Item 1. Business.
Overview
Middlesex Water Company (Middlesex) was incorporated as a water utility company in 1897 and owns and operates regulated water utility and wastewater systems in New Jersey, Delaware and Pennsylvania. Middlesex also operates water and wastewater systems under contract on behalf of municipal and private clients in New Jersey and Delaware.
The terms “the Company,” “we,” “our,” and “us” refer to Middlesex Water Company and its subsidiaries, including Tidewater Utilities, Inc. (Tidewater) and Tidewater’s wholly-owned subsidiaries, Southern Shores Water Company, LLC (Southern Shores) and White Marsh Environmental Systems, Inc. (White Marsh). The Company’s other subsidiaries are 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), Tidewater Environmental Services, Inc. (TESI) and Twin Lakes Utilities, Inc. (Twin Lakes).
The Company’s principal executive offices are located at 1500 Ronson Road, Iselin, New Jersey 08830. Our telephone number is (732) 634-1500. Our internet website address is http://www.middlesexwater.com. We make available, free of charge through our internet website, reports and amendments filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, after such material is electronically filed with or furnished to the United States Securities and Exchange Commission (the SEC).
Middlesex System
The Middlesex System in New Jersey provides water services to approximately 60,000 retail customers, primarily in eastern Middlesex County, New Jersey and provides water under wholesale contracts to the City of Rahway, Townships of Edison and Marlboro, the Borough of Highland Park and the Old Bridge Municipal Utilities Authority. The Middlesex System treats, stores and distributes water for residential, commercial, industrial and fire protection purposes. The Middlesex System also provides water treatment and pumping services to the Township of East Brunswick under contract. The Middlesex System produced approximately 59% of our 2014 consolidated operating revenues.
The Middlesex System’s retail customers are located in an area of approximately 55 square miles in Woodbridge Township, the City of South Amboy, the Boroughs of Metuchen and Carteret, portions of the Township of Edison and the Borough of South Plainfield in Middlesex County and, to a minor extent, a portion of the Township of Clark in Union County. Retail customers include a mix of residential customers, large industrial concerns and commercial and light industrial facilities. These customers are located in generally well-developed areas of central New Jersey.
The contract customers of the Middlesex System comprise an area of approximately 110 square miles with a population of approximately 219,000. Contract sales to Edison, Old Bridge, Marlboro and Rahway are supplemental to the existing water systems of these customers. Middlesex is the sole source of water for Highland Park and East Brunswick.
Middlesex provides water service to approximately 300 customers in Cumberland County, New Jersey. This system is referred to as Bayview, and is not physically interconnected with the Middlesex System. Bayview produced less than 1% of our 2014 consolidated operating revenues.
Tidewater System
Tidewater, together with its wholly-owned subsidiary, Southern Shores, provides water services to approximately 40,000 retail customers for residential, commercial and fire protection purposes in over 375 separate communities in New Castle, Kent and Sussex Counties, Delaware. White Marsh is a wholly-owned subsidiary of Tidewater
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that is unregulated as to rates and operates 42 water and wastewater systems under contracts that serve approximately 4,000 residential customers. White Marsh owns two commercial properties that are leased to Tidewater as its administrative office campus and its field operations center. The Tidewater System produced approximately 27% of our 2014 consolidated operating revenues.
Utility Service Affiliates-Perth Amboy
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. USA-PA serves approximately 11,000 homes and businesses, most of which are served by both the water and wastewater systems. Under the agreement, USA-PA receives fixed fees, and may receive variable fees, based on customer revenue growth. Fixed fee revenues increase over the term of the 20-year contract based upon a schedule of rates. USA-PA produced approximately 9% of our 2014 consolidated operating revenues.
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.
Pinelands System
Pinelands Water provides water services to approximately 2,500 residential customers in Burlington County, New Jersey. Pinelands Water produced less than 1% of our 2014 consolidated operating revenues. Pinelands Water is not physically interconnected with the Middlesex System.
Pinelands Wastewater provides wastewater services to approximately 2,500 residential customers. Under contract, it also services one municipal wastewater system in Burlington County, New Jersey with approximately 200 residential customers. Pinelands Wastewater produced approximately 1% of our 2014 consolidated operating revenues.
Utility Service Affiliates, Inc.
USA operates the Borough of Avalon, New Jersey’s (Avalon) water utility, sewer utility and storm water system under a ten-year operations and maintenance contract expiring in 2022. USA serves approximately 6,000 Avalon homes and businesses, most of which are served by both the water and wastewater systems. In addition to performing 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 New Jersey municipalities.
Under a marketing agreement with HomeServe USA (HomeServe), USA offers residential customers in New Jersey and Delaware a menu of water and wastewater related home maintenance programs. HomeServe is a leading provider of such home maintenance service programs. USA receives a service fee for the billing, cash collection and other administrative matters associated with HomeServe’s service contracts. The agreement expires in 2021.
USA produced approximately 2% of our 2014 consolidated operating revenues.
TESI System
TESI provides wastewater services to approximately 3,300 residential retail customers in Kent and Sussex Counties, Delaware. TESI produced approximately 2% of our 2014 consolidated operating revenues.
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Twin Lakes System
Twin Lakes provides water services to approximately 120 residential customers in Shohola, Pennsylvania. Twin Lakes produced less than 1% of our 2014 consolidated operating revenues.
Financial Information
Consolidated operating revenues, operating income and net income are as follows:
Operating revenues were earned from the following sources:
Water Supplies and Contracts
Our New Jersey, Delaware and Pennsylvania water supply systems are physically separate and are not interconnected. In New Jersey, the Pinelands System and Bayview System are not interconnected with the Middlesex System or each other. We believe that we have adequate sources of water supply to meet the current service requirements of our present customers in New Jersey, Delaware and Pennsylvania.
Middlesex System
Our Middlesex System, which produced approximately 14.3 billion gallons in 2014, obtains water from surface sources and wells, or groundwater sources. In 2014, surface sources of water provided approximately 71% of the Middlesex System’s water supply, groundwater sources provided approximately 21% from 31 wells and the balance was purchased from a non-affiliated water utility. Middlesex System’s distribution storage facilities are used to supply water to customers at times of peak demand, outages and emergencies.
The principal source of surface water for the Middlesex System is the Delaware & Raritan Canal, which is owned by the State of New Jersey and operated as a water resource by the New Jersey Water Supply Authority (NJWSA). Middlesex is under a contract with the NJWSA, which expires November 30, 2023, and provides for average purchases of 27.0 million gallons per day (mgd) of untreated water from the Delaware & Raritan Canal, augmented by the Round Valley/Spruce Run Reservoir System. The untreated surface water is pumped to and treated at the Middlesex Carl J. Olsen (CJO) Water Treatment Plant. Middlesex also has an agreement with a non-
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affiliated regulated water utility for the purchase of treated water. This agreement, which expires February 27, 2016, provides for minimum purchase of 3.0 mgd of treated water with provisions for additional purchases.
