UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2015

 

OR

 

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

 

For the transition period from _________________ to______________________

 

Commission File Number     0-422

 

MIDDLESEX WATER COMPANY

(Exact name of registrant as specified in its charter)

New Jersey (State of incorporation)

22-1114430 (IRS employer identification no.)

 

1500 Ronson Road, Iselin, New Jersey 08830

(Address of principal executive offices, including zip code)

(732) 634-1500

(Registrant's telephone number, including area code)

 

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

Yes þ  No ¨

 

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

Yes þ  No ¨

 

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

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

 

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

Yes ¨  No þ

The number of shares outstanding of each of the registrant's classes of common stock, as of October 31, 2015: Common Stock, No Par Value: 16,211,304 shares outstanding.

 

INDEX

 

 

PART I.	FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Statements of Income	1
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Cash Flows	3
	Condensed Consolidated Statements of Capital Stock  and Long-Term Debt	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures of Market Risk	22
Item 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults upon Senior Securities	23
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information	23
Item 6.	Exhibits	23
SIGNATURES		24

 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share amounts)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Operating Revenues		$	34,654			$	32,669			$	95,100			$	89,032
Operating Expenses:
Operations and Maintenance			16,772				14,956				49,089				44,957
Depreciation			3,032				2,880				8,962				8,532
Other Taxes			3,390				3,213				9,671				9,210
Total Operating Expenses			23,194				21,049				67,722				62,699
Operating Income			11,460				11,620				27,378				26,333
Other Income (Expense):
Allowance for Funds Used During Construction			113				80				297				213
Other Income (Expense), net			108				5				108				(23	)
Total Other Income, net			221				85				405				190
Interest Charges			1,505				1,516				4,058				4,134
Income before Income Taxes			10,176				10,189				23,725				22,389
Income Taxes			3,433				3,431				8,258				7,735
Net Income			6,743				6,758				15,467				14,654
Preferred Stock Dividend Requirements			36				36				108				115
Earnings Applicable to Common Stock		$	6,707			$	6,722			$	15,359			$	14,539
Earnings per share of Common Stock:
Basic		$	0.41			$	0.42			$	0.95			$	0.91
Diluted		$	0.41			$	0.42			$	0.95			$	0.90
Average Number of
Common Shares Outstanding :
Basic			16,202				16,097				16,161				16,030
Diluted			16,358				16,253				16,317				16,211
Cash Dividends Paid per Common Share		$	0.1925			$	0.1900			$	0.5775			$	0.5700

 

See Notes to Condensed Consolidated Financial Statements.

 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED  BALANCE SHEETS

(Unaudited)

(In thousands)

 

				September 30,				December 31,
ASSETS				2015				2014
UTILITY PLANT:		Water Production		$	140,417			$	138,242
		Transmission and Distribution			388,433				378,154
		General			60,461				58,851
		Construction Work in Progress			12,564				8,145
		TOTAL			601,875				583,392
		Less Accumulated Depreciation			124,037				117,986
		UTILITY PLANT - NET			477,838				465,406
CURRENT ASSETS:		Cash and Cash Equivalents			4,651				2,673
		Accounts Receivable, net			12,830				10,012
		Unbilled Revenues			7,991				5,937
		Materials and Supplies (at average cost)			2,681				2,253
		Prepayments			2,736				1,989
		TOTAL CURRENT ASSETS			30,889				22,864
DEFERRED CHARGES		Unamortized Debt Expense			3,391				3,474
AND OTHER ASSETS:		Preliminary Survey and Investigation Charges			2,045				2,211
		Regulatory Assets			65,811				66,216
		Operations Contracts, Developer and Other Receivables			3,241				3,313
		Restricted Cash			439				2,573
		Non-utility Assets - Net			9,236				9,197
		Federal Income Tax Receivable			9,756				—
		Other			433				518
		TOTAL DEFERRED CHARGES AND OTHER ASSETS			94,352				87,502
		TOTAL ASSETS		$	603,079			$	575,772
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:		Common Stock, No Par Value		$	150,251			$	148,668
		Retained Earnings			54,628				48,623
		TOTAL COMMON EQUITY			204,879				197,291
		Preferred Stock			2,436				2,436
		Long-term Debt			135,240				136,039
		TOTAL CAPITALIZATION			342,555				335,766
CURRENT		Current Portion of Long-term Debt			5,725				5,910
LIABILITIES:		Notes Payable			18,000				19,000
		Accounts Payable			8,609				6,354
		Accrued Taxes			11,337				8,948
		Accrued Interest			411				1,134
		Unearned Revenues and Advanced Service Fees			872				839
		Other			1,946				1,687
		TOTAL CURRENT LIABILITIES			46,900				43,872
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
DEFERRED CREDITS		Customer Advances for Construction			20,921				21,978
AND OTHER LIABILITIES:		Accumulated Deferred Investment Tax Credits			851				910
		Accumulated Deferred Income Taxes			64,103				47,306
		Employee Benefit Plans			43,647				45,135
		Regulatory Liability - Cost of Utility Plant Removal			10,772				10,273
		Other			1,638				1,277
		TOTAL DEFERRED CREDITS AND OTHER LIABILITIES			141,932				126,879
CONTRIBUTIONS IN AID OF CONSTRUCTION					71,692				69,255
		TOTAL CAPITALIZATION AND LIABILITIES		$	603,079			$	575,772

 

See Notes to Condensed Consolidated Financial Statements.

