS: Cash and Cash Equivalents 9,388,822 2,513,294
Temporary Cash Investments - Restricted 9,776,072 218,787
Accounts Receivable 4,886,067 3,794,860
Unbilled Revenues 2,298,148 2,175,934
Materials and Supplies (at average cost) 906,866 960,577
Prepayments 528,348 387,487
-----------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 27,784,323 10,050,939
- ---------------------------------------------------------------------------------------------------------------
DEFERRED CHARGES: Unamortized Debt Expense 3,143,384 2,773,233
Preliminary Survey and Investigation Charges 276,202 213,650
Regulatory Assets:
Income Taxes (Note 3) 5,788,752 6,031,247
Postretirement Costs (Note 9) 1,214,092 1,328,722
Other (Note 2) 2,467,674 2,253,678
-----------------------------------------------------------------------------------------
TOTAL DEFERRED CHARGES 12,890,104 12,600,530
-----------------------------------------------------------------------------------------
TOTAL $ 203,501,256 $ 159,760,773
-----------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-21-
CAPITALIZATION AND LIABILITIES
December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION Common Stock $ 45,507,172 $ 31,138,484
(See Accompanying Retained Earnings 21,222,294 20,087,065
Statements and Note 8): ----------------------------------------------------------------------------------------------------
TOTAL COMMON EQUITY 66,729,466 51,225,549
----------------------------------------------------------------------------------------------------
Cumulative Preferred Stock 4,995,635 4,995,635
Long-term Debt 78,031,513 52,918,245
----------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION 149,756,614 109,139,429
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT Current Portion of Long-term Debt 71,730 42,708
LIABILITIES: Notes Payable 1,000,000 564,701
Accounts Payable 3,373,595 3,191,033
Taxes Accrued 5,220,669 5,142,089
Interest Accrued 1,701,330 1,183,561
Other 1,832,737 1,453,516
----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 13,200,061 11,577,608
- ------------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4)
- ------------------------------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS: Customer Advances for Construction 11,275,660 10,830,646
Accumulated Deferred Investment Tax Credits (Note 3) 2,165,384 2,237,060
Accumulated Deferred Federal Income Taxes (Note 3) 12,070,474 12,177,993
Employee Benefit Plans (Note 9) 3,762,516 2,719,797
Other 791,460 723,173
----------------------------------------------------------------------------------------------------
TOTAL DEFERRED CREDITS 30,065,494 28,688,669
----------------------------------------------------------------------------------------------------
CONTRIBUTIONS IN AID OF CONSTRUCTION 10,479,087 10,355,067
----------------------------------------------------------------------------------------------------
TOTAL $ 203,501,256 $ 159,760,773
----------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-22-
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES (Note 2) $ 43,057,966 $ 40,294,118 $ 38,024,669
- ----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Operations (Note 4) 19,807,472 17,771,892 17,288,440
Maintenance 1,715,357 1,741,487 1,527,842
Depreciation 3,284,669 3,070,843 2,929,106
Other Taxes 6,101,719 5,781,641 5,569,047
Federal Income Taxes (Note 3) 2,999,288 3,135,118 2,526,297
- ----------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 33,908,505 31,500,981 29,840,732
- ----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 9,149,461 8,793,137 8,183,937
- ----------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Allowance for Funds Used During Construction 1,050,044 147,912 63,614
Other - Net 745,322 256,554 223,786
- ----------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 1,795,366 404,466 287,400
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES 10,944,827 9,197,603 8,471,337
- ----------------------------------------------------------------------------------------------------------------------
INTEREST CHARGES:
Interest on Long-term Debt 4,088,631 3,163,035 3,166,786
Amortization of Debt Expense 132,049 121,089 120,930
Other Interest Expense 202,921 52,573 16,161
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST CHARGES 4,423,601 3,336,697 3,303,877
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME 6,521,226 5,860,906 5,167,460
- ----------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK DIVIDEND REQUIREMENTS 318,786 226,027 158,926
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS APPLICABLE TO COMMON STOCK $ 6,202,440 $ 5,634,879 $ 5,008,534
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS AND DIVIDENDS PER SHARE OF COMMON STOCK:
Earnings per Share (Note 8):
Basic $ 1.42 $ 1.33 $ 1.20
Diluted $ 1.41 $ 1.33 $ 1.20
Average Number of Shares Outstanding (Note 8):
Basic 4,353,879 4,235,082 4,169,334
Diluted 4,580,305 4,382,345 4,258,740
Dividends Paid per Share $ 1.15 $ 1.121/2 $ 1.101/2
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-23-
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
December 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock, No Par Value (Note 8):
Shares Authorized - 10,000,000
Shares Outstanding - 1998 - 4,897,069 $ 45,889,980
1997 - 4,269,217 $ 31,425,398
Restricted Stock Plan (Note 9) (382,808) (286,914)
--------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK 45,507,172 31,138,484
- --------------------------------------------------------------------------------------------------------------------------------