Tidewater System
Our Tidewater System produced approximately 2.0 billion gallons in 2014 from 162 wells. Tidewater will submit applications to Delaware regulatory authorities for the approval of additional wells as growth, demand and water quality warrant. Tidewater augments its water production with annual purchases of 15.0 million gallons of treated water under contract with the City of Dover, Delaware. Tidewater does not have a central water treatment facility for the 375 separate communities it serves. As the number has grown, many of Tidewater’s individual systems have been interconnected forming regional systems that are served by multiple water treatment facilities.
Pinelands Water System
Water supply to our Pinelands Water System is derived from four wells which produced approximately 141.0 million gallons in 2014. The pumping capacity of the four wells is 2.2 mgd.
Pinelands Wastewater System
The Pinelands Wastewater System discharges into the South Branch of the Rancocas Creek through a tertiary treatment plant that provides clarification, sedimentation, filtration and disinfection. The total capacity of the plant is 0.5 mgd, and the system treated approximately 102.9 million gallons in 2014.
Bayview System
Water supply to Bayview customers is derived from two wells, which produced approximately 7.5 million gallons in 2014.
TESI System
The TESI System is comprised of eight wastewater treatment systems in Kent and Sussex Counties, Delaware. The treatment plants provide clarification, sedimentation, and disinfection. The combined total treatment capacity of the plants is 0.7 mgd. The TESI System treated approximately 101.6 million gallons in 2014.
Twin Lakes System
Water supply to Twin Lakes’ customers is derived from one well, which produced approximately 25.3 million gallons in 2014.
Employees
As of December 31, 2014, we had a total of 282 employees. No employees are represented by a union. We believe our employee relations are good. Wages and benefits are reviewed annually and are considered competitive within both the industry and the regions where we operate.
Competition
Our business in our franchised service area is substantially free from direct competition with other public utilities, municipalities and other entities. However, our ability to provide contract water supply and wastewater services and operations and maintenance services is subject to competition from other public utilities, municipalities and other entities. Although Tidewater and TESI have been granted exclusive franchises for each of their existing community water and wastewater systems, their ability to expand service areas can be affected by the Delaware Public Service Commission awarding franchises to other regulated water and wastewater utilities with whom we compete for such franchises and for projects.
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Regulation
Our rates charged to customers for water and wastewater services, the quality of the services we provide and certain other matters are regulated by the following state utility commissions (collectively, the Utility Commissions):
·New Jersey-New Jersey Board of Public Utilities (NJBPU)
·Delaware-Delaware Public Service Commission (DEPSC)
·Pennsylvania-Pennsylvania Public Utilities Commission (PAPUC)
Our USA, USA-PA and White Marsh subsidiaries are not regulated public utilities. However they are subject to environmental regulation with respect to water and wastewater effluent quality to the extent such services are provided.
We are subject to environmental and water quality regulation by the following regulatory agencies (collectively, the Government Environmental Regulatory Agencies):
·United States Environmental Protection Agency (EPA)
·New Jersey Department of Environmental Protection (NJDEP) with respect to operations in New Jersey
·Delaware Department of Natural Resources and Environmental Control, the Delaware Department of Health and Social Services-Division of Public Health (DEDPH), and the Delaware River Basin Commission (DRBC) with respect to operations in Delaware
·Pennsylvania Department of Environmental Protection (PADEP) with respect to operations in Pennsylvania
In addition, our issuances of equity securities are subject to the prior approval of the NJBPU and require registration with the SEC. Our issuances of long-term debt securities are subject to the prior approval of the appropriate Utility Commissions.
Regulation of Rates and Services
For ratemaking purposes, we account separately for operations in New Jersey, Delaware and Pennsylvania to facilitate independent ratemaking by the applicable Utility Commissions.
In determining our rates, the respective Utility Commissions consider the revenue, expenses, rate base of property used and useful in providing service to the public and a fair rate of return on investments within their separate jurisdictions. Rate determinations by the respective Utility Commissions do not guarantee particular rates of return to us for our New Jersey, Delaware and Pennsylvania operations. Thus, we may not achieve the rates of return permitted by the Utility Commissions. In addition, there can be no assurance that any future rate increases will be granted or, if granted, that they will be in the amounts requested.
Middlesex Rate Matters
In June 2014, Middlesex’s application petition to the NJBPU seeking permission to increase base water rates was partially approved, granting an increase in annual operating revenues of $4.2 million. The originally-filed base water rate increase request of $10.6 million, filed in November 2013 (subsequently revised to $8.1 million, primarily resulting from lower employee benefit plan costs), was necessitated by capital investments Middlesex had made, or committed to make, increased operations and maintenance costs and reduced revenues resulting from the expiration of a wholesale water sales contract with the Borough of Sayreville, New Jersey in August 2013. In addition, Middlesex’s largest retail water customer, Hess Corporation, ceased its oil refining operations at its Port Reading, New Jersey facility in February 2013. 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 $208.6 million, based on a return on equity of 9.75%. The rate increase became effective on July 20, 2014.
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In May 2014, 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 investments in, and generate a return on, capital improvements to their water distribution system made between base rate proceedings. In August 2014, the Foundational Filing was approved by the NJBPU, which allows Middlesex to implement a DSIC rate 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 $3.6 million. The DSIC rate for the first six-month period costs is expected to become effective in May 2015 and generate $0.3 of annual revenues.
In July 2012, the NJBPU approved an $8.1 million increase in Middlesex’s annual base water rates. A base rate increase request of $11.3 million was filed in January 2012 seeking recovery of increased costs of operations, chemicals, fuel, electricity, taxes, labor and benefits, and decreases in industrial and commercial customer demand patterns, as well as capital investment in utility plant.
Tidewater Rate Matters
The DEPSC approved a $0.8 million increase in Tidewater’s annual base water rates, effective August 19, 2014. The originally-filed base water rate increase request of $3.9 million, filed in November 2013 (subsequently revised to $2.5 million, primarily resulting from lower employee benefit plan costs), was necessitated by capital investments Tidewater had made, or committed to make, as well as increased operations and maintenance costs. In connection with the rate increase application, Tidewater implemented a DEPSC approved 6.5% interim rate increase, subject to refund, on February 6, 2014. Since the final required and approved rate increase was less than the interim rate increase, Tidewater refunded $0.4 million of previously deferred revenues to customers in the form of a one-time credit to each customer account.
Effective January 1, 2015, Tidewater implemented a DEPSC-approved DSIC rate increase that is expected to generate revenues of less than $0.1 million annually.
In April 2014, the DEPSC approved Tidewater’s 50-year agreement with the United States Department of Defense for the privatization of the water system of Dover Air Force Base (DAFB) in Dover, Delaware. On October 1, 2014, Tidewater assumed ownership of the DAFB water utility assets and began providing regulated water service to DAFB under Tidewater’s DEPSC approved tariff rates.