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		Nine Months Ended September 30,
		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	15,467			$	14,654
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization			9,990				9,091
Provision for Deferred Income Taxes and Investment Tax Credits			17,631				2,107
Equity Portion of Allowance for Funds Used During Construction (AFUDC)			(179	)			(138	)
Cash Surrender Value of Life Insurance			(51	)			(81	)
Stock Compensation Expense			468				430
Changes in Assets and Liabilities:
Accounts Receivable			(2,746	)			687
Unbilled Revenues			(2,054	)			(1,775	)
Materials & Supplies			(428	)			(154	)
Prepayments			(747	)			(1,253	)
Accounts Payable			2,255				867
Accrued Taxes			2,389				2,431
Accrued Interest			(723	)			(720	)
Employee Benefit Plans			(3,122	)			(2,720	)
Unearned Revenue and Advanced Service Fees			33				15
Federal Income Tax Receivable			(9,756	)			—
Other Assets and Liabilities			725				(1,002	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			29,152				22,439
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility Plant Expenditures, Including AFUDC of $118 in 2015, $75 in 2014			(19,297	)			(15,783	)
Restricted Cash			1,391				(965	)
Distribution From Joint Venture			—				782
NET CASH USED IN INVESTING ACTIVITIES			(17,906	)			(15,966	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Long-term Debt			(5,358	)			(4,678	)
Proceeds from Issuance of Long-term Debt			5,000				4,398
Net Short-term Bank Borrowings			(1,000	)			2,050
Deferred Debt Issuance Expense			(66	)			(69	)
Common Stock Issuance Expense			(22	)			—
Restricted Cash			744				—
Proceeds from Issuance of Common Stock			1,115				1,120
Payment of Common Dividends			(9,331	)			(9,130	)
Payment of Preferred Dividends			(108	)			(115	)
Construction Advances and Contributions-Net			(242	)			169
NET CASH USED IN  FINANCING ACTIVITIES			(9,268	)			(6,255	)
NET CHANGES IN CASH AND CASH EQUIVALENTS			1,978				218
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			2,673				4,834
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	4,651			$	5,052
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Utility Plant received as Construction Advances and Contributions		$	1,622			$	1,797
Long-term Debt Deobligation		$	466			$	—
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Interest		$	4,897			$	4,971
Interest Capitalized		$	118			$	75
Income Taxes		$	1,136			$	3,775

 

See Notes to Condensed Consolidated Financial Statements.

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK

AND LONG-TERM DEBT

(Unaudited)

(In thousands)

 

			September 30,				December 31,
			2015				2014
Common Stock, No Par Value
Shares Authorized -	40,000
Shares Outstanding -	2015 - 16,210		$	150,251			$	148,668
	2014 - 16,124
Retained Earnings				54,628				48,623
TOTAL COMMON EQUITY			$	204,879			$	197,291
Cumulative Preferred Stock, No Par Value:
Shares Authorized -	126
Shares Outstanding -	24
Convertible:
Shares Outstanding, $7.00 Series - 10				1,007				1,007
Shares Outstanding, $8.00 Series - 3				349				349
Nonredeemable:
Shares Outstanding, $7.00 Series -   1				80				80
Shares Outstanding, $4.75 Series - 10				1,000				1,000
TOTAL PREFERRED STOCK			$	2,436			$	2,436
Long-term Debt:
8.05%, Amortizing Secured Note, due December 20, 2021			$	1,680			$	1,825
6.25%, Amortizing Secured Note, due May 19, 2028				5,320				5,635
6.44%, Amortizing Secured Note, due August 25, 2030				4,177				4,387
6.46%, Amortizing Secured Note, due September 19, 2031				4,457				4,667
4.22%, State Revolving Trust Note, due December 31, 2022				399				421
3.60%, State Revolving Trust Note, due May 1, 2025				2,366				2,463
3.30% State Revolving Trust Note, due March 1, 2026				469				506
3.49%, State Revolving Trust Note, due January 25, 2027				501				536
4.03%, State Revolving Trust Note, due December 1, 2026				674				697
4.00% to 5.00%, State Revolving Trust Bond, due August 1, 2021				254				299
0.00%, State Revolving Fund Bond, due August 1, 2021				203				241
3.64%, State Revolving Trust Note, due July 1, 2028				304				313
3.64%, State Revolving Trust Note, due January 1, 2028				101				104
3.45%, State Revolving Trust Note, due August 1, 2031				1,066				1,115
6.59%, Amortizing Secured Note, due April 20, 2029				4,738				4,999
7.05%, Amortizing Secured Note, due January 20, 2030				3,583				3,771
5.69%, Amortizing Secured Note, due January 20, 2030				7,350				7,735
4.46%, Amortizing Secured Note, due April 20, 2040				12,817				8,000
3.75%, State Revolving Trust Note, due July 1, 2031				2,357				2,411
3.75%, State Revolving Trust Note, due November 30, 2030				1,246				1,276
First Mortgage Bonds:
0.00%, Series X, due September 1, 2018				162				215
4.25% to 4.63%, Series Y, due September 1, 2018				185				245
0.00%, Series Z, due September 1, 2019				446				559
5.25% to 5.75%, Series AA, due September 1, 2019				565				700
0.00%, Series BB, due September 1, 2021				723				845
4.00% to 5.00%, Series CC, due September 1, 2021				895				1,025
0.00%, Series EE, due August 1, 2023				3,132				3,550
3.00% to 5.50%, Series FF, due August 1, 2024				3,690				4,900
0.00%, Series GG, due August 1, 2026				993				1,083
4.00% to 5.00%, Series HH, due August 1, 2026				1,300				1,390
0.00%, Series II, due August 1, 2024				789				881
3.40% to 5.00%, Series JJ, due August 1, 2027				1,010				1,090
0.00%, Series KK, due August 1, 2028				1,167				1,255
5.00% to 5.50%, Series LL, due August 1, 2028				1,365				1,435
0.00%, Series MM, due August 1, 2030				1,437				1,537
3.00% to 4.375%, Series NN, due August 1, 2030				1,675				1,755
0.00%, Series OO, due August 1, 2031				2,408				2,559
2.00% to 5.00%, Series PP, due August 1, 2031				815				850
5.00%, Series QQ, due October 1, 2023				9,915				9,915
3.80%, Series RR, due October 1, 2038				22,500				22,500
4.25%, Series SS, due October 1, 2047				23,000				23,000
0.00%, Series TT, due August 1, 2032				2,559				2,709
3.00% to 3.25%, Series UU, due August 1, 2032				935				975
0.00%, Series VV, due August 1, 2033				2,577				2,720
3.00% to 5.00%, Series WW, due August 1, 2033				900				935
SUBTOTAL LONG-TERM DEBT				139,205				140,029
Add: Premium on Issuance of Long-term Debt				1,760				1,920
Less: Current Portion of Long-term Debt				(5,725	)			(5,910	)
TOTAL LONG-TERM DEBT			$	135,240			$	136,039

 

See Notes to Condensed Consolidated Financial Statements.  

MIDDLESEX WATER COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Basis of Presentation and Recent Developments

 

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

 

The consolidated notes within the 2014 Annual Report on Form 10-K (the 2014 Form 10-K) are applicable to these financial statements and, in the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (including normal recurring accruals) to present fairly the financial position as of September 30, 2015, the results of operations for the three month and nine month periods ended September 30, 2015 and 2014 and cash flows for the nine month periods ended September 30, 2015 and 2014. Information included in the Condensed Consolidated Balance Sheet as of December 31, 2014, has been derived from the Company’s audited financial statements for the year ended December 31, 2014 included in the 2014 Form 10-K.