Cumulative Preference Stock, No Par Value:
Shares Authorized - 100,000
Shares Outstanding - None
Cumulative Preferred Stock, No Par Value (Note 8):
Shares Authorized - 149,980
Convertible:
Shares Outstanding, $7.00 Series - 14,881 1,562,505 1,562,505
Shares Outstanding, $8.00 Series - 20,000 2,331,430 2,331,430
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 4,995,635 4,995,635
- --------------------------------------------------------------------------------------------------------------------------------
Long-term Debt (Note 8):
8.05%, Amortizing Secured Note, due December 20, 2021 3,418,243 3,460,953
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 -
0.00%, Series X, due August 1, 2018 1,050,000 -
4.53%, Series Y, due August 1, 2018 1,135,000 -
- --------------------------------------------------------------------------------------------------------------------------------
SUBTOTAL LONG-TERM DEBT 78,103,243 52,960,953
- --------------------------------------------------------------------------------------------------------------------------------
Less: Current Portion of Long-term Debt (71,730) (42,708)
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 78,031,513 $ 52,918,245
- --------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-24-
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,521,226 $ 5,860,906 $ 5,167,460
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 3,796,607 3,145,218 3,011,337
Provision for Deferred Income Taxes 134,976 778,521 811,993
Allowance for Funds Used During Construction (1,050,044) (147,912) (63,614)
Changes in Assets and Liabilities:
Accounts Receivable (1,091,207) 305,079 202,524
Accounts Payable 182,562 1,653,239 164,745
Accrued Taxes 78,580 612,904 207,266
Accrued Interest 517,769 11,170 (48,609)
Unbilled Revenues (122,214) 29,344 (5,335)
Employee Benefit Plans 1,015,280 536,342 666,392
Other-Net 433,666 (158,099) 142,566
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,417,201 12,626,712 10,256,725
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures* (26,275,281) (10,233,685) (6,172,482)
Cash from Acquisition of Subsidiary - 158,436 -
Notes Receivable (1,619,065) 5,963 -
Preliminary Survey & Investigation Charges (62,552) (458,016) (883,015)
Other-Net (654,605) (779,145) (657,958)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (28,611,503) (11,306,447) (7,713,455)
- ------------------------------------------------------------------------------------------------------------------------
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt (42,710) (41,780) (1,200,000)
Proceeds from Issuance of Long-term Debt 25,185,000 - 1,000,000
Short-term Bank Borrowings 435,299 - -
Deferred Debt Issuance Expenses (502,200) - (251)
Temporary Cash Investments-Restricted (9,557,285) 9,996 (152,593)
Proceeds from Issuance of Common Stock-Net 14,288,456 1,147,418 1,168,122
Payment of Common Dividends (4,987,013) (4,761,327) (4,604,504)
Payment of Preferred Dividends (318,751) (239,361) (158,926)
Construction Advances and Contributions-Net 569,034 1,032,721 549,604
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 25,069,830 (2,852,333) (3,398,548)
- ------------------------------------------------------------------------------------------------------------------------
NET CHANGES IN CASH AND CASH EQUIVALENTS 6,875,528 (1,532,068) (855,278)
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,513,294 4,045,362 4,900,640
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,388,822 $ 2,513,294 $ 4,045,362
- ------------------------------------------------------------------------------------------------------------------------
*Excludes Allowance for Funds Used During Construction.
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Interest (net of amounts capitalized) $ 2,810,578 $ 3,045,867 $ 3,116,338
Income Taxes $ 3,162,975 $ 1,702,200 $ 2,117,998
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-25-
MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Years Ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 20,087,065 $ 19,226,847 $ 18,822,817
NET INCOME 6,521,226 5,860,906 5,167,460
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL 26,608,291 25,087,753 23,990,277
- ---------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS:
Cumulative Preferred Stock 318,751 239,361 158,926
Common Stock 4,987,013 4,761,327 4,604,504
COMMON STOCK EXPENSES 80,233 - -
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL DEDUCTIONS 5,385,997 5,000,688 4,763,430
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 21,222,294 $ 20,087,065 $ 19,226,847
- ---------------------------------------------------------------------------------------------------------------------------
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)
and Utility Service Affiliates (Perth Amboy) Inc. (USA-PA), which was
established in October 1998. Public Water Supply Company, Inc. (Public) 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 and Pinelands Wastewater
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 Public 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, 1998, 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,
Public, Pinelands Water and Pinelands Wastewater capitalize AFUDC, which
represents the cost of financing major 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, 1998, 1997 and 1996, and the corresponding expense and deduction
for those years, is less than $0.1 million.