In June 2012, the DEPSC approved a $3.9 million increase in Tidewater’s annual base water rates. A base rate increase request of $6.9 million was filed in September 2011 seeking recovery of increased costs for operations, maintenance and taxes, as well as capital investment.
TESI Rate Matters
On October 1, 2013, TESI closed on its DEPSC-approved purchase of the wastewater utility assets of the Plantations development (the Plantations) for $0.4 million and began providing wastewater services to the 600 residential customers in the Plantations in Delaware. Upon commencing service to the Plantations, annual revenues were approximately $0.2 million. In October 2014, TESI implemented a 33.5% Plantations base wastewater rate increase (approximately $0.1 million annually).
In June 2012, the DEPSC approved a $0.6 million increase in TESI’s annual base wastewater rates, a portion of which is to be phased in through 2015. A base rate increase request of $0.8 million was filed in July 2011 seeking recovery of increased operation and maintenance costs, as well as capital investment.
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Pinelands Rate Matters
In March 2013, the NJBPU approved a combined $0.2 million increase in Pinelands Water and Pinelands Wastewater’s annual base water and wastewater 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 water service, which is approximately 50% of the approved increase, was phased-in over one year.
Southern Shores Rate Matters
Under the terms of a multi-year DEPSC-approved agreement expiring in 2020, customer rates will increase on January 1st of each year to generate additional annual revenue of $0.1 million with each increase.
Twin Lakes Rate Matters
The PAPUC approved a $0.1 million, three-year phased-in base water rate increase effective March 3, 2012. This increase was designed to recover capital investment in the upgrade and renovation of the Twin Lakes System, as well as increased operating costs.
Future Rate Filings
Management monitors the need for rate relief for our regulated subsidiaries on an ongoing basis. When capital improvements (both made and planned) and/or increases in operation and maintenance costs require rate relief, base rate increase requests are expeditiously filed with those subsidiaries’ Utility Commissions.
Water and Wastewater Quality and Environmental Regulations
Government environmental regulatory agencies regulate our operations in New Jersey, Delaware and Pennsylvania with respect to water supply, treatment and distribution systems and the quality of the water. They also regulate our operations with respect to wastewater collection, treatment and disposal.
Regulations relating to water quality require us to perform tests to ensure our water meets state and federal quality requirements. In addition, government environmental regulatory agencies continuously review current regulations governing the limits of certain organic compounds found in the water as byproducts of the treatment process. We participate in industry-related research to identify the various types of technology that might reduce the level of organic, inorganic and synthetic compounds found in water. The cost to water companies of complying with the proposed water quality standards depends in part on the limits set in the regulations and on the method selected to treat the water to the required standards. We regularly test our water to determine compliance with existing government environmental regulatory agencies’ primary water quality standards.
Treatment of well water in our Middlesex System is by chlorination for primary disinfection purposes. In addition, at certain locations, air stripping is used for removal of volatile organic compounds.
Surface water treatment in our Middlesex System is by conventional treatment; coagulation, sedimentation and filtration. The treatment process includes pH adjustment, chlorination for disinfection, and corrosion control for the distribution system.
Treatment of well water in our Tidewater System is by chlorination for disinfection purposes and, in some cases, pH correction and filtration for nitrate and iron removal and granular activated carbon filtration for organics removal.
Treatment of well water in the Pinelands, Bayview and Twin Lakes Systems (primary disinfection only) is performed at individual well sites.
The NJDEP, DEDPH and PADEP monitor our activities and review the results of water quality tests that are performed for adherence to applicable regulations. Other applicable regulations include the Federal Lead and Copper Rule, the Federal Surface Water Treatment Rule and the Federal Total Coliform Rule and regulations for maximum contaminant levels established for various volatile organic compounds.
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Seasonality
Customer demand for our water during the warmer months is generally greater than other times of the year due primarily to additional consumption of water in connection with irrigation systems, swimming pools, cooling systems and other outside water use. Throughout the year, and particularly during typically warmer months, demand may vary with temperature and rainfall timing and overall levels. In the event that temperatures during the typically warmer months are cooler than normal, or if there is more rainfall than normal, the customer demand for our water may decrease and therefore, adversely affect our revenues.
Management
This table lists information concerning our executive management team:
Dennis W. Doll - Mr. Doll joined the Company in November 2004 as Executive Vice President and was named President and Chief Executive Officer and became a Director of Middlesex effective January 1, 2006. In May 2010, he was elected Chairman of the Board of Directors of Middlesex. He is also Chairman for all subsidiaries of Middlesex. Prior to joining the Company, Mr. Doll had been employed in various executive leadership roles in the regulated water utility business since 1985. Mr. Doll also serves as a volunteer Director on selected non-profit Boards including the New Jersey Utilities Association, the Water Research Foundation, Raritan Bay Medical Center and the National Association of Water Companies.
A. Bruce O’Connor - Mr. O’Connor, a Certified Public Accountant, joined the Company in 1990 and was named Vice President and Chief Financial Officer in 1996 and Treasurer in 2014. He is Treasurer and a Director of Tidewater, USA, White Marsh and TESI. He is Vice President, Treasurer and a Director of Pinelands Water, USA-PA, Pinelands Wastewater and Twin Lakes.
Richard M. Risoldi - Mr. Risoldi joined the Company in 1989 as Director of Production. He was appointed Assistant Vice President of Operations in 2003. He was named Vice President-Subsidiary Operations in May 2004. In January 2010, he was named Vice President - Operations and Chief Operating Officer. He is a Director of Tidewater, White Marsh and TESI. He also serves as a Director and President of Pinelands Water, USA, USA-PA, Pinelands Wastewater and Twin Lakes.
Jay L. Kooper - Mr. Kooper joined the Company in March 2014 as Vice President and General Counsel and serves as Secretary for the Company and all subsidiaries. Prior to joining the Company, Mr. Kooper held various positions in private and public entities as well as in private law practice, representing electric, gas, water, wastewater, telephone and cable companies as well as municipalities and private clients before 15 state public utility commissions and legislatures, federal agencies and federal and state appellate courts. He is a member of the New Jersey State Bar Association and currently serves as Assistant Secretary of its’ Public Utility Law Section.
Bernadette M. Sohler - Ms. Sohler joined the Company in 1994, was named Director of Communications in 2003 and promoted to Vice President-Corporate Affairs in March 2007. She also serves as Vice President of USA. Prior to joining the Company, Ms. Sohler held marketing and public relations management positions in the financial services industry. Ms. Sohler serves as a volunteer director on several non-profit Boards including the
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National Association of Water Companies and is the Chair of the New Jersey Utilities Association’s Communications Committee.
