UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2013

 

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 July 31, 2013: Common Stock, No Par Value: 15,847,729 shares outstanding.

 
 

 

INDEX

 

 

PART I. FINANCIAL INFORMATION PAGE
     
Item 1. Financial Statements (Unaudited):  
     
  Condensed Consolidated Statements of Income 1
     
  Condensed Consolidated Balance Sheets 2
     
  Condensed Consolidated Statements of Cash Flows 3
     
  Condensed Consolidated Statements of Capital Stock and Long-Term Debt 4
     
  Notes to Unaudited Condensed Consolidated Financial Statements 5
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
     
Item 3. Quantitative and Qualitative Disclosures of Market Risk 21
     
Item 4. Controls and Procedures 22
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 23
     
Item 1A. Risk Factors 23
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
     
Item 3. Defaults upon Senior Securities 23
     
Item 4. Mine Safety Disclosures 23
     
Item 5. Other Information 23
     
Item 6. Exhibits 24
     
SIGNATURES 25

 

 
Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share amounts)

 

   Three Months Ended June 30,  Six Months Ended June 30,
   2013  2012  2013  2012
             
Operating Revenues  $29,102   $27,401   $56,140   $50,947 
                     
Operating Expenses:                    
Operations and Maintenance   15,148    14,765    30,578    29,140 
Depreciation   2,725    2,582    5,434    5,130 
Other Taxes   3,058    2,844    6,092    5,590 
                     
Total Operating Expenses   20,931    20,191    42,104    39,860 
                     
Operating Income   8,171    7,210    14,036    11,087 
                     
Other Income (Expense):                    
Allowance for Funds Used During Construction   89    137    127    273 
Other Income   —    125    97    317 
Other Expense   (11)   (11)   (21)   (151)
                     
Total Other Income, net   78    251    203    439 
                     
Interest Charges   1,538    1,779    2,693    3,133 
                     
Income before Income Taxes   6,711    5,682    11,546    8,393 
                     
Income Taxes   2,230    1,957    3,888    2,861 
                     
Net Income   4,481    3,725    7,658    5,532 
                     
Preferred Stock Dividend Requirements   51    51    103    103 
                     
Earnings Applicable to Common Stock  $4,430   $3,674   $7,555   $5,429 
                     
Earnings per share of Common Stock:                    
Basic  $0.28   $0.23   $0.48   $0.35 
Diluted  $0.28   $0.23   $0.47   $0.35 
                     
Average Number of                    
Common Shares Outstanding :                    
Basic   15,829    15,716    15,818    15,704 
Diluted   16,092    15,979    16,081    15,967 
                     
Cash Dividends Paid per Common Share  $0.1875   $0.1850   $0.3750   $0.3700 

See Notes to Condensed Consolidated Financial Statements.

1
Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED  BALANCE SHEETS

(Unaudited)

(In thousands)

 

      June 30,  December 31,
ASSETS     2013  2012
UTILITY PLANT:  Water Production  $130,503   $129,840 
   Transmission and Distribution   346,973    343,074 
   General   55,433    54,830 
   Construction Work in Progress   12,780    7,834 
   TOTAL   545,689    535,578 
   Less Accumulated Depreciation   104,884    100,360 
   UTILITY PLANT - NET   440,805    435,218 
              
CURRENT ASSETS:  Cash and Cash Equivalents   2,992    3,025 
   Accounts Receivable, net   11,558    12,447 
   Unbilled Revenues   6,731    5,483 
   Materials and Supplies (at average cost)   2,104    1,403 
   Prepayments   2,734    2,255 
   TOTAL CURRENT ASSETS   26,119    24,613 
              
DEFERRED CHARGES  Unamortized Debt Expense   3,596    3,606 
AND OTHER ASSETS:  Preliminary Survey and Investigation Charges   5,024    5,117 
   Regulatory Assets   59,455    72,831 
   Operations Contracts, Developer and Other Receivables   598    992 
   Restricted Cash   5,362    9,019 
   Non-utility Assets - Net   11,076    9,882 
   Other   390    448 
   TOTAL DEFERRED CHARGES AND OTHER ASSETS   85,501    101,895 
   TOTAL ASSETS  $552,425   $561,726 
              
CAPITALIZATION AND LIABILITIES          
CAPITALIZATION:  Common Stock, No Par Value  $144,724   $143,572 
   Retained Earnings   39,685    38,060 
   TOTAL COMMON EQUITY   184,409    181,632 
   Preferred Stock   3,353    3,353 
   Long-term Debt   133,504    131,467 
   TOTAL CAPITALIZATION   321,266    316,452 
              
CURRENT  Current Portion of Long-term Debt   5,285    11,130 
LIABILITIES:  Notes Payable   27,950    27,950 
   Accounts Payable   5,133    3,808 
   Accrued Taxes   9,796    9,266 
   Accrued Interest   1,144    955 
   Unearned Revenues and Advanced Service Fees   759    756 
   Other   1,950    2,067 
   TOTAL CURRENT LIABILITIES   52,017    55,932 
              
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)          
              
DEFERRED CREDITS  Customer Advances for Construction   21,944    21,990 
AND OTHER LIABILITIES:  Accumulated Deferred Investment Tax Credits   1,028    1,068 
   Accumulated Deferred Income Taxes   40,920    41,776 
   Employee Benefit Plans   44,288    54,768 
   Regulatory Liability - Cost of Utility Plant Removal   9,230    8,811 
   Other   991    973 
   TOTAL DEFERRED CREDITS AND OTHER LIABILITIES   118,401    129,386 
              
CONTRIBUTIONS IN AID OF CONSTRUCTION   60,741    59,956 
   TOTAL CAPITALIZATION AND LIABILITIES  $552,425   $561,726 

See Notes to Condensed Consolidated Financial Statements.