 

Recent Accounting Guidance

As previously disclosed in the 2014 Form 10-K, in May 2014, the Financial Accounting Standards Board (FASB) issued an update to authoritative guidance related to revenue from contracts with customers. The update replaces most of the existing guidance with a single set of principles for recognizing revenue from contracts with customers. The FASB has deferred the effective date of these new revenue recognition standards by one year to January 1, 2018.

 

In April 2015, the FASB issued an update to authoritative guidance related to the presentation of debt issuance costs on the balance sheet, requiring companies to present debt issuance costs as a direct deduction from the carrying value of debt, which the Company will adopt beginning January 1, 2016. The new guidance must be applied retrospectively to each prior period presented. The adoption of this guidance will have no impact on the Company’s statement of income or cash flows and will not have a material impact on the Company’s balance sheet.

 

There are no other new adopted or proposed accounting guidance that the Company is aware of that could have a material impact on the Company’s financial statements.

 

Note 2 – Rate and Regulatory Matters

 

Middlesex - In August 2015, Middlesex’s Petition to the New Jersey Board of Public Utilities (NJBPU) seeking permission to increase base water rates was concluded, based on a negotiated settlement, resulting in an increase in annual operating revenues of $5.0 million. The base water rate increase request of $9.5 million, filed in March 2015, was necessitated by declining consumption by Middlesex’s Commercial and Industrial class customers, increasing benefit costs for active and retired employees, capital infrastructure investments and regulation-driven increases in other operations and maintenance costs. The new base water rates are designed to recover the increased costs and lost revenues, as well as a return on invested capital in rate base of $219.0 million, based on a return on equity of 9.75%. The rate increase became effective on August 29, 2015. Concurrent with the increase Middlesex was required to reset its Distribution System Improvement Charge (DSIC) to zero. A DSIC is a rate-mechanism that allows water utilities to recover investments in, and generate a return on, qualifying capital improvements to their water distribution system made between base rate proceedings. The Middlesex DSIC had been in effect since May 2015, and had generated less than $0.1 million of revenues.

Tidewater - Effective July 1, 2015, Tidewater’s Delaware Public Service Commission-approved DSIC was increased from 0.31% to 0.37%. Total annual revenues under the Tidewater DSIC are expected to amount to approximately $0.1 million.

 

Pinelands – In October 2015, Pinelands Water and Pinelands Wastewater filed separate petitions with the NJBPU seeking permission to increase base rates by approximately $0.3 million and $0.2 million per year, respectively. These requests were necessitated by capital infrastructure investments both companies have made, or have committed to make, increased operations and maintenance costs and lower non-fixed fee revenues for both companies. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the requests. A decision by the NJBPU in either matter is not expected until the third quarter of 2016.

 

Note 3 – Capitalization

 

Common Stock

During the nine months ended September 30, 2015 and 2014, there were 48,414 common shares (approximately $1.1 million) and 54,627 common shares (approximately $1.1 million), respectively, issued under the Middlesex Water Company Investment Plan (the Investment Plan), a direct share purchase and sale and dividend reinvestment plan for Middlesex common stock. In July 2015, the Company filed a registration statement with the United States Securities and Exchange Commission registering an additional 700,000 common shares for potential issuance under the Investment Plan.

 

Long-term Debt

In 2014, the NJBPU approved Middlesex’s request to borrow up to $5.0 million through the New Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey State Revolving Fund (SRF) loan program. This loan was intended to fund the current year RENEW Program, which is our ongoing initiative to clean and cement all unlined mains in the Middlesex system. Due to administrative changes in the New Jersey SRF loan program, participants are now required to complete construction of the qualifying project prior to closing on a long-term loan or, in the alternative, enter into a construction loan agreement with the NJEIT until the project is complete. At that time, the construction loan can be rolled into the next NJEIT long-term loan. Middlesex is currently reviewing the impact of these new requirements. These changes, along with an assessment of the condition of the mains subject to rehabilitation under the current year RENEW Program, will delay the project until 2016. During the fourth quarter of 2015, Middlesex expects to file an update to its petition with the NJPBU seeking approval to modify the previous granted financing timetable to accommodate the New Jersey SRF loan program changes.

 

In the second quarter of 2015, the NJEIT de-obligated future principal payments of $0.5 million on Series FF SRF long-term debt.

 

In 2014, Tidewater completed a $15.0 million debt transaction. Through September 30, 2015, Tidewater has drawn down $13.0 million, including $5.0 million for the nine months ended September 30, 2015. $11.0 million of the loan is at a fixed interest rate of 4.46% and $2.0 million is at a market-based variable interest rate. The proceeds were used to pay down short-term debt and for other general corporate purposes. In October 2015, Tidewater drew down the remaining $2.0 million at a market-based variable interest rate. Those funds are expected to be used for general corporate purposes. The interest rates on loans that are variable can be fixed at Tidewater’s discretion. The final maturity date of all borrowings under this loan agreement is April 2040.

 

Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments for which it is practicable to estimate that value. The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, trade receivables, accounts payable and notes payable approximate their respective fair values due to the short-term maturities of these instruments. The fair value of the Company’s long-term debt relating to First Mortgage and SRF Bonds (Bonds) is based on quoted market prices for similar issues. Under the fair value hierarchy, the fair value of cash and cash equivalents is classified as a Level 1 measurement and the fair value of the Bonds in the table below are classified as Level 2 measurements. The carrying amount and fair value of the Company’s bonds were as follows:

 

		September 30, 2015								December 31, 2014
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
First Mortgage Bonds		$	85,143			$	87,054			$	88,628			$	90,115
SRF Bonds		$	457			$	459			$	540			$	542

 

For other long-term debt for which there was no quoted market price and there is not an active trading market, it was not practicable to estimate their fair value (for details, including carrying value, interest rate and due date on these series of long-term debt, please refer to those series noted as “Amortizing Secured Note” and “State Revolving Trust Note” on the Condensed Consolidated Statements of Capital Stock and Long-Term Debt). The carrying amount of these instruments was $53.6 million at September 30, 2015 and $50.8 million at December 31, 2014. Customer advances for construction have carrying amounts of $20.9 million and $22.0 million at September 30, 2015 and December 31, 2014, 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 4 – Earnings Per Share

 

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

 