Lorrie B. Ginegaw - Ms. Ginegaw joined Tidewater in 2004. In September 2005, Ms. Ginegaw was promoted to Human Resources Manager. In May 2007, Ms. Ginegaw was promoted to Director of Human Resources for Middlesex. In March 2012, Ms. Ginegaw was named Vice President-Human Resources. Prior to joining the Company, Ms. Ginegaw worked in various human resources positions in the healthcare and transportation/logistics industries. She is the Chair of the New Jersey Utilities Association’s Human Resources Committee and a member of the Middlesex County, New Jersey Workforce Investment Board.
Gerard L. Esposito - Mr. Esposito joined Tidewater in 1998 as Executive Vice President. He was named President of Tidewater and White Marsh in 2003 and President of TESI in January 2005. Prior to joining the Company he worked in various executive positions for Delaware environmental protection and water quality governmental agencies. He is a Director of Tidewater, White Marsh and TESI. Mr. Esposito is a volunteer Director on selected Delaware non-profit, government, and professional Boards, including the Delaware Solid Waste Authority, which he chairs, Port of Wilmington, Delaware Workforce Investment Board, and the University of Delaware Sea Grant Advisory Council, which he chairs.
ITEM 1A.
ITEM 1A. RISK FACTORS.
Our revenue and earnings depend on the rates we charge our customers. We cannot raise utility rates in our regulated businesses without filing a petition with the appropriate Utility Commissions. If these agencies modify, delay, or deny our petition, our revenues will not increase and our earnings will decline unless we are able to reduce costs.
The NJBPU regulates our public utility companies in New Jersey with respect to rates and charges for service, classification of accounts, awards of new service territory, acquisitions, financings and other matters. That means, for example, that we cannot raise the utility rates we charge to our customers without first filing a petition with the NJBPU and going through a lengthy administrative process. In much the same way, the DEPSC and the PAPUC regulate our public utility companies in Delaware and Pennsylvania, respectively. We cannot give assurance of when we will request approval for any such matter, nor can we predict whether these Utility Commissions will approve, deny or reduce the amount of such requests.
Certain costs of doing business are not completely within our control. The failure to obtain any rate increase would prevent us from increasing our revenues and, unless we are able to reduce costs, would result in reduced earnings.
General economic conditions may materially and adversely affect our financial condition and results of operations.
Ongoing economic conditions continue to negatively impact some of our customers’ water usage demands, particularly the level of water usage demand by our commercial and industrial customers in our Middlesex System. We are unable to determine when these customers’ water demands may return to previous levels, or if the decline in demand will continue indefinitely. If water demand by our commercial and industrial customers in our Middlesex System does not return to previous levels, our financial condition and results of operations could continue to be negatively impacted.
We are subject to environmental laws and regulations, including water quality and wastewater effluent quality regulations, as well as other state and local regulations. Compliance with those laws and regulations requires us to incur costs and we are subject to fines or other sanctions for non-compliance.
Government environmental regulatory agencies regulate our operations in New Jersey, Delaware and Pennsylvania with respect to water supply, treatment and distribution systems and the quality of water. Government environmental regulatory agencies’ regulations relating to water quality require us to perform expanded types of testing to ensure that our water meets state and federal water quality requirements. We are
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subject to EPA regulations under the Federal Safe Drinking Water Act, which include the Lead and Copper Rule, the maximum contaminant levels established for various volatile organic compounds, the Federal Surface Water Treatment Rule and the Total Coliform Rule. There are also similar NJDEP regulations for our New Jersey water systems. The NJDEP, DEDPH and PADEP monitor our activities and review the results of water quality tests that we perform for adherence to applicable regulations. In addition, Government Environmental Regulatory Agencies are continually reviewing regulations governing the limits of certain organic compounds found in the water as byproducts of treatment.
We are also subject to regulations related to fire protection services in New Jersey and Delaware. In New Jersey there is no state-wide fire protection regulatory agency. However, New Jersey regulations exist as to the size of piping required regarding the provision of fire protection services. In Delaware, fire protection is regulated statewide by the Office of State Fire Marshal.
The cost of compliance with the water and wastewater effluent quality standards depends in part on the limits set in the regulations and on the method selected to implement them. If new or more restrictive standards are imposed, the cost of compliance could be very high and have an adverse impact on our revenues and results of operations if we cannot recover those costs through our rates that we charge our customers. The cost of compliance with fire protection requirements could also be high and make us less profitable if we cannot recover those costs through our rates charged to our customers.
In addition, if we fail to comply with environmental or other laws and regulations to which our business is subject, we could be fined or subject to other sanctions, which could adversely impact our business or results of operations.
We depend upon our ability to raise money in the capital markets to finance some of the costs of complying with laws and regulations, including environmental laws and regulations or to pay for some of the costs of improvements to or the expansion of our utility system assets. Our regulated utility companies cannot issue debt or equity securities without regulatory approval.
We require financing to fund the ongoing capital program for the improvement in our utility system assets and for planned expansion of those systems. We expect to spend approximately $96 million for capital projects through 2017. We must obtain approval from our economic regulators to sell debt or equity securities to raise money for these projects. If sufficient capital is not available, or the cost of capital is too high, or if the regulatory authorities deny a petition of ours to sell debt or equity securities, we may not be able to meet the costs of complying with environmental laws and regulations or the costs of improving and expanding our utility system assets to the level we believe operationally prudent. This may result in the imposition of fines from environmental regulators or restrictions on our operations which could curtail our ability to upgrade or replace utility system assets.
We rely on our information technology systems to help manage our operations.
Our information technology systems require periodic modifications, upgrades and or replacement which subject us to costs and risks including potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate existing or new systems, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. In addition, challenges implementing new technology systems may cause disruptions in our business operations and have an adverse effect on our business operations, if not anticipated and appropriately mitigated.
We rely on our computer, information and communications technology systems in connection with the operation of our business, especially with respect to customer service and billing, accounting and, in some cases, the monitoring and operation of our operating facilities. Our computer and communications systems and operations could be damaged or interrupted by natural disasters, power loss and internet, telecommunications or data network failures or acts of war or terrorism or similar events or disruptions. Any of these or other events could
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cause service interruption, delays and loss of critical data or, impede aspects of operations and therefore, adversely affect our financial results.
There have been an increasing number of cyber security incidents on companies around the world, which have caused operational failures or compromised sensitive corporate data. Although we do not believe our systems are at a materially greater risk of cyber incidents than other similar organizations, such cyber security incidents may result in the loss or compromise of customer, financial or operational data, disruption of billing, collections or normal field service activities, disruption of electronic monitoring and control of operational systems and delays in financial reporting and other management functions. Possible impacts associated with a cyber incident may include remediation costs related to lost, stolen, or compromised data, repairs to data processing systems, increased cyber security protection costs, adverse effects on our compliance with regulatory and environmental laws and regulation, including standards for drinking water, litigation and reputational damage.
Weather conditions and overuse of underground aquifers may interfere with our sources of water, demand for water services and our ability to supply water to customers.