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Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   Six Months Ended June 30,
   2013  2012
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Income  $7,658   $5,532 
Adjustments to Reconcile Net Income to          
Net Cash Provided by Operating Activities:          
Depreciation and Amortization   5,705    5,489 
Provision for Deferred Income Taxes and Investment Tax Credits   1,075    990 
Equity Portion of Allowance for Funds Used During Construction (AFUDC)   (82)   (170)
Cash Surrender Value of Life Insurance   (112)   (90)
Stock Compensation Expense   269    372 
Changes in Assets and Liabilities:          
Receivables   1,283    4,201 
Unbilled Revenues   (1,248)   (1,351)
Materials & Supplies   (701)   (18)
Prepayments   (479)   (620)
Accounts Payable   1,325    (909)
Accrued Taxes   530    1,405 
Accrued Interest   189    (6)
Employee Benefit Plans   767    1,846 
Unearned Revenue & Advanced Service Fees   3    9 
Other Assets and Liabilities   14    (867)
           
NET CASH PROVIDED BY OPERATING ACTIVITIES   16,196    15,813 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Utility Plant Expenditures, Including AFUDC of $45 in 2013, $103 in 2012   (10,222)   (12,574)
Restricted Cash   (2,630)   (2,578)
Investment in Joint Venture   (1,005)   (500)
           
NET CASH USED IN INVESTING ACTIVITIES   (13,857)   (15,652)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Redemption of Long-term Debt   (7,724)   (1,590)
Proceeds from Issuance of Long-term Debt   3,987    4,929 
Net Short-term Bank Borrowings   —    1,000 
Deferred Debt Issuance Expense   —    (22)
Restricted Cash   6,070    — 
Proceeds from Issuance of Common Stock   883    788 
Payment of Common Dividends   (5,930)   (5,809)
Payment of Preferred Dividends   (103)   (103)
Construction Advances and Contributions-Net   445    267 
           
NET CASH USED IN  FINANCING ACTIVITIES   (2,372)   (540)
NET CHANGES IN CASH AND CASH EQUIVALENTS   (33)   (379)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   3,025    3,106 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $2,992   $2,727 
           
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:          
Utility Plant received as Construction Advances and Contributions  $291   $453 
Long-term Debt Deobligation  $64   $— 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:          
   Cash Paid During the Year for:          
Interest  $2,627   $3,208 
Interest Capitalized  $45   $103 
Income Taxes  $3,190   $774 

See Notes to Condensed Consolidated Financial Statements.

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Index

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK

AND LONG-TERM DEBT

(Unaudited)

(In thousands)

 

   June 30,  December 31,
   2013  2012
Common Stock, No Par Value          
Shares Authorized - 40,000          
Shares Outstanding -   2013 - 15,844  $144,724   $143,572 
  2012 - 15,795          
           
Retained Earnings   39,685    38,060 
TOTAL COMMON EQUITY  $184,409   $181,632 
           
Cumulative Preferred Stock, No Par Value:          
Shares Authorized - 134          
Shares Outstanding - 32          
Convertible:          
Shares Outstanding, $7.00 Series - 14   1,457    1,457 
Shares Outstanding, $8.00 Series -   7   816    816 
Nonredeemable:          
Shares Outstanding, $7.00 Series -   1   80    80 
Shares Outstanding, $4.75 Series - 10   1,000    1,000 
TOTAL PREFERRED STOCK  $3,353   $3,353 
           
Long-term Debt:          
8.05%, Amortizing Secured Note, due December 20, 2021  $2,089   $2,169 
6.25%, Amortizing Secured Note, due May 19, 2028   6,265    6,475 
6.44%, Amortizing Secured Note, due August 25, 2030   4,807    4,947 
6.46%, Amortizing Secured Note, due September 19, 2031   5,087    5,227 
4.22%, State Revolving Trust Note, due December 31, 2022   486    506 
3.30% to 3.60%, State Revolving Trust Note, due May 1, 2025   3,305    3,413 
3.49%, State Revolving Trust Note, due January 25, 2027   586    602 
4.03%, State Revolving Trust Note, due December 1, 2026   763    784 
4.00% to 5.00%, State Revolving Trust Bond, due August 1, 2021   388    388 
0.00%, State Revolving Fund Bond, due August 1, 2021   313    320 
3.64%, State Revolving Trust Note, due July 1, 2028   339    347 
3.64%, State Revolving Trust Note, due January 1, 2028   113    116 
3.45%, State Revolving Trust Note, due August 1, 2031   409    397 
6.59%, Amortizing Secured Note, due April 20, 2029   5,523    5,697 
7.05%, Amortizing Secured Note, due January 20, 2030   4,146    4,271 
5.69%, Amortizing Secured Note, due January 20, 2030   8,504    8,761 
3.75%, State Revolving Trust Note, due July 1, 2031   2,565    2,615 
3.75%, State Revolving Trust Note, due November 30, 2030   1,361    1,388 
First Mortgage Bonds:          
0.00%, Series X, due September 1, 2018   316    322 
4.25% to 4.63%, Series Y, due September 1, 2018   355    355 
0.00%, Series Z, due September 1, 2019   766    782 
5.25% to 5.75%, Series AA, due September 1, 2019   955    955 
0.00%, Series BB, due September 1, 2021   1,064    1,085 
4.00% to 5.00%, Series CC, due September 1, 2021   1,275    1,275 
5.10%, Series DD, due January 1, 2032   —    6,000 
0.00%, Series EE, due August 1, 2023   4,295    4,386 
3.00% to 5.50%, Series FF, due August 1, 2024   5,755    5,755 
0.00%, Series GG, due August 1, 2026   1,242    1,262 
4.00% to 5.00%, Series HH, due August 1, 2026   1,560    1,560 
0.00%, Series II, due August 1, 2024   1,038    1,060 
3.40% to 5.00%, Series JJ, due August 1, 2027   1,235    1,235 
0.00%, Series KK, due August 1, 2028   1,410    1,435 
5.00% to 5.50%, Series LL, due August 1, 2028   1,570    1,570 
0.00%, Series MM, due August 1, 2030   1,704    1,801 
3.00% to 4.375%, Series NN, due August 1, 2030   1,910    1,910 
0.00%, Series OO, due August 1, 2031   2,809    2,860 
2.00% to 5.00%, Series PP, due August 1, 2031   915    915 
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   2,960    — 
3.00% to 3.25%, Series UU, due August 1, 2032   1,015    — 
SUBTOTAL LONG-TERM DEBT   136,613    140,361 
Add: Premium on Issuance of Long-term Debt   2,176    2,236 
Less: Current Portion of Long-term Debt   (5,285)   (11,130)
TOTAL LONG-TERM DEBT  $133,504   $131,467 