(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 the Delaware subsidiaries 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, main cleaning and lining costs,
tank painting and regulatory expenses are amortized over 2 to 15-year periods.
-27-
(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, commercial paper and money market funds maturing in less than 90 days.
(k) Use of Estimates - Conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements. Actual results could differ from those
estimates.
(l) In June 1998, The Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts. The Company is currently
evaluating the requirements of this accounting standard, which is required to be
adopted in the first quarter of 2000.
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. At December 31, 1998, the Company does not have any
significant items of comprehensive income that would effect the current
reporting of the Company's financial position, 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 September 17, 1998, Middlesex filed a petition with the BPU for a base rate
increase of $8.0 million, or 21.9%. Approximately 75% of the increase is
necessary to recover the investment in the upgrade and expansion of the Carl J.
Olsen Water Treatment Plant (CJO Plant) serving our central New Jersey water
system. The purpose of the upgrade is to meet the new and anticipated regulatory
standards concerning water quality, as well as to increase the plant's
production capacity. A decision by the BPU is expected in the summer of 1999.
On January 29, 1998, the BPU approved an increase in the rates of Middlesex by
4.4%, or $1.5 million. The original petition was filed in November 1996. Under
the approval, the allowed return on equity is 11.0% with an overall rate of
return of 8.56%. The increase includes the recovery of postretirement costs
other than pension expenses which are mandated by the Company's compliance with
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions."
In December 1998, Middlesex filed a petition with the BPU for approval of a
franchise ordinance to provide retail water service and install water system
facilities in the City of South Amboy (South Amboy). A favorable decision by the
BPU will result in the elimination of an existing wholesale water sales contract
and a significant modification to an existing management service contract
between Middlesex, along with USA, and South Amboy (See Note 4). A decision from
the BPU is expected in the second quarter of 1999.
-28-
In January 1997, the BPU approved a stipulation agreed to by the parties to the
Pinelands Water and Wastewater Companies' rate cases which were filed in
February 1996. The stipulations allow for a combined rate increase which will
result in $0.4 million additional revenues. The new rates were phased in over a
three-year period to minimize the impact on customers. The three phases were
implemented in January 1999, 1998 and 1997, respectively.
Included in Deferred Charges-Other is $0.9 million of deferred costs at December
31, 1998, which Middlesex, Pinelands Water and Pinelands Wastewater are
recovering through rates over periods of 2 to 14 years. The BPU has excluded
these costs from their rate bases and, therefore, they are not earning a return
on the unamortized costs during the recovery periods.
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)
1998 1997 1996
- --------------------------------------------------------------------------------------
Income Tax at Statutory Rate of 34% ............ $ 3,237 $ 2,956 $ 2,616
Tax Effect of:
AFUDC ........................................ (357) (49) (22)
Other ........................................ 119 (133) (68)
- --------------------------------------------------------------------------------------
Total Federal Income Tax Expense ............... $ 2,999 $ 2,774 $ 2,526
- --------------------------------------------------------------------------------------
Federal income tax expense is comprised of the following:
Current ................................. $ 2,975 $ 2,117 $ 1,835
Deferred:
Customer Advances ..................... 51 63 35
Accelerated Depreciation .............. 595 753 733
Employee Benefit Plans ................ (358) (107) (99)
Investment Tax Credit ................. (72) (72) (72)
Other ................................. (192) 20 94
- --------------------------------------------------------------------------------
Total Federal Income Tax Expense ........ $ 2,999 $ 2,774 $ 2,526
- --------------------------------------------------------------------------------
Charged to: Operating Expenses ......... $ 2,999 $ 3,135 $ 2,526
Other Income-Net ... -- (361) --
- --------------------------------------------------------------------------------
Total Provision ........................ $ 2,999 $ 2,774 $ 2,526
- --------------------------------------------------------------------------------
The statutory review period for income tax returns for the years prior to 1995
has been closed.
The Company is required to set up deferred income taxes for all temporary
differences regardless of the regulatory ratemaking treatment. However, if it is
probable that these additional taxes will be passed on to ratepayers, an
offsetting regulatory asset or liability can be recorded. Management believes
that it is probable that the consolidated deferred income tax liability of
approximately $5.8 million will be recovered in future rates. Therefore, a
regulatory asset has been set up to offset the increased liability.