Our ability to meet current and future water demands of our customers depends on the availability of an adequate supply of water. Unexpected conditions may interfere with our water supply sources. Drought and overuse of underground aquifers may limit the availability of ground and/or surface water. Freezing weather may also contribute to water transmission interruptions caused by water main breakage. Any interruption in our water supply could cause a reduction in our revenue and profitability. These factors may adversely affect our ability to supply water in sufficient quantities to our customers. Governmental drought restrictions may result in decreased customer demand for water services and can adversely affect our revenue and earnings.
Our business is subject to seasonal fluctuations, which could affect demand for our water service and our revenues.
Demand for our water during the warmer months is generally greater than during cooler months due primarily to additional consumption of water in connection with irrigation systems, swimming pools, cooling systems and other outdoor water use. Throughout the year, and particularly during typically warmer months, demand may vary with temperature and rainfall levels. In the event that temperatures during the typically warmer months are cooler than normal, or if there is more rainfall than normal, the demand for our water may decrease and adversely affect our revenues.
Our water sources may become contaminated by naturally-occurring or man-made compounds and events. This may cause disruption in services and impose costs to restore the water to required levels of quality.
Our sources of water may become contaminated by naturally-occurring or man-made compounds or other events. In the event that any portion of our water supply is contaminated, we may need to interrupt the use of that water supply until we are able to install treatment capability or substitute the flow of water from an uncontaminated water source through existing interconnections with other water purveyors or through our transmission and distribution systems, where possible. We may also incur significant costs in treating any contaminated water through the use of our current treatment facilities, or development of new treatment methods. Our inability to substitute water supply from an uncontaminated water source, or to adequately treat the contaminated water source in a cost-effective manner, may reduce our revenues and make us less profitable.
We face competition from other water and wastewater utilities and service providers which might hinder our growth and reduce our profitability.
We face risks of competition from other utilities or other entities authorized by federal, state or local agencies to provide utility services. Once a state utility regulator grants a franchise to a utility to serve a specific territory, that utility effectively has an exclusive right to service that territory. Although a new franchise offers some protection against competitors, the pursuit of franchises is often competitive, particularly in Delaware, where new franchises may be awarded to utilities based upon competitive negotiation. Competing entities have challenged, and may
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challenge in the future, our applications for new franchises. Also, third parties entering into long-term agreements to operate municipal utility systems may adversely affect our long-term agreements to supply water or wastewater services on a contract basis to municipalities, which could adversely affect our financial results.
We have long-term contractual obligations for water, wastewater and storm water system operation and maintenance under which we may incur costs in excess of payments received.
USA-PA operates and maintains the water and wastewater systems of Perth Amboy under a 20-year contract expiring in 2018. USA operates and maintains the water, wastewater and storm water systems of Avalon under a 10-year contract expiring in 2022. These contracts do not protect us against incurring costs in excess of revenues we earn pursuant to the contracts. There can be no absolute assurance that we will not experience losses resulting from these contracts. Losses under these contracts, or our failure or inability to perform, may have a material adverse effect on our financial condition and results of operations.
We serve as guarantor of performance of an unaffiliated company that will design, construct and operate a leachate pretreatment facility at the Monmouth County Reclamation Center in Tinton Falls, New Jersey.
Middlesex entered into agreements, expiring in 2028, with Applied Water Management, Inc. (AWM), Natural Systems Utilities, LLC, the parent company of AWM, and the County of Monmouth, New Jersey (Monmouth County) for the design, construction and operation of a leachate pretreatment facility at the Monmouth County Reclamation Center in Tinton Falls, New Jersey. Under the terms of the agreements, AWM is obtaining permits and is designing, building and will operate a landfill leachate pretreatment facility. Middlesex is serving the role of guarantor of AWM's performance on the project (the Guaranty), for which Middlesex earns a fee, in addition to providing operational support. Construction of the facility is being financed by Monmouth County and began in September 2014. If asked to perform under the Guaranty, Middlesex could be required to fulfill the construction and operational commitments of AWM. There can be no absolute assurance that we will not experience losses if asked to perform under the Guaranty. Losses from performance under this Guaranty, or our failure or inability to perform, may have a material adverse effect on our financial condition and results of operations.
Capital market conditions and key assumptions may adversely impact the value of our postretirement benefit plan assets and liabilities.
Market factors can adversely affect the rate of return on assets held in trusts to satisfy our future postretirement benefit obligations as well negatively affect interest rates, which impacts the discount rates used in the determination of our postretirement benefit actuarial valuations. In addition, changes in demographics, such as increases in life expectancy assumptions, can increase future postretirement benefit obligations. Any negative impact to these factors, either individually or a combination thereof, may have a material adverse effect on our financial condition and results of operations.
An important element of our growth strategy is the acquisition of water and wastewater assets, operations, contracts or companies. Any pending or future acquisitions we decide to undertake may involve risks.
The acquisition and/or operation of water and wastewater systems is an element of our growth strategy. This strategy depends on identifying suitable opportunities and reaching mutually agreeable terms with acquisition candidates or contract partners. Further, acquisitions may result in dilution of our equity securities, incurrence of debt and contingent liabilities, fluctuations in quarterly results and other related expenses. In addition, the assets, operations, contracts or companies we acquire may not achieve the sales and profitability expected.
The current concentration of our business in central New Jersey and Delaware makes us susceptible to adverse development in local regulatory, economic, demographic, competitive and weather conditions.
Our New Jersey water and wastewater businesses provide services to customers who are located primarily in eastern Middlesex County, New Jersey. Water service is provided under wholesale contracts to the Townships of Edison, East Brunswick and Marlboro, the Borough of Highland Park, the Old Bridge Municipal Utilities Authority, and the City of Rahway in Union County, New Jersey. We also provide water and wastewater services to customers in the State of Delaware. Our revenues and operating results are therefore subject to local regulatory, economic, demographic, competitive and weather conditions in a relatively concentrated geographic area. A change in any of these conditions could make it more costly for us to conduct our business.
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The necessity for ongoing security has and may continue to result in increased operating costs.
Because of continuing physical and operational threats to the health and security of the United States of America, we employ procedures to review and modify, as necessary, physical and other security measures at our facilities. We provide ongoing training and communications to our employees about threats to our water supply, our assets and related systems and our employees’ personal safety. Security measures include, but are not limited to, protocols regarding delivery and handling of certain chemicals used in our business. We are at risk for terrorist attacks and have incurred, and will continue to incur, costs for security measures to protect against such risks.
Our ability to achieve organic growth in our market area is dependent on the residential building market. Housing starts are one element that impacts our rate of growth and therefore, may not meet our expectations.
We expect our revenues to increase from customer growth for our regulated water and wastewater operations as a result of anticipated construction and sale of new housing units. If housing starts decline, or do not increase as we have projected, as a result of economic conditions or otherwise, the timing and extent of our organic revenue growth may not meet our expectations, our deferred project costs may not produce revenue-generating projects in the timeframes anticipated and our financial results could be negatively impacted.