 

See Notes to Condensed Consolidated Financial Statements.

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Index

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 are reported on a consolidated basis. All significant intercompany accounts and transactions have been eliminated.

 

The consolidated notes within the 2012 Annual Report on Form 10-K (the 2012 Form 10-K) are applicable to these financial statements and, in the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (including normal recurring accruals) to present fairly the financial position as of June 30, 2013 and the results of operations and cash flows for the three and six month periods ended June 30, 2013, and 2012. Information included in the Condensed Consolidated Balance Sheet as of December 31, 2012, has been derived from the Company’s audited financial statements for the year ended December 31, 2012 included in the 2012 Form 10-K. Certain reclassifications have been made to prior year financial statements to conform with current year presentation.

 

Borough of Sayreville, New Jersey and Hess Corporation

Middlesex has received notification from the Borough of Sayreville, New Jersey (Sayreville), one of Middlesex's wholesale contract customers, that Sayreville will not be renewing its contract for the purchase of water from Middlesex. In accordance with the terms, this contract will remain in effect through August 12, 2013. Gross operating revenues from water sales to Sayreville amounted to $1.9 million in 2012. In addition, Hess Corporation (Hess), Middlesex's largest retail water customer, ceased its oil refining operations at its Port Reading, New Jersey facility in February 2013. Revenues from Hess amounted to $2.6 million in 2012. Revenue reductions from either of these customers may accelerate the need for Middlesex to file a base rate increase petition with the New Jersey Board of Public Utilities (NJBPU).

 

Recent Accounting Guidance

In the second quarter of 2013, there was no new adopted or proposed accounting guidance that could have a material impact on the Company’s financial statements.

 

Note 2 – Rate Matters

 

Middlesex – In June 2013, the NJBPU approved a Middlesex Petition to defer approximately $0.4 million of costs of Superstorm Sandy related costs. These costs include labor, outside contractor costs, fuel, generator rental and other directly related expenses resulting from storm damage mitigation, repair, clean-up and restoration activities. Middlesex has submitted claims for these costs through its insurance carrier. Middlesex will seek recovery of any Superstorm Sandy related costs not recovered through insurance in its next base rate increase proceeding. Middlesex cannot predict the timing of or whether these costs, if any, will be recovered through insurance or in its next base rate proceeding.

 

In April 2013, the NJBPU approved a Middlesex Petition to establish a Purchased Water Adjustment Clause and implement a tariff rate sufficient to recover increased costs of $0.1 million to purchase untreated water from the New Jersey Water Supply Authority (NJWSA) and treated water from a non-affiliated regulated water utility.

 

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Index

In November 2012, Middlesex filed a Petition with the NJBPU seeking approval of foundational information (Foundational Filing) that would allow for the implementation of a Distribution System Improvement Charge (DSIC). A DSIC is a rate-mechanism that allows water utilities to recover investment in capital improvements to their water distribution system made between base rate proceedings.  In February 2013, the Foundational Filing was approved by the NJBPU, which allows Middlesex to implement a DSIC rate in September 2013 to recover costs for qualifying projects that are placed in service in the six-month post-approval period.  The DSIC rate is allowed to increase in three subsequent six month periods for any additional qualifying projects placed in service during those time periods. The maximum annual revenue allowed to be recovered under the approved Foundational Filing is $1.4 million.

 

Pinelands - In March 2013, the NJBPU approved a combined $0.2 million increase in Pinelands Water and Pinelands Wastewater’s annual base revenues. In its initial request, filed in August 2012, Pinelands had sought an increase of $0.3 million on a combined basis. The rate increase for the water service, which is approximately 50% of the approved increase, will be phased-in over one year.

 

TESI – In November 2012, TESI filed an application with the Delaware Public Service Commission (DEPSC) seeking approval to purchase all of the utility assets of the 600 customer wastewater system serving the residents of the Plantations development (the Plantations) in Rehoboth Beach, Delaware. The application also requests the transfer of the wastewater franchise from the current owner to TESI. In connection with this transaction, TESI also filed an application with DEPSC seeking an approximate $0.1 million increase in the Plantations’ residents base wastewater rates. TESI’s willingness to purchase the Plantations’ wastewater system is contingent upon several requirements being met to TESI’s satisfaction, including, among other things, the DEPSC’s approval of the sale and transfer application as well as a rate decision by the DEPSC that provides TESI a reasonable opportunity to earn its authorized return from the date of acquisition. In June 2013, a settlement agreement executed by TESI, the DEPSC Staff and the Delaware Department of the Public Advocate was submitted to a DEPSC-appointed Hearing Examiner as part of an evidentiary hearing. The homeowners association of the Plantations elected not to execute the settlement agreement and submitted objections to the Hearing Examiner. We cannot predict whether the DEPSC will ultimately approve or deny the settlement agreement. A decision by the DEPSC is not expected until the middle of the third quarter of 2013.