-29-
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)
1998 1997
- --------------------------------------------------------------------------------
Utility Plant Related $17,549 $17,151
Customer Advances (4,669) (4,586)
Employee Benefits (813) (489)
Other 3 102
- --------------------------------------------------------------------------------
Total Deferred Tax Liability $12,070 $12,178
- --------------------------------------------------------------------------------
Note 4 - Commitments and Contingent Liabilities
Service Agreement - On December 8, 1998, the Company's newly formed subsidiary,
USA-PA, entered into a 20-year agreement with the City of Perth Amboy, New
Jersey (Perth Amboy) and the Middlesex County Improvement Authority (MCIA) to
operate and maintain the water and wastewater systems of Perth Amboy. USA-PA
began operating Perth Amboy's systems on January 1, 1999.
Perth Amboy has a population of 40,000 and has approximately 9,500 customers,
most of whom are served by both systems. The agreement is being 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 will
receive a fixed fee and a variable fee based on increased system billing. Fixed
fee payments begin at $6.4 million in the first year and increase to $9.7 in
year 20. 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 MCIA, issued
approximately $68.0 million in three series of bonds on January 28, 1999. The
Company guaranteed one of those series of bonds, in principal amount of
approximately $26.3 million. Perth Amboy guaranteed the two other series of
bonds.
In addition to the agreement with Perth Amboy, effective January 1, 1999, USA-PA
entered into a 20-year subcontract with a sewer contracting firm for the
operation and maintenance of the Perth Amboy wastewater system. The subcontract
requires the sharing of certain fixed and variable fees and operating expenses.
Franchise Agreement/Service Agreement - On December 9, 1998, Middlesex signed an
agreement with the City of South Amboy (South Amboy) whereby Middlesex will be
granted a franchise to provide water service and install water system facilities
in South Amboy. The implementation of the franchise agreement, which is subject
to approval by the BPU, will significantly impact two existing agreements
entered into by the parties in 1994.
-30-
The first agreement is for the sale of water to South Amboy on a wholesale
basis. The second agreement, which included Middlesex's wholly owned subsidiary
USA, is a contract to provide management services for a fixed fee. In
conjunction with the franchise agreement, the water sales contract will be
eliminated. In addition, the management services contract will be 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 will be forgiven
in consideration for the franchise agreement. Fixed fee revenues recognized
under the original contract will be eliminated in lieu of revenues derived from
providing water to South Amboy's 2,600 customers. In 1998, 1997 and 1996,
service contract revenues recognized under the original contract were $0.5
million, $0.4 million and $0.3 million, respectively. A decision by the BPU is
expected in the second quarter of 1999.
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 1998, 1997 and 1996
costs under this agreement were $1.6 million, $1.5 million and $1.3 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, 1999. This agreement is
renewable on an annual basis. The total costs under this agreement in 1998, 1997
and 1996 were $1.8 million, $1.7 million and $1.7 million, respectively.
Construction - The Company plans to spend approximately $26.6 million, $10.4
million and $9.8 million in 1999, 2000 and 2001, respectively, on its
construction program. 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.
Litigation - A motel in our Middlesex service area originally filed claims
against us in 1990 alleging financial losses due to improper water pressure and
service and also seeking punitive damages. Subsequently in 1994, and again in
1997, the motel suffered outbreaks of legionella, resulting in the 1997 shutdown
of the motel by the New Jersey Department of Health. The motel amended its
claims to assert that we provided water containing the legionella bacteria. The
motel is in bankruptcy. A bank creditor of the motel has joined in the motel's
claim against us. We believe that the motel's claims are not supportable. 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 us. We have substantial
insurance coverage, which we believe will be sufficient for all claims in this
matter other than for punitive damages. We do not believe the motel's claims for
punitive damages will prevail. While the outcome of this case remains uncertain,
we believe that the final resolution will not have a significant effect on our
financial condition or results of operations.
A 1995 fire at a warehouse in our service territory resulted in multiple party
claims brought forth in the Superior Court for Middlesex County, New Jersey, as
well as, with the financial collapse of the principal tenant, in the Federal
Bankruptcy Court. The claims in the State court action are for unspecified
amounts but include claims against us for insufficient water pressure and
supply. The Bankruptcy Court has stayed all claims against the tenant except, to
the extent the tenant is insured, claims brought by us arising from claims made
against us by other tenants and the landlord. Under New Jersey case law, we will
not have financial responsibility to parties to the extent they receive payments
under their own insurance policies. We do not
-31-
know either the total amount of claims against us or how much of that amount
will be covered by the parties' own insurance policies. Our counsel in the
litigation advises us that the case is unlikely to be resolved rapidly. We
believe we have substantial defenses to the claims against us, although we do
not have insurance coverage for them.