There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.
We have paid dividends on our common stock each year since 1912 and have increased the amount of dividends paid each year since 1973. Our earnings, financial condition, capital requirements, applicable regulations and other factors, including the timeliness and adequacy of rate increases, will determine both our ability to pay dividends and the amount of those dividends. There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.
If we are unable to pay the principal and interest on our indebtedness as it comes due or we default under certain other provisions of our loan documents, our indebtedness could be accelerated and our results of operations and financial condition could be adversely affected.
Our ability to pay the principal and interest on our indebtedness as it comes due will depend upon our current and future performance. Our performance is affected by many factors, some of which are beyond our control.
We believe cash generated from operations and, if necessary, borrowings under existing credit facilities, will be sufficient to enable us to make our debt payments as they become due. If, however, we do not generate sufficient cash, we may be required to refinance our obligations or sell additional equity, which may be on terms that are less favorable than we desire.
No assurance can be given that any refinancing or sale of equity will be possible when needed, or that we will be able to negotiate acceptable terms. In addition, our failure to comply with certain provisions contained in our trust indentures and loan agreements relating to our outstanding indebtedness could lead to a default under these documents, which could result in an acceleration of our indebtedness.
We depend significantly on the technical and management services of our senior management team, and the departure of any of those persons could cause our operating results to temporarily be short of our expectations.
Our success depends significantly on the continued individual and collective contributions of our senior management team. If we lose the services of any member of our senior management, or are unable to attract and retain qualified senior management personnel, our operating results could be negatively impacted.
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We are subject to anti-takeover measures that may be used to discourage, delay or prevent changes of control that might benefit non-management shareholders.
Subsection 10A of the New Jersey Business Corporation Act, known as the New Jersey Shareholders Protection Act, applies to us. The Shareholders Protection Act deters merger proposals, tender offers or other attempts to effect changes in control that are not approved by our Board of Directors. In addition, we have a classified Board of Directors, which means only a portion of the Director population is elected each year. A classified Board can make it more difficult for an acquirer to gain control of the Company by voting its candidates onto the Board of Directors and may also deter merger proposals and tender offers. Our Board of Directors also has the ability, subject to obtaining NJBPU approval, to issue one or more series of preferred stock having such number of shares, designation, preferences, voting rights, limitations and other rights as the Board of Directors may fix. This could be used by the Board of Directors to discourage, delay or prevent an acquisition that the Board of Directors determines is not in the best interest of the common stockholders.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
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ITEM 2.
ITEM 2. PROPERTIES.
Utility Plant
The water utility plant in our systems consist of source of supply, pumping, water treatment, transmission and distribution, general facilities and all appurtenances, including all connecting pipes.
The wastewater utility plant in our systems consist of pumping, treatment, collection mains, general facilities and all appurtenances, including all connecting pipes.
Middlesex System
The Middlesex System’s principal source of surface supply is the Delaware & Raritan Canal owned by the State of New Jersey and operated as a water resource by the NJWSA.
Water is withdrawn from the Delaware & Raritan Canal at New Brunswick, New Jersey through our intake and pumping station, located on state-owned land bordering the canal. Water is transported through two raw water pipelines for treatment and distribution at our CJO Water Treatment Plant in Edison, New Jersey.
The CJO Water Treatment Plant includes chemical storage and chemical feed equipment, two dual rapid mixing basins, four upflow clarifiers which are also called superpulsators, four underground reinforced chlorine contact tanks, twelve rapid filters containing gravel, sand and anthracite for water treatment and a steel washwater tank. The CJO Water Treatment Plant also includes a computerized Supervisory Control and Data Acquisitions system to monitor and control the CJO Water Treatment Plant and the water supply and distribution system in the Middlesex System. There is an on-site State certified laboratory capable of performing bacteriological, chemical, process control and advanced instrumental chemical sampling and analysis. The firm design capacity of the CJO Water Treatment Plant is 55 mgd (60 mgd maximum capacity). The five electric motor-driven, vertical turbine pumps presently installed have an aggregate capacity of 85 mgd.
In addition, there is a 15 mgd auxiliary pumping station located at the CJO Water Treatment Plant location. It has a dedicated substation and emergency power supply provided by a diesel-driven generator. It pumps from the 10 million gallon distribution storage reservoir directly into the distribution system.
The transmission and distribution system is comprised of 740 miles of mains and includes 23,200 feet of 48-inch reinforced concrete transmission main connecting the CJO Water Treatment Plant to our distribution pipe network and related storage facilities. Also included is a 58,600 foot transmission main and a 38,800 foot transmission main, augmented with a long-term, non-exclusive agreement with the East Brunswick system to transport water to several of our contract customers.
The Middlesex System’s storage facilities consist of a 10 million gallon reservoir at the CJO Water Treatment Plant, 5 million gallon and 2 million gallon reservoirs in Edison (Grandview), a 5 million gallon reservoir in Carteret (Eborn) and a 2 million gallon reservoir at the Park Avenue Well Field.
In New Jersey, we own the properties on which the Middlesex System’s 31 wells are located, the properties on which our storage tanks are located as well as the property where the CJO Water Treatment Plant is located. We also own our headquarters complex located at 1500 Ronson Road, Iselin, New Jersey, consisting of a 27,000 square foot office building and an adjacent 16,500 square foot maintenance facility.
Tidewater System
The Tidewater System is comprised of 84 production plants that vary in pumping capacity from 46,000 gallons per day to 4.2 mgd. Water is transported to our customers through 693 miles of transmission and distribution mains. Storage facilities include 45 tanks, with an aggregate capacity of 7.2 million gallons. On October 1, 2014, Tidewater began providing DAFB with potable water service and acquired the water utility assets of DAFB, which consisted of 1 production plant, 5 wells, 31 miles of transmission and distribution mains and 2 storage tanks. The Delaware office property, located on an eleven-acre parcel owned by White Marsh, consists of two
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office buildings totaling approximately 17,000 square feet. In addition, Tidewater maintains a field operations center servicing its largest service territory area in Sussex County, Delaware. The operations center is located on a 2.9 acre parcel owned by White Marsh, and consists of one building totaling approximately 5,300 square feet.
Pinelands System
Pinelands Water owns well site and storage properties in Southampton Township, New Jersey. The Pinelands Water storage facility is a 1.3 million gallon standpipe. Water is transported to our customers through 18 miles of transmission and distribution mains.
Pinelands Wastewater System
Pinelands Wastewater owns a 12 acre site on which its 0.5 million gallons per day capacity tertiary treatment plant and connecting pipes are located. Its wastewater collection system is comprised of approximately 24 miles of sewer lines.
Bayview System
Bayview owns two well sites, which are located in Downe Township, Cumberland County, New Jersey. Water is transported to its customers through our 4.2 mile distribution system.