 

Note 3 – Capitalization

 

Common Stock

During the six months ended June 30, 2013 and 2012, there were 45,378 common shares (approximately $0.9 million) and 42,472 common shares (approximately $0.8 million), respectively, issued under the Company’s Amended and Restated Dividend Reinvestment and Common Stock Purchase Plan.

 

The Company maintains a stock plan for its non-management directors (Outside Director Stock Compensation Plan). In May 2013 and May 2012, the Company granted and issued 5,432 (approximately $0.1 million) and 5,768 shares (approximately $0.1 million) of common stock, respectively, to the non-management directors under the Outside Director Stock Compensation Plan.

 

Long-term Debt

In May 2013, Middlesex borrowed $4.0 million through the New Jersey Environmental Infrastructure Trust under the New Jersey State Revolving Fund (SRF) loan program and issued first mortgage bonds designated as Series TT ($3.0 million) and Series UU ($1.0 million). The interest rate on the Series TT bond is zero and the interest rate on the Series UU bond ranges from 3.0% to 3.25% depending on the serial maturity date. The final maturity date for both bonds is August 1, 2032. Proceeds were recorded as Restricted Cash and may only be used for the Middlesex 2013 RENEW project, which is part of a program to clean and cement all unlined mains in the Middlesex system.

 

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Index

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 notes payable and 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:

 

   (Thousands of Dollars)
   June 30, 2013  December 31, 2012
   Carrying  Fair  Carrying  Fair
   Amount  Value  Amount  Value
First Mortgage Bonds  $89,565   $84,195   $91,938   $93,556 
SRF Bonds  $701   $704   $708   $712 

 

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 $46.3 million at June 30, 2013 and $47.7 million at December 31, 2012. Customer advances for construction have a carrying amount of $21.9 million and $22.0 million, respectively, at June 30, 2013 and December 31, 2012. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases.

 

Note 4 – Earnings Per Share

 

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

 

   (In Thousands Except per Share Amounts)
   Three Months Ended June 30,
   2013  2012
Basic:  Income  Shares  Income  Shares
Net Income  $4,481    15,829   $3,725    15,716 
Preferred Dividend   (51)        (51)     
Earnings Applicable to Common Stock  $4,430    15,829   $3,674    15,716 
                     
Basic EPS  $0.28        $0.23      
                     
Diluted:                    
Earnings Applicable to Common Stock  $4,430    15,829   $3,674    15,716 
$7.00 Series Preferred Dividend   24    167    24    167 
$8.00 Series Preferred Dividend   14    96    14    96 
Adjusted Earnings Applicable to  Common Stock  $4,468    16,092   $3,712    15,979 
                     
Diluted EPS  $0.28        $0.23      

 

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   (In Thousands Except per Share Amounts)
   Six Months Ended June 30,
   2013  2012
Basic:  Income  Shares  Income  Shares
Net Income  $7,658    15,818   $5,532    15,704 
Preferred Dividend   (103)        (103)     
Earnings Applicable to Common Stock  $7,555    15,818   $5,429    15,704 
                     
Basic EPS  $0.48        $0.35      
                     
Diluted:                    
Earnings Applicable to Common Stock  $7,555    15,818   $5,429    15,704 
$7.00 Series Preferred Dividend   49    167    49    167 
$8.00 Series Preferred Dividend   28    96    28    96 
Adjusted Earnings Applicable to  Common Stock  $7,632    16,081   $5,506    15,967 
                     
Diluted EPS  $0.47        $0.35      

 

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.

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   (In Thousands)
   Three Months Ended  Six Months Ended
   June 30,  June 30,
Operations by Segments:  2013  2012  2013  2012
Revenues:                    
   Regulated  $25,637   $24,442   $49,061   $45,300 
   Non – Regulated   3,580    3,089    7,316    5,847 
Inter-segment Elimination   (115)   (130)   (237)   (200)
Consolidated Revenues  $29,102   $27,401   $56,140   $50,947 
                     
Operating Income:                    
   Regulated  $7,678   $6,878   $13,016   $10,381 
   Non – Regulated   493    332    1,020    706 
Consolidated Operating Income  $8,171   $7,210   $14,036   $11,087 
                     
Net Income:                    
   Regulated  $4,235   $3,557   $7,145   $5,144 
   Non – Regulated   246    168    513    388 
Consolidated Net Income  $4,481   $3,725   $7,658   $5,532 
                     
Capital Expenditures:                    
  Regulated  $5,703   $6,296   $10,104   $12,335 
   Non – Regulated   13    140    118    239 
Total Capital Expenditures  $5,716   $6,436   $10,222   $12,574 

 

   As of  As of  
   June 30,  December 31,  
   2013  2012  
Assets:            
   Regulated  $551,039   $560,165   
   Non – Regulated   11,444    11,674   
Inter-segment Elimination   (10,058)   (10,113)  
Consolidated Assets  $552,425   $561,726   

 

Note 6 – Short-term Borrowings

 

As of June 30, 2013, the Company has established lines of credit aggregating $60.0 million. At June 30, 2013, the outstanding borrowings under these credit lines were $28.0 million at a weighted average interest rate of 1.27%.

 

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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  Six Months Ended
   June 30,  June 30,
   2013  2012  2013  2012
Average Daily Amounts Outstanding  $25,873   $24,635   $26,895   $24,102 
Weighted Average Interest Rates   1.34%    1.38%    1.37%    1.35% 

 

The maturity dates for the $28 million outstanding as of June 30, 2013 are all in July 2013 and are extendable at the discretion of the Company.