The Company has been notified of a potential claim of $1.5 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 a
petroleum based insulating fluid. The Company is insured for damages except for
damages resulting from pollution discharge. Causation and liability has not been
established.
Note 5 - Lines of Credit, Notes Payable and Restricted Cash
(Thousands of Dollars)
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Established Lines at Year End $28,000 $20,000 $20,000
Maximum Amount Outstanding 4,575 - -
Average Outstanding 2,653 - -
Notes Payable at Year End 1,000 - -
Weighted Average Interest Rate 5.37% - -
To accommodate the funding requirements of the Company's on-going capital
program, in December 1997 the Board of Directors authorized an increase in the
amount of lines of credit for up to $30 million. Short-term borrowings are
generally below the prime rate with some requirements for compensating balances
not exceeding 5% of the line.
Restricted temporary cash investments at December 31, 1998 include a $7.1
million balance of Series W First Mortgage Bonds proceeds and a $2.2 million
balance of Series X and Y First Mortgage Bonds proceeds. These funds are held in
trusts and restricted to specific capital expenditures. The Series W proceeds
are for costs related to the CJO Plant upgrade. Series X and Y proceeds can only
be used for the 1999 main cleaning and cement lining program.
Note 6 - Related Party Transactions
During 1998, 1997 and 1996, Middlesex had transactions with a construction
company in which a member of the Board of Directors has a financial interest.
Major construction transactions were awarded on the basis of competitive bids
approved by the Board of Directors (with the interested Director abstaining) and
amounted to $1.0 million, $0.7 million and $0.9 million for the years 1998, 1997
and 1996, respectively. These amounts included $0.1 million due the construction
company at December 31, 1998, 1997 and 1996.
-32-
Note 7 - Quarterly Operating Results - Unaudited
Quarterly operating results for 1998 and 1997 are as follows:
(Thousands of Dollars Except per Share Data)
1st 2nd 3rd 4th
1998 Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------
Operating Revenues $ 9,769 $ 10,591 $12,074 $10,624 $43,058
Operating Income 1,948 2,268 2,978 1,955 9,149
Net Income 1,263 1,574 2,348 1,336 6,521
Basic Earnings per Share $ 0.28 $ 0.34 $ 0.52 $ 0.28 $ 1.42
Diluted Earnings per Share 0.28 0.34 0.51 0.28 1.41
1997
- ------------------------------------------------------------------------------------------------------
Operating Revenues $9,336 $ 9,937 $10,968 $10,053 $40,294
Operating Income 2,023 2,120 2,682 1,943 8,768
Net Income 1,282 1,311 1,894 1,374 5,861
Basic Earnings per Share $ 0.30 $ 0.30 $ 0.43 $ 0.30 $ 1.33
Diluted Earnings per Share 0.30 0.30 0.43 0.30 1.33
The information above, in the opinion of the Company, includes all adjustments
consisting only of normal recurring accruals necessary for a fair presentation
of such amounts. The business of the Company is subject to seasonal fluctuation
with the peak period usually occurring during the summer months.
Note 8 - 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 December 1998, the Company completed the sale of 517,000 shares of its no par
common stock at a price of $24.625 per share. The majority of the proceeds of
the offering will be used to fund a portion of the cost of the CJO Plant
upgrade. In addition, other capital improvement expenditures for the Company's
utility systems will be funded by the proceeds.
In June 1998, the Company increased the number of shares authorized under the
Dividend Reinvestment and Common Stock Purchase Plan (DRP) from 900,000 to
1,700,000 shares. The cumulative number of shares issued under the DRP at
December 31, 1998 is 848,493. In October 1997, the Board of Directors approved a
5% discount on the first 100,000 shares of common stock sold to participants of
the Company's DRP between the period of January 2, 1998 and June 1, 1998.
During 1998, 1997 and 1996, 110,852 shares ($2.3 million), 64,148 shares ($1.1
million) and 67,977 shares ($1.2 million) of common stock were issued under DRP
and the restricted stock plan, respectively.
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, 1998, no
restrictions were placed on common dividends.
-33-
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 1998, the
number of authorized Preferred Stock, without par value, was reduced from
150,000 shares to 149,980 shares to account for shares that were redeemed. At
December 31, 1998 and 1997, 45,898 shares of Preferred Stock presently
authorized were outstanding for each year. There were no dividends in arrears.