TESI System
The TESI System is comprised of eight wastewater treatment systems in Southern Delaware. The treatment plants provide clarification, sedimentation, and disinfection. The combined total capacity of the plants is 0.7 mgd. TESI’s wastewater collection system is comprised of approximately 41.9 miles of sewer lines.
Twin Lakes System
Twin Lakes owns two well sites, which are located in the Township of Shohola, Pike County, Pennsylvania. Water is transported to our customers through 3.7 miles of distribution mains.
USA-PA, USA and White Marsh
Our non-regulated subsidiaries, namely USA-PA, USA and White Marsh, do not own utility plant property.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
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.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company’s common stock is traded on the NASDAQ Stock Market, LLC, under the symbol MSEX. The following table shows the range of high and low share prices per share for the common stock and the dividend paid to shareholders in such quarter. As of December 31, 2014, there were 1,794 holders of record.
The Company has paid dividends on its common stock each year since 1912. The payment of future dividends is contingent upon the future earnings of the Company, its financial condition and other factors deemed relevant by the Board of Directors at its discretion.
If four or more quarterly dividends are in arrears, the preferred shareholders, as a class, are entitled to elect two members to the Board of Directors in addition to Directors elected by holders of the common stock. In the event dividends on the preferred stock are in arrears, no dividends may be declared or paid on the common stock of the Company.
The Company periodically issues shares of common stock in connection with its Dividend Reinvestment and Common Stock Purchase Plan (the DRP). The Company raised approximately $1.5 million through the issuance of 0.1 million shares under the DRP during 2014. In February 2015, the Company filed a petition with the NJBPU seeking approval to increase the number of shares authorized under the DRP from 2.3 million shares to 3.0 million shares.
The Company has a stock compensation plan for certain management employees (the 2008 Restricted Stock Plan). The Company maintains an escrow account for 0.1 million awarded shares of the Company's common stock for the 2008 Restricted Stock Plan. Such stock is subject to an agreement requiring forfeiture by the employee in the event of termination of employment within five years of the award other than as a result of retirement, death, disability or change in control. The maximum number of shares authorized for grant under the 2008 Restricted Stock Plan is 0.3 million shares and 0.1 million shares remain available for future awards under the 2008 Restricted Stock Plan.
The Company has a stock compensation plan for its outside directors (the Outside Director Stock Compensation Plan). In 2014, 5,082 shares of common stock were granted and issued to the Company’s outside directors under the Outside Director Stock Compensation Plan. The maximum number of shares authorized for grant under the Outside Director Stock Compensation Plan is 100,000. 76,915 shares remain available for future grants under the Outside Director Stock Compensation Plan.
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Set forth below is a line graph comparing the yearly change in the cumulative total return (which includes reinvestment of dividends) of a $100 investment for the Company’s common stock, a peer group of investor-owned water utilities, and the Dow Jones Wilshire 5000 Stock Index for the period of five years commencing December 31, 2009. The Dow Jones Wilshire 5000 Stock Index measures the performance of all U.S. headquartered equity securities with readily available price data.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Middlesex Water Company, the Dow Jones Wilshire 5000 Stock Index and a Peer Group*
* Peer group includes American States Water Company, Artesian Resources Corp., California Water Service Company, Connecticut Water Service, Inc., SJW Corp., York Water Company and Middlesex.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
CONSOLIDATED SELECTED FINANCIAL DATA
(Thousands Except per Share Data)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The following discussion of the Company’s historical results of operations and financial condition should be read in conjunction with the Company’s consolidated financial statements and related notes.
Management’s Overview
Operations
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.
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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. We also have an investment in a joint venture, Ridgewood Green RME, LLC, that operates facilities to optimize the production of electricity at the Village of Ridgewood, New Jersey wastewater treatment plant and other municipal facilities. 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 operates the Borough of Avalon, New Jersey’s (Avalon) water utility, sewer utility and storm water system under a ten-year operations and maintenance contract expiring in 2022. In addition to performing day to day operations, USA is responsible for billing, collections, customer service, emergency responses and management of capital projects funded by Avalon. Under a marketing agreement with HomeServe USA (HomeServe), USA offers residential customers in New Jersey and Delaware a menu of water and wastewater related home maintenance programs. HomeServe is a leading provider of such home maintenance service programs. USA receives a service fee for the billing, cash collection and other administrative matters associated with HomeServe’s service contracts. The agreement expires in 2021. USA also provides unregulated water and wastewater services under contract with several 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 in Kent and Sussex Counties, Delaware.
Our Pennsylvania subsidiary, Twin Lakes, provides water services to approximately 120 retail customers in the Township of Shohola, Pike County, Pennsylvania.
Recent Developments
Middlesex and Tidewater Implement Base Water Rate Increases - In the second quarter of 2014, Middlesex and Tidewater implemented base water rate increases of $4.2 million and $0.8 million, respectively. These increases were necessitated by capital investments made, increased operations and maintenance costs and recent industrial and wholesale customer losses by Middlesex, for which we were given appropriate recognition in the base water rate increases. See “Rates” below for further discussion of these base water rate increases.
Dover Air Force Base - In April 2014, the Delaware Public Service Commission (the DEPSC) approved Tidewater’s 50-year agreement with the United States Department of Defense for the privatization of the water system of Dover Air Force Base (DAFB) in Dover, Delaware. On October 1, 2014, Tidewater assumed ownership of the DAFB water utility assets and began providing regulated water service to DAFB under Tidewater’s DEPSC approved tariff rates.
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Strategy for Growth
Our strategy is focused on four key areas:
·Acquire investor- and municipally-owned water and wastewater utilities;
·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.
Rates
Middlesex - In June 2014, Middlesex’s petition to the New Jersey Board of Public Utilities (NJBPU) seeking permission to increase base water rates was partially approved, granting an increase in annual operating revenues of $4.2 million. The originally-filed base water rate increase request of $10.6 million, filed in November 2013 (subsequently revised to $8.1 million, primarily resulting from lower employee benefit plan costs), was necessitated by capital investments Middlesex had made, or committed to make, increased operations and maintenance costs and reduced revenues resulting from the expiration of a wholesale water sales contract with the Borough of Sayreville, New Jersey in August 2013. In addition, Middlesex’s largest retail water customer, Hess Corporation, ceased its oil refining operations at its Port Reading, New Jersey facility in February 2013. 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 $208.6 million, based on a return on equity of 9.75%. The rate increase became effective on July 20, 2014.
In May 2014, 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 investments in, and generate a return on, capital improvements to their water distribution system made between base rate proceedings. In August 2014, the Foundational Filing was approved by the NJBPU, which allows Middlesex to implement a DSIC rate 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 $3.6 million. The DSIC rate for the first six-month period costs is expected to become effective in May 2015 and generate $0.3 of annual revenues.