		(In Thousands Except per Share Amounts)
		Three Months Ended September 30,
		2015								2014
Basic:		Income				Shares				Income				Shares
Net Income		$	6,743				16,202			$	6,758				16,097
Preferred Dividend			(36	)							(36	)
Earnings Applicable to Common Stock		$	6,707				16,202			$	6,722				16,097
Basic EPS		$	0.41							$	0.42
Diluted:
Earnings Applicable to Common Stock		$	6,707				16,202			$	6,722				16,097
$7.00 Series Preferred Dividend			17				115				17				115
$8.00 Series Preferred Dividend			6				41				6				41
Adjusted Earnings Applicable to  Common Stock		$	6,730				16,358			$	6,745				16,253
Diluted EPS		$	0.41							$	0.42

 

 

		(In Thousands Except per Share Amounts)
		Nine Months Ended September 30,
		2015								2014
Basic:		Income				Shares				Income				Shares
Net Income		$	15,467				16,161			$	14,654				16,030
Preferred Dividend			(108	)							(115	)
Earnings Applicable to Common Stock		$	15,359				16,161			$	14,539				16,030
Basic EPS		$	0.95							$	0.91
Diluted:
Earnings Applicable to Common Stock		$	15,359				16,161			$	14,539				16,030
$7.00 Series Preferred Dividend			50				115				57				140
$8.00 Series Preferred Dividend			18				41				18				41
Adjusted Earnings Applicable to  Common Stock		$	15,427				16,317			$	14,614				16,211
Diluted EPS		$	0.95							$	0.90

  

Note 5 – Business Segment Data

 

The Company has identified two reportable segments. One is the regulated business of collecting, treating and distributing water on a retail and wholesale basis to residential, commercial, industrial and fire protection customers in parts of New Jersey, Delaware and Pennsylvania. This segment also includes regulated wastewater systems in New Jersey and Delaware. The Company is subject to regulations as to its rates, services and other matters by New Jersey, Delaware and Pennsylvania with respect to utility services within these states. The other segment is primarily comprised of non-regulated contract services for the operation and maintenance of municipal and private water and wastewater systems in New Jersey and Delaware. Inter-segment transactions relating to operational costs are treated as pass-through expenses. Finance charges on inter-segment loan activities are based on interest rates that are below what would normally be charged by a third party lender.

		(In Thousands)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
Operations by Segments:		2015				2014				2015				2014
Revenues:
Regulated		$	31,120			$	29,346			$	83,998			$	78,719
Non – Regulated			3,650				3,492				11,445				10,752
Inter-segment Elimination			(116	)			(169	)			(343	)			(439	)
Consolidated Revenues		$	34,654			$	32,669			$	95,100			$	89,032
Operating Income:
Regulated		$	10,938			$	11,039			$	25,774			$	24,585
Non – Regulated			522				581				1,604				1,748
Consolidated Operating Income		$	11,460			$	11,620			$	27,378			$	26,333
Net Income:
Regulated		$	6,466			$	6,458			$	14,653			$	13,753
Non – Regulated			277				300				814				901
Consolidated Net Income		$	6,743			$	6,758			$	15,467			$	14,654
Capital Expenditures:
Regulated		$	6,613			$	7,211			$	19,232			$	15,685
Non – Regulated			38				67				65				98
Total Capital Expenditures		$	6,651			$	7,278			$	19,297			$	15,783

 

		As of				As of
		September 30,				December 31,
		2015				2014
Assets:
Regulated		$	600,452			$	574,854
Non – Regulated			6,991				7,252
Inter-segment Elimination			(4,364	)			(6,334	)
Consolidated Assets		$	603,079			$	575,772

 

Note 6 – Short-term Borrowings

 

As of September 30, 2015, the Company has established lines of credit aggregating $60.0 million. At September 30, 2015, the outstanding borrowings under these credit lines were $18.0 million at a weighted average interest rate of 1.20%.

 

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

 

		(In Thousands)
		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Average Daily Amounts Outstanding		$	17,304			$	28,832			$	16,992			$	27,906
Weighted Average Interest Rates			1.19%				1.44%				1.18%				1.44%

The maturity dates for the $18.0 million outstanding as of September 30, 2015 are all in October 2015 and are extendable at the discretion of the Company.

 

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

 

Note 7 – Commitments and Contingent Liabilities

 

Water Supply

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

 

Middlesex also has an agreement with a non-affiliated regulated water utility for the purchase of treated water. This agreement, which expires February 27, 2021, provides for the minimum purchase of 3 mgd of treated water with provisions for additional purchases.

 

Tidewater contracts with the City of Dover, Delaware to purchase 15.0 million gallons of treated water annually.

 

Purchased water costs are shown below:

 

		(In Thousands)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Treated		$	775			$	764			$	2,271			$	2,344
Untreated			674				642				1,869				1,763
Total Costs		$	1,449			$	1,406			$	4,140			$	4,107

 

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

 

Guarantees - In September 2013, Middlesex entered into an agreement with the County of Monmouth, New Jersey (Monmouth County) to serve as guarantor of the performance of Applied Water Management, Inc. (AWM) to design, construct and operate a leachate pretreatment facility at the Monmouth County Reclamation Center in Tinton Falls, New Jersey. Middlesex expects to act as guarantor of AWM’s performance through at least August 2018 and is contractually obligated to act as guarantor of AWM’s performance through 2028 unless another guarantor acceptable to Monmouth County is identified. Construction of the facility, which is being financed by Monmouth County, is substantially complete and the facility is currently in the testing phase. Middlesex also entered into agreements with AWM and Natural Systems Utilities, Inc. (NSU), the parent company of AWM. Under these agreements, Middlesex earns a fee for providing the guaranty of AWM’s performance to Monmouth County, Middlesex provides operational support to the project, and AWM and NSU, serving as guarantor to Middlesex with respect to the performance of AWM, indemnify Middlesex against any claims that may arise under the Middlesex guaranty to Monmouth County.

 

Middlesex believes it is unlikely any payments would need to be made under Middlesex’s guaranty of AWM’s performance to Monmouth County. If asked to perform under the guaranty to Monmouth County, and, if AWM and NSU, as guarantor to Middlesex, do not fulfill their obligations to indemnify Middlesex against any claims that may arise under the Middlesex guaranty to Monmouth County, Middlesex would be required to fulfill the construction and operational commitments of AWM. As of September 30, 2015 and December 31, 2014, the liability recognized in Other Non-Current Liabilities on the balance sheet for the guaranty is approximately $0.2 million and $0.3 million, respectively.

 

Construction

The Company has budgeted approximately $22.4 million for its construction program in 2015. The actual timing and amount of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain projects.