 

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

 

Note 7 – Commitments and Contingent Liabilities

 

Contract Operations

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

 

Water Supply

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

 

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

 

Purchased water costs are shown below:

 

   (In Thousands)
   Three Months Ended  Six Months Ended
   June 30,  June 30,
   2013  2012  2013  2012
             
Treated  $762   $775   $1,523   $1,494 
Untreated   515    516    1,121    1,128 
Total Costs  $1,277   $1,291   $2,644   $2,622 

 

 

Construction

The Company expects to spend approximately $21.9 million on its construction program in 2013. The actual amount and timing of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain projects.

 

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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 substantially all employees hired prior to March 31, 2007. Employees hired after March 31, 2007 are not eligible to participate in this plan, but do participate in a defined contribution plan that provides an annual contribution into a self-directed retirement account at the discretion of the Company, based upon a percentage of the participants’ compensation. In order to be eligible for contribution, the participating employee must be employed by the Company on December 31st of the year to which the award relates. For the three months ended June 30, 2013 and 2012, the Company did not make any Pension Plan cash contributions. For the six months ended June 30, 2013 and 2012, the Company made Pension Plan cash contributions of $0.6 and $0.8 million, respectively. The Company expects to make additional Pension Plan cash contributions of approximately $2.7 million over the remainder of the current year. The Company also maintains an unfunded supplemental retirement benefit plan for certain active and retired Company officers and currently pays $0.3 million in annual benefits to the retired participants.

 

Other Postretirement Benefits

The Company’s postretirement plan other than pensions (Other Benefits Plan) covers substantially all of its retired employees. Employees hired after March 31, 2007 are not eligible to participate in this plan. Coverage includes healthcare and life insurance. Effective January 1, 2013, the Company has amended a provision of the Other Benefits Plan increasing the level of retiree contributions required towards the insurance premiums. Eligible employees retiring in 2013 and beyond will contribute a higher percentage towards their healthcare premiums.  The amendment resulted in a $10.2 million decrease in the Company’s Employee Benefit Plans’ Liability, and related Regulatory Asset, as of January 1, 2013. For the three months ended June 30, 2013 and 2012, the Company did not make any Other Benefits Plan cash contributions. For the six months ended June 30, 2013 and 2012, the Company made Other Benefits Plan cash contributions of $0.7 million and $0.8 million, respectively. The Company expects to make additional Other Benefits Plan cash contributions of approximately $1.5 million over the remainder of the current year.

 

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

 

   (In Thousands)
   Pension Benefits  Other Benefits
   Three Months Ended June 30,
   2013  2012  2013  2012
             
Service Cost  $575   $549   $335   $446 
Interest Cost   617    604    398    467 
Expected Return on Assets   (723)   (614)   (405)   (315)
Amortization of Unrecognized Losses   408    388    517    442 
Amortization of Unrecognized Prior Service Cost   3    3    (432)   — 
Amortization of Transition Obligation   —    —    —    34 
Net Periodic Benefit Cost  $880   $930   $413   $1,074 

 

   (In Thousands)
   Pension Benefits  Other Benefits
   Six Months Ended June 30,
   2013  2012  2013  2012
             
Service Cost  $1,150   $1,099   $669   $892 
Interest Cost   1,234    1,208    797    934 
Expected Return on Assets   (1,447)   (1,229)   (811)   (629)
Amortization of Unrecognized Losses   816    775    1,033    883 
Amortization of Unrecognized Prior Service Cost   5    5    (864)   — 
Amortization of Transition Obligation   —    —    —    68 
Net Periodic Benefit Cost  $1,758   $1,858   $824   $2,148 

 

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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, 2012.

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;
-the existence of financially attractive acquisition candidates and the risks involved in pursuing those acquisitions;
-acts of war or terrorism;
-significant changes in the pace of housing development in Delaware;
-the availability and cost of capital resources;
-the ability to translate Preliminary Survey & Investigation charges into viable projects; and
-other factors discussed elsewhere in this quarterly report.

 

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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, 2012.

 

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 300,000. We also have an investment in a joint venture, Ridgewood Green RME, LLC, that is constructing, and will own and operate, facilities to optimize the production of electricity at the Village of Ridgewood, New Jersey wastewater treatment plant and other municipal facilities (full operation of the facilities is expected to begin in the third quarter of 2013). In partnership with our subsidiary, USA-PA, we operate the water supply system and wastewater system for the City of Perth Amboy, New Jersey (Perth Amboy). 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.

 

USA offers residential customers in New Jersey and Delaware water service line and sewer lateral maintenance programs (LineCare). USA entered into a marketing agreement (the 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. On July 1, 2012, USA began service to the Borough of Avalon, New Jersey (Avalon) under a ten-year operations and maintenance contract for the Avalon water utility, sewer utility and storm water system. 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.

 

Our Delaware subsidiaries, Tidewater and Southern Shores Water Company, LLC (Southern Shores), provide water services to approximately 37,000 retail customers in New Castle, Kent and Sussex Counties, Delaware. Tidewater’s subsidiary, White Marsh, services an additional 4,600 customers in Kent and Sussex Counties through various operations and maintenance contracts.

 

Our Tidewater Environmental Services, Inc. (TESI) subsidiary provides wastewater services to approximately 2,400 retail customers. We expect our regulated wastewater operations in Delaware will continue to become a more significant component of our operations.

 

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Our Pennsylvania subsidiary, Twin Lakes, provides water services to approximately 100 retail customers in the Township of Shohola, Pike County, Pennsylvania.

 

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

 

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

 

Recent Developments

 

Rate Matters

Middlesex - In June 2013, the New Jersey Board of Public Utilities (NJBPU) approved a Middlesex Petition to defer approximately $0.4 million of costs of Superstorm Sandy related costs. These costs include labor, outside contractor costs, fuel, generator rental and other directly related expenses resulting from storm damage mitigation, repair, clean-up and restoration activities. Middlesex has submitted claims for these costs through its insurance carrier. Middlesex will seek recovery of any Superstorm Sandy related costs not recovered through insurance in its next base rate increase proceeding. Middlesex cannot predict the timing of or whether these costs, if any, will be recovered through insurance or in its next base rate proceeding.