The conversion feature of the no par $7.00 Cumulative and Convertible Preferred
Stock allows the security holders to exchange one convertible preferred share
for six 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 six shares of the Company's common stock
for each share of convertible stock redeemed. On July 31, 1997, Middlesex issued
20,000 shares of no par $8.00 Cumulative and Convertible Preferred Stock
convertible into 137,140 shares of Middlesex's common stock for 100% of the
common stock of Public. The preferred shares are convertible at the election of
the security holder within seven years from the date of issuance at the common
equivalent rate of 6.857 shares of common stock for each share of preferred. The
same conversion feature is granted to Middlesex after seven years from the date
of issuance.
The acquisition of Public, a 2,500-customer water system located in Sussex
County Delaware was accounted for under the purchase method of accounting. The
acquisition price, representing the value of the convertible preferred stock
issued, was $2.3 million and resulted in an acquisition adjustment of $1.0
million. The acquisition adjustment is being amortized over a period determined
using the remaining composite life of Public's utility plant.
The following is supplemental unaudited pro forma information, as though the
acquisition occurred as of January 1, 1996.
1997 1996
- --------------------------------------------------------------------------------
Operating Revenues $40,985 $38,643
Net Income 5,864 5,247
Basic Earnings per Share $ 1.31 $ 1.18
Diluted Earnings per Share 1.30 1.18
Long-term Debt
On March 31, 1998, Middlesex issued $23.0 million of First Mortgage Bonds
designated as Series W with a maturity date of February 1, 2038 and a coupon
rate of 5.35%. The effective interest cost to maturity is 5.48%. The bond
offering was competitively bid in cooperation with the New Jersey Economic
Development Authority. Interest paid to the bondholders is exempt from federal
and New Jersey income taxes (Tax Exempt). However, the interest is subject to
the Alternative Minimum Tax (AMT). The proceeds of the bonds are being used to
finance a significant portion of the upgrade of the CJO Plant.
On November 1, 1998, the Company issued $1.05 million, designated as Series X,
and $1.135 million, designated as Series Y, First Mortgage Bonds through the New
Jersey State Revolving Fund (SRF). Series X has a zero interest cost, while
Series Y has a coupon rate that varies from 4.25% to 4.625%. Both issues have a
final maturity date of August 1, 2018. 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 public water
-34-
utilities can apply for construction loans, which are funded by the
participating state and the EPA through the state 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 market place at time of issuance.
The interest paid to bondholders is considered Tax Exempt subject to AMT. The
proceeds of the bonds are being used to fund the 1999 capital project to clean
and cement line previously unlined pipes and mains. The aggregate annual
maturities for the amortizing secured note and Series X and Y First Mortgage
Bonds for each of the next five years are as follows: 1999 and 2000 - $0.1
million; and 2001 through 2003; $0.2 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, 1998 and 1997 was 6.0% and 6.35%,
respectively.
Earnings Per Share
In accordance with SFAS No. 128, "Earnings Per Share," which requires dual
presentation of basic and diluted earnings per share in the Consolidated
Statement of Income and requires a reconciliation of basic earnings per share
(EPS) to diluted EPS, the following table presents the calculation of basic and
diluted EPS for the three years ended December 31. 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.
(In Thousands Except per Share Amounts)
1998 1997 1996
Basic: Income Shares Income Shares Income Shares
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $6,521 4,354 $5,861 4,235 $5,167 4,169
Preferred Dividend (319) (226) (159)
------ ----- ------ ----- ------ -----
Earnings Applicable to Common Stock $6,202 4,354 $5,635 4,235 $5,008 4,169
Basic EPS $ 1.42 $ 1.33 $ 1.20
Diluted:
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $6,202 4,354 $5,635 4,235 $5,008 4,169
$7.00 Series Dividend 104 89 104 89 104 89
$8.00 Series Dividend 160 137 68 58 - -
------ ----- ------ ----- ------ -----
Adjusted Earnings Applicable to Common Stock $6,466 4,580 $5,807 4,382 $5,112 4,258
Diluted EPS $ 1.41 $ 1.33 $ 1.20
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, 1998 and 1997, the carrying and fair market
value of the Company's bonds were as follows:
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(Thousands of Dollars)
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------------------------------------------
First Mortgage Bonds $74,685 $75,106 $49,500 $49,800
For other long-term debt for which there were no quoted market price, it was not
practicable to estimate their fair value. The carrying amounts of these
instruments at December 31, 1998 and 1997 were $3.4 million and $3.5 million,
respectively. Customer advances for construction have a carrying value of $11.3
million and $10.8 million at December 31, 1998 and 1997, 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 9 - Employee Benefit Plans
Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which revises and
standardizes disclosure requirements for pension and other postretirement
benefit plans but does not change the measurement or recognition of those plans.