 

Litigation

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

 

Change in Control Agreements

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

 

Note 8 – Employee Benefit Plans

 

Pension Benefits

The Company’s Pension Plan covers all active employees hired prior to April 1, 2007. Employees hired after March 31, 2007 are not eligible to participate in this plan, but do participate in a defined contribution plan that provides an annual contribution at the discretion of the Company, based upon a percentage of the participants’ compensation. In order to be eligible for contribution, the eligible employee must be employed by the Company on December 31st of the year to which the contribution relates. For the three months ended September 30, 2015 and 2014, the Company made Pension Plan cash contributions of $1.0 million and $1.3 million, respectively. For the nine months September 30, 2015 and 2014, the Company made Pension Plan cash contributions of $2.0 million and $2.5 million, respectively. The Company expects to make Pension Plan cash contributions of approximately $1.3 million over the remainder of the current calendar year. The Company also maintains an unfunded supplemental retirement benefit plan for certain active and retired Company officers and currently pays $0.3 million in annual benefits to the retired participants.

 

Other Postretirement Benefits

The Company’s retirement plan other than pensions (Other Benefits Plan) covers substantially all of its current retired employees. Employees hired after March 31, 2007 are not eligible to participate in this plan. Coverage includes healthcare and life insurance. For the three months ended September 30, 2015, the Company did not make any Other Benefits Plan cash contributions. For the three months ended September 30, 2014, the Company made Other Benefits Plan cash contributions of $0.5 million. For the nine months ended September 30, 2015 and 2014, the Company made Other Benefits Plan cash contributions of $0.8 million and $0.9 million, respectively. The Company expects to make Other Benefits Plan cash contributions of approximately $0.3 million over the remainder of the current calendar year.

 

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

 

		(In Thousands)
		Pension Benefits								Other Benefits
		Three Months Ended September 30,
		2015				2014				2015				2014
Service Cost		$	639			$	473			$	343			$	258
Interest Cost			724				670				480				448
Expected Return on Assets			(980	)			(883	)			(527	)			(484	)
Amortization of Unrecognized Losses			411				104				565				353
Amortization of Unrecognized Prior Service Cost (Credit)			—				1				(432	)			(432	)
Net Periodic Benefit Cost		$	794			$	365			$	429			$	143

 

		(In Thousands)
		Pension Benefits								Other Benefits
		Nine Months Ended September 30,
		2015				2014				2015				2014
Service Cost		$	1,918			$	1,420			$	1,029			$	774
Interest Cost			2,171				2,011				1,441				1,344
Expected Return on Assets			(2,939	)			(2,650	)			(1,580	)			(1,453	)
Amortization of Unrecognized Losses			1,234				312				1,696				1,060
Amortization of Unrecognized Prior Service Cost (Credit)			—				2				(1,296	)			(1,296	)
Net Periodic Benefit Cost		$	2,384			$	1,095			$	1,290			$	429

 

Note 9 – Income Taxes

 

The Internal Revenue Service (IRS) has issued final regulations pertaining to the deductibility of costs that qualify as repairs on tangible property. The regulations, which the Company adopted by filing a change in accounting method request with its 2014 Federal income tax return, redefine the characteristics previously used by the Company to determine tax deductibility of expenditures associated with tangible property. Under the regulations, the IRS has provided guidelines for certain industries, but not for regulated public water utilities. Consequently, the Company undertook a comprehensive study to support the adoption and integration of the new regulations into its tax policies prospectively, and to also determine the level of deductibility for income tax purposes for expenditures incurred on projects completed in prior years where such expenditures were capitalized, but may now be considered currently deductible as repairs under the new regulations. Included in its 2014 Federal income tax return, filed in September 2015, the Company submitted support which results in a net reduction of $17.6 million in taxes due to the federal government. While the Company believes that the deduction for qualifying tangible property repair costs included in its tax return is proper, it could be challenged under an examination by the IRS. Therefore, the Company has recorded a provision of $2.3 million against refundable taxes. The Company believes that the net operating loss carry-forward resulting from adoption of the regulations (approximately $7.8 million) is more likely than not to be recovered.

 

It is probable that any net tax benefits that resulted from adopting the study findings will be considered in determining the revenue requirement used to set base rates for the Company in a future regulatory proceeding. Consequently, adoption of the new regulations did not and will not have a significant impact on the Company’s financial statements or effective tax rate. Adoption of these new regulations resulted in a $10.3 million receivable for federal income taxes ($0.5 million of which is current), a $1.5 million increase in regulatory assets for additional expenses incurred expected to be recovered from customers in the future, a $5.0 million decrease in accrued taxes for the amount of refund applied against future tax payments and a $16.8 million increase in accumulated deferred income taxes.

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

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of Middlesex Water Company (Middlesex or the Company) included elsewhere herein and with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Forward-Looking Statements

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

 

-

statements as to expected financial condition, performance, prospects and earnings of the Company;

-

statements regarding strategic plans for growth;

-

statements regarding the amount and timing of rate increases and other regulatory matters, including the recovery of certain costs recorded as regulatory assets;

-

statements as to the Company’s expected liquidity needs during the upcoming fiscal year and beyond and statements as to the sources and availability of funds to meet its liquidity needs;

-

statements as to expected customer rates, consumption volumes, service fees, revenues, margins, expenses and operating results;

-

statements as to financial projections;

-

statements as to the expected amount of cash contributions to fund the Company’s retirement benefit plans, anticipated discount rates and rates of return on retirement benefit plan assets;

-

statements as to the ability of the Company to pay dividends;

-

statements as to the Company’s compliance with environmental laws and regulations and estimations of the materiality of any related costs;

-

statements as to the safety and reliability of the Company’s equipment, facilities and operations;

-

statements as to the Company’s plans to renew municipal franchises and consents in the territories it serves;

-

statements as to trends; and

-

statements regarding the availability and quality of our water supply.

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

 

-

the effects of general economic conditions;

-

increases in competition in the markets served by the Company;

-

the ability of the Company to control operating expenses and to achieve efficiencies in its operations;

-

the availability of adequate supplies of water;

-

actions taken by government regulators, including decisions on rate increase requests;

-

new or additional water quality standards;

-

weather variations and other natural phenomena;

-

acts of war or terrorism;

-

significant changes in the pace of housing development;

-

the availability and cost of capital resources; and

-

other factors discussed elsewhere in this quarterly report.