 

In April 2013, the NJBPU approved a Middlesex Petition to establish a Purchased Water Adjustment Clause (PWAC) and implement a tariff rate sufficient to recover increased costs of $0.1 million to purchase untreated water from the New Jersey Water Supply Authority and treated water from a non-affiliated regulated water utility.

 

In November 2012, Middlesex filed a Petition with the NJBPU seeking approval of foundational information (Foundational Filing) that would allow for the implementation of a Distribution System Improvement Charge (DSIC). A DSIC is a rate-mechanism that allows water utilities to recover investment in capital improvements to their water distribution system made between base rate proceedings.  In February 2013, the Foundational Filing was approved by the NJBPU, which allows Middlesex to implement a DSIC rate in September 2013 to recover costs for qualifying projects that are placed in service in the six-month post-approval period.  The DSIC rate is allowed to increase in three subsequent six month periods for any additional qualifying projects placed in service during those time periods. The maximum annual revenues allowed to be recovered under the approved Foundational Filing is $1.4 million.

 

Pinelands - In March 2013, the NJBPU approved a combined $0.2 million increase in Pinelands Water and Pinelands Wastewater’s annual base revenues. In its initial request, filed in August 2012, Pinelands had sought an increase of $0.3 million on a combined basis. The rate increase for the water service, which is approximately 50% of the approved increase, will be phased-in over one year.

 

TESI – In November 2012, TESI filed an application with the Delaware Public Service Commission (DEPSC) seeking approval to purchase all of the utility assets of the 600 customer wastewater system serving the residents of the Plantations development (the Plantations) in Rehoboth Beach, Delaware. The application also requests the transfer of the wastewater franchise from the current owner to TESI. In connection with this transaction, TESI also filed an application with DEPSC seeking an approximate $0.1 million increase in the Plantations’ residents base wastewater rates. TESI’s willingness to purchase the Plantations’ wastewater system is contingent upon several requirements being met to TESI’s satisfaction, including, among other things, the DEPSC’s approval of the sale and transfer application as well as a rate decision by the DEPSC that provides TESI a reasonable opportunity to earn its authorized return from the date of acquisition. In June 2013, a settlement agreement executed by TESI, the DEPSC Staff and the Delaware Department of the Public Advocate was submitted to a DEPSC-appointed Hearing Examiner as part of an evidentiary hearing. The homeowners association of the Plantations elected not to execute the settlement agreement and submitted objections to the Hearing Examiner. We cannot predict whether the DEPSC will ultimately approve or deny the settlement agreement. A decision by the DEPSC is not expected until the middle of the third quarter of 2013.

 

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Outlook

 

Revenues for 2013 are expected to be favorably impacted by the full year effect of approved 2012 and 2013 base rate increases for Middlesex, Tidewater, TESI, Southern Shores, Twin Lakes, Pinelands Water and Pinelands Wastewater. Also expected to contribute to additional revenues in 2013 are the Tidewater DSIC and the Middlesex PWAC and DSIC.

 

Middlesex has received notification from the Borough of Sayreville, New Jersey (Sayreville), one of Middlesex's wholesale contract customers, that Sayreville will not be renewing its contract for the purchase of water from Middlesex. In accordance with the terms, this contract will remain in effect through August 12, 2013. Gross operating revenues from water sales to Sayreville amounted to $1.9 million in 2012. In addition, Hess Corporation (Hess), Middlesex's largest retail water customer, ceased its oil refining operations at its Port Reading, New Jersey facility in February 2013. Revenues from Hess amounted to $2.6 million in 2012. Revenue reductions from either of these customers are expected to accelerate the need for Middlesex to file a base rate increase petition with the NJBPU in 2013.

 

Effective January 1, 2013, the Company has amended a provision of its postretirement medical plan (Other Benefits Plan) increasing the level of retiree contributions required towards the insurance premiums. Eligible employees retiring in 2013 and beyond will contribute a higher percentage towards their postretirement healthcare premiums. This amendment, combined with somewhat improved performance in 2012 on our investment of retirement plan funds, is expected to lower employee benefit plan expenses by approximately $2.8 million in 2013, as compared to 2012.  In addition, we expect our cash contributions to our Other Benefits Plan to decrease to $2.2 million in 2013 from $3.9 million in 2012.  See Note 8 of the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion of our Employee Benefit Plans.

 

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

 

Revenues and earnings are influenced by weather. Recent levels of precipitation and unexpected weather patterns have negatively impacted usage by our water customers in New Jersey and Delaware. Changes in usage patterns, as well as increases in capital expenditures and operating costs, are the primary factors in determining the need for rate increase requests. We continue to implement plans to streamline operations and reduce operating costs.