SFAS No. 132 supersedes the disclosure requirements in SFAS No. 87, "Employers'
Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
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. In 1998, employees of Public, Pinelands Water and
Pinelands Wastewater became eligible to participate in the Plan. 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 pension for
substantially all of its retired employees. Coverage includes health care and
life insurance. Employee contributions are dependent on credited years of
service. Accrued retirement benefit costs are recorded each year. In 1998,
employees of Tidewater, Public, Pinelands Water and Pinelands Wastewater became
eligible to participate in the Plan.
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. As part of
Middlesex's most recent rate case settlement (see Note 2), the BPU allowed the
recovery of the annual accrued retirement benefit costs and the amortization of
the transition obligation over 15 years. The regulatory assets at December 31,
1998 and 1997 were $1.2 million and $1.3 million, respectively.
The following table sets forth information relating to the Company's Pension
Plans and Other Postretirement Benefits.
-36-
(Thousands of Dollars)
Pension Benefits Other Benefits
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Reconciliation of Benefit Obligation
Beginning Balance ...................................... $ 15,577 $ 13,262 $ 4,209 $ 3,602
Service Cost ........................................... 619 534 132 116
Interest Cost .......................................... 1,065 935 287 258
Actuarial (Gain)/Loss .................................. -- 522 1 173
Benefits Paid .......................................... (688) (647) (195) (214)
- ---------------------------------------------------------------------------------------------------------------
Ending Balance ......................................... $ 16,573 $ 14,606 $ 4,434 $ 3,935
- ---------------------------------------------------------------------------------------------------------------
Reconciliation of Plan Assets at Fair Value
Beginning Balance ...................................... $ 14,777 $ 12,831 $ -- $ --
Actual Return on Plan Assets ........................... 3,456 2,498 -- --
Employer Contributions ................................. 46 95 195 214
Benefits Paid .......................................... (687) (647) (195) (214)
- ---------------------------------------------------------------------------------------------------------------
Ending Balance ......................................... $ 17,592 $ 14,777 -- --
- ---------------------------------------------------------------------------------------------------------------
Funded Status .......................................... $ 1,019 $ 171 $ (4,434) $ (3,935)
Unrecognized Net Transition Obligation ................. 44 58 1,894 2,029
Unrecognized Net Actuarial (Gain)/Loss ................. (3,661) (2,287) 945 734
Unrecognized Prior Service Cost ........................ 758 826 (146) (157)
- ---------------------------------------------------------------------------------------------------------------
Accrued Benefit Cost ................................... $ (1,840) $ (1,232) $ (1,741) $ (1,329)
- ---------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
Pension Benefits Other Benefits
1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost
Service Cost ......................................... $ 619 $ 534 $ 507 $ 132 $ 116 $ 101
Interest Cost ........................................ 1,065 935 879 287 258 211
Expected Return on Plan Assets ....................... (1,156) (1,002) (924) -- -- --
Amortization of Net Transition Obligation ............ 14 14 14 135 135 135
Amortization of Net Actuarial (Gain)/Loss ............ 10 7 -- 64 41 2
Amortization of Prior Service Cost ................... 102 98 107 (11) (11) (11)
Regulatory Deferral .................................. -- -- -- -- (325) (246)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Periodic Benefit Cost ............................ $ 654 $ 586 $ 583 $ 607 $ 214 $ 192
- ------------------------------------------------------------------------------------------------------------------------------------
-37-
Bnefits Pension Benefits Other
Weighted-Average Assumptions 1998 1997 1996 1998 1997 1996
----------------------------------------------------------
Discount Rate ................ 7.00% 7.00% 7.25% 7.00% 7.00% 7.25%
Expected Return on Plan Assets 8.00% 8.00% 8.00% -- -- --
Actual Return on Plan Assets . 23.95% 20.42% 12.10% -- -- --
Rate of Compensation Increase 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%
For measurement purposes, a 5.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998 and all future years.
Assumed health care trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
(Thousands of Dollars)
1 Percentage Point
Increase Decrease
-------- --------
Effect on Current Year's Benefit Expense $ 69 $ (58)
Effect on Benefit Obligation 717 (607)
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 1998, 1997 and 1996 amounted to $0.2 million for each year.
Stock Based Compensation
The Company maintains a restricted stock plan, under which 36,050 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.
In May 1997, 100,000 additional shares were allocated to the restricted stock
plan, bringing the maximum number of shares authorized for grant under this plan
to 160,000 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.
The compensation expenses were $0.1 million for each of the years 1998, 1997 and
1996.
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.