 

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

For an additional discussion of factors that may affect the Company’s business and results of operations, see Item 1A. - Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

Overview

 

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

 

Our New Jersey water utility system (the Middlesex System) provides water services to approximately 60,000 retail customers, primarily in central New Jersey. The Middlesex System also provides water service under contract to municipalities in central New Jersey with a total population of approximately 219,000. Our Bayview subsidiary provides water services in Downe Township, New Jersey. Our other New Jersey subsidiaries, Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), provide water and wastewater services to residents in Southampton Township, New Jersey.

 

We have an investment in a joint venture, Ridgewood Green RME, LLC, that owns and operates facilities to optimize the production of electricity at the Village of Ridgewood, New Jersey wastewater treatment plant and other municipal facilities.

 

In conjunction with our subsidiary, USA-PA, we operate the water supply system and wastewater system for the City of Perth Amboy, New Jersey (Perth Amboy) under contract.

 

USA offers residential customers in New Jersey and Delaware water service line and sewer lateral maintenance programs (LineCare). USA entered into a marketing agreement, expiring in 2021, with HomeServe USA (HomeServe), a leading provider of home maintenance service programs to service, develop and grow USA’s LineCare customer base. USA receives a service fee for the billing, cash collection and other administrative matters associated with HomeServe’s service contracts. USA also operates the Borough of Avalon, New Jersey’s (Avalon) water utility, sewer utility and storm water system under contract. In addition to performing the day to day operations, USA is responsible for billing, collections, customer service, emergency responses and management of capital projects funded by Avalon. USA also provides unregulated water and wastewater services under contract with several additional New Jersey municipalities.

 

Our Delaware subsidiaries, Tidewater and Southern Shores Water Company, LLC (Southern Shores), provide water services to approximately 40,000 retail customers in New Castle, Kent and Sussex Counties, Delaware. Tidewater’s subsidiary, White Marsh, services approximately 4,000 customers in Kent and Sussex Counties through various operations and maintenance contracts.

 

Our Tidewater Environmental Services, Inc. (TESI) subsidiary provides wastewater services to approximately 3,300 residential retail customers.

 

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

 

The majority of our revenue is generated from retail and contract water services to customers in our service areas. We record water service revenue as such service is rendered and include estimates for amounts unbilled at the end of the period for services provided after the last billing cycle. Fixed service charges are billed in advance by our subsidiary, Tidewater, and are recognized in revenue as the service is provided.

 

Our ability to increase operating income and net income is based significantly on four factors: weather, adequate and timely rate relief, effective cost management, and customer growth. These factors are evident in the discussions below which compare our results of operations with the prior period.

 

Recent Developments

 

Middlesex Base Water Rate Increase - In August 2015, Middlesex’s Petition to the New Jersey Board of Public Utilities (NJBPU) seeking permission to increase base water rates was concluded, based on a negotiated settlement, resulting in an increase in annual operating revenues of $5.0 million. The base water rate increase request of $9.5 million, filed in March 2015, was necessitated by declining consumption by Middlesex’s Commercial and Industrial class customers, increasing benefit costs for active and retired employees, capital infrastructure investments, and regulation-driven increases in other operations and maintenance costs. The new base water rates are designed to recover the increased costs and lost revenues, as well as a return on invested capital in rate base of $219.0 million, based on a return on equity of 9.75%. The rate increase became effective on August 29, 2015. Concurrent with the increase, Middlesex was required to reset its Distribution System Improvement Charge (DSIC) to zero. A DSIC is a rate-mechanism that allows water utilities to recover investments in, and generate a return on, qualifying capital improvements to their water distribution system made between base rate proceedings. The Middlesex DSIC had been in effect since May 2015, and had generated less than $0.1 million of revenues.

 

Tidewater DSIC - Effective July 1, 2015, Tidewater’s Delaware Public Service Commission-approved DSIC was increased from 0.31% to 0.37%. Total annual revenues under the Tidewater DSIC are expected to amount to approximately $0.1 million.

 

Pinelands – In October 2015, Pinelands Water and Pinelands Wastewater filed separate petitions with the NJBPU seeking permission to increase base rates by approximately $0.3 million and $0.2 million per year, respectively. These requests were necessitated by capital investments both companies have made, or have committed to make, increased operations and maintenance costs and lower non-fixed fee revenues for both companies. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the request. A decision by the NJBPU in either matter is not expected until the third quarter of 2016.

 

Income Taxes - The Internal Revenue Service (IRS) has issued final regulations pertaining to the deductibility of costs that qualify as repairs on tangible property. The regulations, which the Company adopted by filing a change in accounting method request with its 2014 Federal income tax return, redefine the characteristics previously used by the Company to determine tax deductibility of expenditures associated with tangible property. Under the regulations, the IRS has provided guidelines for certain industries, but not for regulated public water utilities. Consequently, the Company undertook a comprehensive study to support the adoption and integration of the new regulations into its tax policies prospectively, and to also determine the level of deductibility for income tax purposes for expenditures incurred on projects completed in prior years where such expenditures were capitalized, but may now be considered currently deductible as repairs under the new regulations. Included in its 2014 Federal income tax return, filed in September 2015, the Company submitted support which results in a net reduction of $17.6 million in taxes due to the federal government. While the Company believes that the deduction for qualifying tangible property repair costs included in its tax return is proper, it could be challenged under an examination by the IRS. Therefore, the Company has recorded a provision against refundable taxes of $2.3 million. The Company believes that the net operating loss carry-forward resulting from adoption of the regulations (approximately $7.8 million) is more likely than not to be recovered.

It is probable that any net tax benefits that resulted from adopting the study findings will be considered in determining the revenue requirement used to set base rates for the Company in a future regulatory proceeding. Consequently, adoption of the new regulations did not and will not have a significant impact on the Company’s financial statements or effective tax rate. Adoption of these new regulations resulted in a $10.3 million receivable for federal income taxes ($0.5 million of which is current), a $1.5 million increase in regulatory assets for additional expenses incurred expected to be recovered from customers in the future, a $5.0 million decrease in accrued taxes for the amount of refund applied against future tax payments and a $16.8 million increase in accumulated deferred income taxes.

 

Outlook

 

Revenues in the fourth quarter of 2015 are expected to be favorably impacted by Middlesex’s August 2015 base water rate increase and Tidewater’s July 2015 DSIC rate increase (see “Recent Developments” above regarding Middlesex’s and Tidewater’s rate increases).