 

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

 

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Our strategy is focused on four key areas:

 

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

 

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

 

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

 

  ·

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

 

Operating Results by Segment

 

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

 

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

 

Results of Operations – Three Months Ended June 30, 2013

 

   (In Thousands) 
   Three Months Ended June 30, 
   2013   2012 
   Regulated   Non-
Regulated		   Total   Regulated   Non-
Regulated		   Total 
Revenues  $25,610   $3,492   $29,102   $24,389   $3,012   $27,401 
Operations and maintenance expenses   12,286    2,862    15,148    12,207    2,558    14,765 
Depreciation expense   2,680    45    2,725    2,541    41    2,582 
Other taxes   2,966    92    3,058    2,763    81    2,844 
  Operating income   7,678    493    8,171    6,878    332    7,210 
                               
Other income, net   78    —    78    235    16    251 
Interest expense   1,514    24    1,538    1,754    25    1,779 
Income taxes   2,007    223    2,230    1,802    155    1,957 
  Net income  $4,235   $246   $4,481   $3,557   $168   $3,725 

 

Operating Revenues

 

Operating revenues for the three months ended June 30, 2013 increased $1.7 million from the same period in 2012. This increase was primarily related to the following factors:

 

·Middlesex System revenues increased $1.3 million due to:
oSales to General Metered Service (GMS) customers increased by $0.8 million primarily due to the July 2012 base water rate increase partially offset by decreased GMS customer demand resulting from:
§greater than expected precipitation during the second quarter of 2013;
§Hess, Middlesex's largest GMS customer, ceasing its oil refining operations at its Port Reading, New Jersey facility in February 2013 (see discussion in “Outlook” section above);
oContract Sales to Municipalities increased by $0.4 million, primarily due to the July 2012 base water rate increase and increased demand;
oOperating revenues for all other categories increased $0.1 million;
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·Tidewater System revenues decreased $0.2 million, primarily due to lower customer demand resulting from greater than expected precipitation during the second quarter of 2013 partially offset by increased fees for new water customer connections and the June 2012 implementation of the final component of the base rate increase. Interim rates had been in effect since November 2011;
·USA’s revenues increased $0.4 million, primarily due to revenues earned under our contract to operate the Avalon water utility, sewer utility and storm water system, which commenced in July 2012;
·TESI’s revenues increased $0.1 million, primarily due to the June 2012 base rate increase; and
·All other subsidiaries revenues increased $0.1 million.

 

Operation and Maintenance Expense

 

Operation and maintenance expenses for the three months ended June 30, 2013 increased $0.4 million from the same period in 2012. This increase was primarily related to the following factors:

 

·Labor costs increased $0.4 million due to lower capitalized payroll, increased overtime expended on emergency repairs and higher average labor rates;
·Variable production costs increased $0.3 million, primarily from higher water treatment costs due to increased precipitation during the second quarter of 2013;
·Water main break costs increased $0.1 million, as we experienced a higher number of main breaks in 2013 as compared to 2012;
·Expenditures for USA’s contract operations serving Avalon, commencing July 1, 2012, resulted in a $0.1 million increase in labor costs and a $0.2 million increase in direct costs for billable supplemental services;
·Employee benefit expenses increased $0.1 million due primarily to lower capitalized benefits. These increases were completely offset by lower costs of $0.6 million primarily due to the amendment of the Other Benefits Plan which increases contributions by future retirees; and
·All other operation and maintenance expense categories decreased $0.2 million.

 

Depreciation

 

Depreciation expense for the three months ended June 30, 2013 increased $0.1 million from the same period in 2012 due to a higher level of utility plant in service.

 

Other Taxes

 

Other taxes for the three months ended June 30, 2013 increased $0.2 million from the same period in 2012, primarily due to increased revenue related taxes on revenues in our Middlesex system.

 

Interest Charges

 

Interest charges for the three months ended June 30, 2013 decreased $0.2 million from the same period in 2012, primarily due to lower average interest rates on long-term debt, resulting from Middlesex’s refinancing of $57.5 million of First Mortgage Bonds in the fourth quarter of 2012.

 

Other Income, net

 

Other Income, net for the three months ended June 30, 2013 decreased $0.2 million from the same period in 2012, primarily due to lower Allowance for Funds Used During Construction, resulting from lower average construction work in progress balances, and lower rental income offset by increased earnings from investments.

 

Income Taxes

 

Income taxes for the three months ended June 30, 2013 increased $0.3 million from the same period in 2012, due to increased operating income in 2013 as compared to 2012.

 

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Net Income and Earnings Per Share

 

Net income for the three months ended June 30, 2013 increased $0.8 million from the same period in 2012. Basic and diluted earnings per share increased to $0.28 for the three months ended June 30, 2013, as compared to $0.23 for the three months ended June 30, 2012.

 

Results of Operations – Six Months Ended June 30, 2013

 

   (In Thousands) 
   Six Months Ended June 30, 
   2013   2012 
   Regulated   Non-
Regulated		   Total   Regulated   Non-
Regulated		   Total 
Revenues  $49,002   $7,138   $56,140   $45,230   $5,717   $50,947 
Operations and maintenance expenses   24,733    5,845    30,578    24,363    4,777    29,140 
Depreciation expense   5,344    90    5,434    5,053    77    5,130 
Other taxes   5,909    183    6,092    5,433    157    5,590 
  Operating income   13,016    1,020    14,036    10,381    706    11,087 
                               
Other income, net   203    —    203    376    63    439 
Interest expense   2,645    48    2,693    3,086    47    3,133 
Income taxes   3,429    459    3,888    2,527    334    2,861 
  Net income  $7,145   $513   $7,658   $5,144   $388   $5,532 

 

Operating Revenues

 

Operating revenues for the six months ended June 30, 2013 increased $5.2 million from the same period in 2012. This increase was primarily related to the following factors:

 

·Middlesex System revenues increased $3.2 million due to:
oSales to GMS customers increased by $2.4 million primarily due to the July 2012 base water rate increase partially offset by decreased GMS customer demand resulting from:
§Greater than expected precipitation during the second quarter of 2013;
§Hess, Middlesex's largest GMS customer, ceasing its oil refining operations at its Port Reading, New Jersey facility in February 2013 (see discussion in “Outlook” section above);
oContract Sales to Municipalities increased by $0.8 million, primarily due to the July 2012 base water rate increase and increased demand;
·Tidewater System revenues increased $0.3 million, primarily due to increased fees for new water customer connections and the June 2012 implementation of the final component of the base rate increase partially offset by lower customer demand resulting from greater than expected precipitation during the second quarter of 2013;
·USA’s revenues increased $1.1 million, primarily due to revenues earned under our contract to operate the Avalon water utility, sewer utility and storm water system, which commenced in July 2012;
·USA-PA’s revenues increased $0.2 million, primarily from scheduled increases in the fixed fees paid under contract with the City of Perth Amboy;
·TESI’s revenues increased $0.2 million, primarily due to the June 2012 base rate increase; and
·All other subsidiaries revenues increased $0.2 million.