-38-
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, 1998 and 1997 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, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
/s/DELOITTE & TOUCHE LLP/
- ------------------------
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 16, 1999
-39-
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/ 3/25/99
President and Director ----------------------- -------
J. Richard Tompkins Date
Executive Vice President and /s/Richard A. Russo/ 3/25/99
Director ------------------- -------
Richard A. Russo Date
Vice President and Controller /s/A. Bruce O'Connor/ 3/25/99
Chief Financial Officer --------------------- -------
A. Bruce O'Connor Date
Director /s/John C. Cutting/ 3/25/99
------------------- -------
John C. Cutting Date
Director /s/Ernest C. Gere/ 3/25/99
------------------ -------
Ernest C. Gere Date
Director /s/John P. Mulkerin/ 3/25/99
-------------------- -------
John P. Mulkerin Date
Director /s/Stephen H. Mundy/ 3/25/99
-------------------- -------
Stephen H. Mundy Date
Director /s/Philip H. Reardon/ 3/25/99
--------------------- -------
Philip H. Reardon Date
Director /s/Jeffries Shein/ 3/25/99
------------------ -------
Jeffries Shein Date
-40-
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.
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 Post Effective Amendments No. 3 and 7, Form S-3, under Securities 33-11717
Act of 1933 filed May 28, 1993, relating to the Dividend
Reinvestment and Common Stock Purchase Plan.
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 10.4 - 10.9
Trustee. 33-54922 and 10.16
10.4 Copy of Trust Indenture, dated as of June 15, 1991, between the New
Jersey Economic Development Authority and Midlantic National Bank,
as Trustee. 33-54922 10.17
10.5 Copy of Supply Agreement, dated as of November 17, 1986, between
the Company and the Old Bridge Municipal Utilities Authority. 33-31476 10.12
-41-
EXHIBIT INDEX
Previous Filing's
Exhibit Registration Exhibit
No. Document Description No. No.
--- -------------------- --- ---
10.6 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
10.7 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.
10.8 Copy of Water Purchase Contract and Supplemental 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.
10.9 Copy of Treating and Pumping Agreement, dated April 9, 1984,
between the Company and the Township of East Brunswick. 33-31476 10.17
10.10 Copy of Supply Agreement, dated June 4, 1990, between the Company
and Edison Township. 33-54922 10.24
10.11 Copy of Supply Agreement, between the Company and the Borough of
Highland Park, filed as Exhibit No. 10.15 of 1996 Form 10-K.
10.12 Copy of Pipeline Lease Agreement, dated as of January 9, 1987,
between the Company and the City of Perth Amboy. 33-31476 10.20
10.13 Copy of Supplemental Executive Retirement Plan, effective January
1, 1984, as amended. 33-31476 10.21
10.14 Copy of 1989 Restricted Stock Plan, filed as Appendix B to the
Company's Definitive Proxy Statement, dated and filed April 25, 33-31476 10.22
1997.
10.15 Amendment to Supplemental Executive Retirement Plan, dated May 23,
1990, filed as Exhibit No. 10.23 of 1991 Form 10-K.
10.16 Copy of Transmission Agreement, dated October 16, 1992, between the
Company and the Township of East Brunswick. 33-54922 10.23
-42-
EXHIBIT INDEX
Previous Filing's
Exhibit Registration Exhibit
No. Document Description No. No.
--- -------------------- --- ---
10.17 Copy of Agreement and Plan of Merger, dated January 7, 1992,
between the Company, Midwater Utilities, Inc. and Tidewater
Utilities, Inc. 33-54922 10.29
10.18 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.
10.19 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.
10.20 Copy of Amended Pipeline Lease Agreement between the Company and
the City of Perth Amboy 333-66727 10.24
10.21 Copy of Supplemental Indenture dated March 1, 1998 between
Middlesex Water Company and First Union National Bank, as Trustee.
Copy of Trust Indenture dated March 1, 1998 between the New Jersey
Economic Development Authority and PNC Bank, National Association,
as Trustee (Series W),filed as Exhibit No. 10.21 of the 1998 Third
Quarter Form 10-Q
10.22 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 and Middlesex Water Company (Series X), filed as Exhibit
No. 10.22 of the 1998 Third Quarter Form 10-Q.
10-23 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 Environmental Infrastructure Trust and Middlesex Water
Company (Series Y), filed as Exhibit No. 10.23 of the 1998 Third
Quarter Form 10-Q.
10.24 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
-43-
Previous Filing's
Exhibit Registration Exhibit
No. Document Description No. No.
--- -------------------- --- ---
10.25 Assignment and Acceptance agreement between Utility Service
Affiliates, Inc. and Utility Service Affiliates (Perth Amboy) Inc. 333-66727 10.25
*23 Independent Auditors' Consent.
*27 Financial Data Schedule
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