 

Revenues and earnings are influenced by weather. Changes in water usage patterns, as well as increases in capital expenditures and operating costs, are significant factors in determining the timing and extent of rate increase requests. We continue, on an ongoing basis, to implement plans to further generate efficiencies in our operations and further reduce operating costs.

 

A market-driven lower discount rate, combined with the adoption of a new mortality table that reflects longer life expectancies, has resulted in higher employee retirement benefit plans expense in 2015. 

 

Our strategy for profitable growth is focused on five key areas:

 

·

Prudent acquisitions of investor- and municipally-owned water and wastewater utilities;

 

·

Timely and adequate recovery of prudent investments in utility plant required to maintain appropriate utility services;

 

·

Operate municipal and industrial water and wastewater systems under contract;

 

·

Invest in renewable energy projects that are complementary to the provision of water and wastewater services, and to our core water and wastewater competencies; and

 

·

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

 

Operating Results by Segment

 

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

 

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

 

Results of Operations – Three Months Ended September 30, 2015

 

		(In Thousands)
		Three Months Ended September 30,
		2015												2014
		Regulated				Non- Regulated				Total				Regulated				Non- Regulated				Total
Revenues		$	31,093			$	3,561			$	34,654			$	29,266			$	3,403			$	32,669
Operations and maintenance expenses			13,856				2,916				16,772				12,261				2,695				14,956
Depreciation expense			2,988				44				3,032				2,835				45				2,880
Other taxes			3,311				79				3,390				3,131				82				3,213
Operating income			10,938				522				11,460				11,039				581				11,620
Other income, net			195				26				221				85				—				85
Interest expense			1,483				22				1,505				1,493				23				1,516
Income taxes			3,184				249				3,433				3,173				258				3,431
Net income		$	6,466			$	277			$	6,743			$	6,458			$	300			$	6,758

 

Operating Revenues

 

Operating revenues for the three months ended September 30, 2015 increased $2.0 million from the same period in 2014. This increase was primarily related to the following factors:

 

·

Middlesex System revenues increased $1.3 million, primarily due to NJBPU-approved rate increases implemented in July 2014 ($0.3 million) and August 2015 ($0.4 million) and higher customer demand by both General Metered Service (GMS) customers ($0.3 million) and wholesale contract customers ($0.3 million);

·

Tidewater System revenues increased $0.3 million primarily due to higher customer demand and Tidewater’s Dover Air Force Base system acquisition, which Tidewater began serving in October 2014;

·

USA-PA’s revenues increased $0.2 million, primarily from scheduled fixed fees increases under our contract with Perth Amboy; and

·

Revenues for all other categories increased $0.2 million.

 

Operation and Maintenance Expenses

 

Operation and maintenance expenses for the three months ended September 30, 2015 increased $1.8 million from the same period in 2014, primarily related to the following factors:

 

·

Employee benefit expenses increased $1.0 million due to higher employee healthcare insurance costs and higher retirement plan costs resulting from a lower discount rate than in the prior year and the adoption of new mortality tables, reflecting longer life expectancies, both used in the calculation of the 2015 net periodic plan costs;

·

Variable production costs increased $0.4 million due to an increase in the rate the Company pays for residuals removal in our Middlesex System and increased production in our Middlesex and Tidewater systems;

·

USA-PA’s operation and maintenance costs increased $0.2 million, primarily due to higher subcontractor expenditures;

·

USA’s operation and maintenance costs increased $0.1 million, due to expenditures for billable supplemental services under USA’s contract to operate the Avalon water, sewer and storm water systems; and

·

Operation and maintenance expenses for all other categories increased $0.1 million.

Depreciation

 

Depreciation expense for the three months ended September 30, 2015 increased $0.2 million from the same period in 2014 due to a higher level of utility plant in service.

 

Other Taxes

 

Other taxes for the three months ended September 30, 2015 rose by $0.2 million from the same period in 2014, primarily due to higher revenue-related taxes on increased revenues in our Middlesex system.

 

Other Income, net

 

Other Income, net for the three months ended September 30, 2015 increased $0.1 million from the same period in 2014, primarily due to higher allowance for funds used during construction, resulting from a higher level of capital projects in progress.

 

Interest Charges

 

Interest charges for the three months ended September 30, 2015 remained consistent with the same period in 2014.

 

Income Taxes

 

Income taxes for the three months ended September 30, 2015 remained consistent with the same period in 2014.

 

Net Income and Earnings Per Share (EPS)

 

Net income for the three months ended September 30, 2015 was down slightly compared with the same period in 2014. A need for rate relief from our New Jersey regulators in the Middlesex system, combined with a higher number of common shares outstanding, caused basic and diluted EPS to be lower by $0.01 for the three months ended September 30, 2015 (EPS $0.41) when compared to the three months ended September 30, 2014 (EPS $0.42).

 

Results of Operations – Nine Months Ended September 30, 2015

 

		(In Thousands)
		Nine Months Ended September 30,
		2015												2014
		Regulated				Non-Regulated				Total				Regulated				Non-Regulated				Total
Revenues		$	83,923			$	11,177			$	95,100			$	78,547			$	10,485			$	89,032
Operations and maintenance expenses			39,894				9,195				49,089				36,624				8,333				44,957
Depreciation expense			8,830				132				8,962				8,394				138				8,532
Other taxes			9,425				246				9,671				8,944				266				9,210
Operating income			25,774				1,604				27,378				24,585				1,748				26,333
Other income, net			385				20				405				196				(6	)			190
Interest expense			3,992				66				4,058				4,066				68				4,134
Income taxes			7,514				744				8,258				6,962				773				7,735
Net income		$	14,653			$	814			$	15,467			$	13,753			$	901			$	14,654

Operating Revenues

 

Operating revenues for the nine months ended September 30, 2015 increased $6.1 million from the same period in 2014. This increase was primarily related to the following factors:

 

·

Middlesex System revenues increased $3.2 million due to NJBPU-approved rate increases implemented in July 2014 ($2.7 million) and August 2015 ($0.4 million) and higher customer demand, primarily by Middlesex’s wholesale contract customers ($0.2 million);

·

Tidewater System revenues increased $1.8 million primarily due to higher customer demand and Tidewater’s Dover Air Force Base system acquisition, which Tidewater began serving in October 2014;

·

USA-PA’s revenues increased $0.7 million, from scheduled fixed fees increases under our contract with Perth Amboy ($0.8 million) partially offset by lower revenues ($0.1 million) under the same contract for supplemental services;

·

TESI’s revenues increased $0.2 million, primarily due to base wastewater rate increases effective in October 2014 and April 2015; and

·

All other revenues increased $0.2 million.