 

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Operation and Maintenance Expense

 

Operation and maintenance expenses for the six months ended June 30, 2013 increased $1.4 million from the same period in 2012. This increase was primarily related to the following factors:

 

·Labor costs increased $0.6 million due to lower capitalized payroll, increased overtime expended on emergency repairs and higher average labor rates. These increases were partially offset by a workforce reduction in our Delaware operations in March 2012;
·Variable production costs increased $0.5 million, primarily from higher water treatment costs due to increased precipitation during the second quarter of 2013;
·Water main break costs increased $0.2 million, as we experienced a higher number of main breaks in 2013 as compared to 2012;
·Expenditures for USA’s contract operations serving Avalon, commencing July 1, 2012, resulted in a $0.2 million increase in labor costs and a $0.7 million increase in direct costs for billable supplemental services;
·Employee benefit expenses increased $0.5 million due primarily to lower capitalized benefits. These increases were completely offset by lower costs of $1.2 million primarily due to the amendment of the Other Benefits Plan which increases contributions by future retirees; and
·All other operation and maintenance expense categories decreased $0.1 million.

 

Depreciation

 

Depreciation expense for the six months ended June 30, 2013 increased $0.3 million from the same period in 2012 due to a higher level of utility plant in service.

 

Other Taxes

 

Other taxes for the six months ended June 30, 2013 increased $0.5 million from the same period in 2012, primarily due to increased revenue related taxes on higher taxable revenues in our Middlesex system.

 

Interest Charges

 

Interest charges for the six months ended June 30, 2013 decreased $0.4 million from the same period in 2012, primarily due to lower average interest rates on long-term debt, resulting from Middlesex’s refinancing of $57.5 million of First Mortgage Bonds in the fourth quarter of 2012.

 

Other Income, net

 

Other Income, net for the six months ended June 30, 2013 decreased $0.2 million from the same period in 2012, primarily due to lower Allowance for Funds Used During Construction, resulting from lower average construction work in progress balances and lower rental income offset by increased earnings from investments and costs incurred in 2012 related to potential projects at our Delaware subsidiaries.

 

Income Taxes

 

Income taxes for the six months ended June 30, 2013 increased $1.0 million from the same period in 2012, due to increased operating income in 2013 as compared to 2012.

 

Net Income and Earnings Per Share

 

Net income for the six months ended June 30, 2013 increased $2.1 million from the same period in 2012. Basic and diluted earnings per share increased to $0.48 and $0.47 for the six months ended June 30, 2013, respectively, as compared to $0.35 for the six months ended June 30, 2012.

 

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Liquidity and Capital Resources

 

Operating Cash Flows

 

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

 

For the six months ended June 30, 2013, cash flows from operating activities increased $0.4 million to $16.2 million. Increased net income resulting from rate increases that went into effect in 2012 were the primary reason for the increase in cash flow. The $16.2 million of net cash flow from operations enabled us to fund all of our utility plant expenditures internally for the period.

 

Capital Expenditures and Commitments

 

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

 

The capital investment program for 2013 is currently estimated to be approximately $21.9 million.  Through June 30, 2013, we have expended $10.2 million and expect to incur approximately $11.7 million for capital projects for the remainder of 2013.

 

We currently project that we may expend approximately $51.1 million for capital projects in 2014 and 2015. 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 2013, we plan on utilizing:

·Internally generated funds;
·Proceeds from the sale of common stock through the DRP;
·Funds available and held in trust under existing New Jersey and Delaware State Revolving Fund (SRF) loans (currently, $4.1 million and $0.7 million, respectively). The SRF programs provide low cost financing for projects that meet certain water quality and system improvement benchmarks; and
·Short-term borrowings, if necessary, through $60.0 million of available lines of credit with several financial institutions. As of June 30, 2013, the outstanding borrowings under these credit lines were $28.0 million.

 

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

 

Item 3. Quantitative and Qualitative Disclosures of Market Risk

 

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, approximately $5.3 million of the current portion of 37 existing long-term debt instruments will mature. Applying a hypothetical change in the rate of interest charged by 10% on those borrowings, would not have a material effect on our earnings.

 

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

 

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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, 2012.

 

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.

 

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Item 6. Exhibits
   
10.33 Amended and Restated Line of Credit Note between registrant and PNC Bank
   
10.34 Uncommitted Line of Credit Letter Agreement and Master Promissory Note between registrant and Bank of America, N.A
   
10.35 Uncommitted Line of Credit Letter Agreement between registrant’s wholly-owned subsidiary Utility Services Affiliates (Perth Amboy) Inc. and Bank of America, N.A
   
10.42 Copy of Loan Agreement By and Between The State of New Jersey, Acting By and Through The New Jersey Department of Environmental Protection and Middlesex Water Company, dated as of May 1, 2013 (Series TT)
   
10.43 Copy of Loan Agreement by and Between New Jersey Environmental Infrastructure Trust and Middlesex Water Company dated as of May 1, 2013 (Series UU)
   
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.DEF XBRL Definition Linkbase Document

 

101.LAB XBRL Labels Linkbase Document

 

101.PRE XBRL Presentation Linkbase Document

 

 

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SIGNATURES

 

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

 

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

 

 

Date: August 2, 2013

 

 

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