 

Operation and Maintenance Expenses

 

Operation and maintenance expenses for the nine months ended September 30, 2015 increased $4.1 million from the same period in 2014, primarily related to the following factors:

 

·

Employee benefit expenses increased $2.4 million due to higher employee healthcare insurance costs and higher retirement plan costs resulting from a lower discount rate than in the prior year and the adoption of new mortality tables, reflecting longer life expectancies, both used in the calculation of the 2015 net periodic plan costs;

·

Variable production costs increased $0.6 million, primarily due to an increase in the rate the Company pays for residuals removal in our Middlesex System and increased production in our Middlesex and Tidewater systems;

·

USA-PA’s operation and maintenance costs increased $0.7 million, primarily due to higher subcontractor expenditures; and

·

USA’s operation and maintenance costs increased $0.4 million, primarily due to expenditures for billable supplemental services under USA’s contract to operate the Avalon water, sewer and storm water systems.

 

Depreciation

 

Depreciation expense for the nine months ended September 30, 2015 increased $0.4 million from the same period in 2014 due to a higher level of utility plant in service.

 

Other Taxes

 

Other taxes for the nine months ended September 30, 2015 increased $0.5 million from the same period in 2014, primarily due to higher revenue related taxes on increased revenues in our Middlesex system.

 

Other Income, net

 

Other Income, net for the nine months ended September 30, 2015 increased $0.2 million from the same period in 2014, primarily due to higher allowance for funds used during construction, resulting from a higher level of capital projects in progress, and lower business development costs at our TESI subsidiary.

 

Interest Charges

 

Interest charges for the nine months ended September 30, 2015 decreased $0.1 million from the same period in 2014, primarily due to lower average interest rates on decreased average total debt outstanding.

 

Income Taxes

 

Income taxes for the nine months ended September 30, 2015 increased $0.5 million from the same period in 2014, primarily due to increased pre-tax operating income in 2015 as compared to 2014.

 

Net Income and Earnings Per Share

 

Net income for the nine months ended September 30, 2015 increased $0.8 million as compared with the same period in 2014. Basic earnings per share were $0.95 and $0.91 for the nine months ended September 30, 2015 and 2014, respectively. Diluted earnings per share were $0.95 and $0.90 for the nine months ended September 30, 2015 and 2014, respectively.

 

Liquidity and Capital Resources

 

Operating Cash Flows

 

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

 

For the nine months ended September 30, 2015, cash flows from operating activities increased $6.7 million to $29.2 million. The increase in cash flows from operating activities primarily resulted from the timing of vendor payments, lower income tax payments and higher net income. The $29.2 million of net cash flow from operations enabled us to fund all utility plant expenditures internally for the period.

 

Capital Expenditures and Commitments

 

To fund our capital program, we use internally generated funds, short-term and long-term debt borrowings, proceeds from sales of common stock under the Middlesex Water Company Investment Plan (Investment Plan) and proceeds from sales offerings to the public of our common stock. See below for a more detailed discussion regarding the funding of our capital program.

 

The capital investment program for 2015 is currently estimated to be $22.4 million. Through September 30, 2015, we have expended $19.3 million and expect to incur approximately $3.1 million for capital projects for the remainder of 2015.

 

We currently project that we may expend approximately $74.5 million for capital projects in 2016 and 2017. The actual amount and timing of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain capital projects.

 

To fund our capital program for the remainder of 2015, we plan on utilizing:

 

·

Internally generated funds.

·

Proceeds from the sale of common stock through the Investment Plan.

·

Short-term borrowings, if necessary, through $60.0 million of available lines of credit with several financial institutions. As of September 30, 2015, there remains $42.0 million to draw upon.

 

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

 

 

Item 3. Quantitative and Qualitative Disclosures of Market Risk

 

We are exposed to market risk associated with changes in interest rates and commodity prices. The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt. The Company’s interest rate risk related to existing fixed rate, long-term debt is not material due to the term of the majority of our First Mortgage Bonds, which have final maturity dates ranging from 2018 to 2047. Over the next twelve months, the Company will pay approximately $5.7 million of the current portion of existing long-term debt instruments. Applying a hypothetical change in the rate of interest charged by 10% on those borrowings, would not have a material effect on our earnings.

 

Our risks associated with commodity price increases for chemicals, electricity and other commodities are reduced through contractual arrangements and the ability to recover price increases through rates. Non-performance by these commodity suppliers could have a material adverse impact on our results of operations, financial position and cash flows.

 

We are exposed to credit risk for both our Regulated and Non-Regulated business segments. Our Regulated operations serve residential, commercial, industrial and municipal customers while our Non-Regulated operations engage in business activities with developers, government entities and other customers. Our primary credit risk is exposure to customer default on contractual obligations and the associated loss that may be incurred due to the non-payment of customer accounts receivable balances. Our credit risk is managed through established credit and collection policies which are in compliance with applicable regulatory requirements and involve monitoring of customer exposure and the use of credit risk mitigation measures such as letters of credit or prepayment arrangements. Our credit portfolio is diversified with no significant customer or industry concentrations. In addition, our Regulated businesses are generally able to recover all prudently incurred costs including uncollectible customer accounts receivable expenses and collection costs through rates.

 

The Company's retirement benefit plan assets are exposed to fluctuating market prices of debt and equity securities. Changes to the Company's retirement benefit plan assets’ value can impact the Company's retirement benefit plan expense, funded status and future minimum funding requirements. Our risk is reduced through our ability to recover retirement benefit plan costs through rates.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

As required by Rule 13a-15 under the Securities and Exchange Act of 1934 (the Exchange Act), an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was conducted by the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Report. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding disclosure.

 

PART II.  OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

None.

 

Item 1A.

Risk Factors

 

The information about risk factors does not differ materially from those set forth in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

10.33

Uncommitted Line of Credit Agreement between registrant, registrant’s subsidiaries and Bank of America, N.A.

 

31.1	Section 302 Certification by Dennis W. Doll pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

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

 

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

 

32.2	Section 906 Certification by A. Bruce O’Connor pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

101.INS

XBRL Instance Document

 

101.SCH

XBRL Schema Document

 

101.CAL

XBRL Calculation Linkbase Document

 

101.LAB

XBRL Labels Linkbase Document

 

101.PRE

XBRL Presentation Linkbase Document

 

101.DEF

XBRL Definition Linkbase Document

 

 

 

SIGNATURES

 

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

 

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

 

 

Date: November 3, 2015