In July 2012, the NJBPU approved an $8.1 million increase in Middlesex’s annual base water rates. A base rate increase request of $11.3 million was filed in January 2012 seeking recovery of increased costs of operations, chemicals, fuel, electricity, taxes, labor and benefits, and decreases in industrial and commercial customer demand patterns, as well as capital investment in utility plant.
Tidewater - The DEPSC approved a $0.8 million increase in Tidewater’s annual base water rates, effective August 19, 2014. The originally-filed base water rate increase request of $3.9 million, filed in November 2013 (subsequently revised to $2.5 million, primarily resulting from lower employee benefit plan costs), was necessitated by capital investments Tidewater had made, or committed to make, as well as increased operations and maintenance costs. In connection with the rate increase application, Tidewater implemented a DEPSC approved 6.5% interim rate increase, subject to refund, on February 6, 2014. Since the final required and approved rate increase was less than the interim rate increase, Tidewater refunded $0.4 million of previously deferred revenues to customers in the form of a one-time credit to each customer account.
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Effective January 1, 2015, Tidewater implemented a DEPSC-approved DSIC rate increase which is expected to generate revenues of less than $0.1 million annually.
In June 2012, the DEPSC approved a $3.9 million increase in Tidewater’s annual base water rates. A base rate increase request of $6.9 million was filed in September 2011 seeking recovery of increased costs for operations, maintenance and taxes, as well as capital investment.
TESI - On October 1, 2013, TESI closed on its DEPSC-approved purchase of the wastewater utility assets of the Plantations development (the Plantations) for $0.4 million and began providing wastewater services to the 600 residential customers in the Plantations in Delaware. Upon commencing service to the Plantations, annual revenues were approximately $0.2 million. In October 2014, TESI implemented a 33.5% Plantations base wastewater rate increase (approximately $0.1 million annually).
In June 2012, the DEPSC approved a $0.6 million increase in TESI’s annual base wastewater rates, a portion of which is to be phased in through 2015. A base rate increase request of $0.8 million was filed in July 2011 seeking recovery of increased operation and maintenance costs, as well as capital investment.
Pinelands - In March 2013, the NJBPU approved a combined $0.2 million increase in Pinelands Water and Pinelands Wastewater’s annual base water and wastewater 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 water service, which is approximately 50% of the approved increase, was phased-in over one year.
Southern Shores - Under the terms of a multi-year DEPSC-approved agreement expiring in 2020, customer rates will increase on January 1st of each year to generate additional annual revenue of $0.1 million with each increase.
Twin Lakes - The Pennsylvania Public Utilities Commission (PAPUC) approved a $0.1 million, three-year phased-in base water rate increase effective March 3, 2012. This increase was designed to recover capital investment in the upgrade and renovation of the Twin Lakes System, as well as increased operating costs.
Outlook
Revenues in 2015 are expected to be favorably impacted by the full year effect of Middlesex’s and Tidewater’s base water rate increases awarded in 2014, TESI’s Plantations base wastewater rate increase and Tidewater’s DAFB contract. In addition, revenues are expected to be favorably impacted by the implementation of the Tidewater DSIC effective since January 1, 2015 and a Middlesex DSIC expected to be effective in the second quarter of 2015. See “Rates” above for further discussion on these base rate increases as well as Middlesex’s and Tidewater’s DSIC requests.
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 to implement plans to further streamline operations and further reduce operating costs.
A market-driven lower discount rate, combined with the required adoption of a new mortality table that reflects current life span expectancies, is expected to result in higher employee benefit plan expense in 2015. See Note 7 of the Notes to Consolidated Financial Statements for further discussion of Employee Benefit Plans.
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 from prior years.
Operating Results by Segment
The Company has two operating segments, Regulated and Non-Regulated. Our Regulated segment contributed approximately 88% of total revenues and approximately 93% of net income over the fiscal years 2012, 2013 and 2014. The discussion of the Company’s results of operations is on a consolidated basis, and includes significant factors by subsidiary. The segments in the tables included below are comprised of the following companies:
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Regulated- Middlesex, Tidewater, Pinelands, Southern Shores, TESI and Twin Lakes; Non-Regulated- USA, USA-PA, and White Marsh.
Results of Operations for 2014 as Compared to 2013
Operating Revenues
Operating revenues for the year ended December 31, 2014 increased $2.3 million from the same period in 2013. This increase was primarily related to the following factors:
·Middlesex System revenues decreased $0.5 million, primarily due to the following:
oContract Sales to Municipalities decreased by $1.1 million primarily due to the expiration of the Borough of Sayreville, New Jersey (Sayreville) wholesale contract in August 2013 ($1.2 million), mitigated for part of 2014 by the NJBPU-approved rate increase implemented in July 2014 and by higher demand for water from customers (collectively $0.l million); and
oRevenues from General Metered Service (GMS) customers increased $0.6 million from the same period in 2013, primarily due to the NJBPU-approved rate increase implemented in July 2014 (approximately $1.7 million) partially offset by decreased GMS customer water demand (approximately $0.9 million) as a result of unfavorable weather and Hess Corporation (Hess) ceasing its oil refining operations at its Port Reading, New Jersey facility in February 2013;
·Tidewater System revenues increased $2.5 million, primarily due to the following:
oHigher customer water demand;
oIncreased fees for new customer connections to our water system; and
oThe implementation of DEPSC-approved interim and final base rate increases (see “Rates-Tidewater” above for further discussion of the Tidewater base water rate increase);
·TESI’s revenues increased $0.5 million, primarily due to service revenues from the customers of the acquired Plantations wastewater system, which TESI began serving in October 2013, and the phase-in of TESI’s 2012 base wastewater rate increase; and
·USA’s revenues decreased $0.4 million, primarily due to a lower level of billable supplemental services under our contract to operate the Avalon water utility, sewer utility and storm water system (see corresponding decrease in “Operations and Maintenance Expense” below; and
·Operating revenues at all other subsidiaries increased $0.2 million.
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Operation and Maintenance Expense
Operation and maintenance expenses for the year ended December 31, 2014 decreased $1.6 million, primarily related to the following factors:
·Employee benefit expenses decreased $3.0 million due primarily to lower postretirement employee benefit plan costs resulting from improved performance in 2013 on our investment of retirement plan funds and a higher discount rate used for the actuarially determined 2014 expense;
·Variable production costs decreased $0.4 million primarily due to lower customer water demand and higher raw water quality in our Middlesex System;
·Expenditures for billable supplemental services related to USA’s Avalon contract decreased $0.4 million (see corresponding decrease in ”Operating Revenues” above);
·Severe winter weather in early 2014 resulted in higher water main break costs of $0.5 million in our Middlesex and Pinelands Systems and higher facilities maintenance expenses of $0.1 million;
·Inspection, storm preparation, maintenance and repair services increased $0.4 million at Middlesex’s production and transmission and distribution facilities;
·Information technology expenses increased $0.2 million primarily due to higher licensing and service contract fees;
·Liability insurance expenses increased $0.2 million;
·Labor costs increased $0.6 million, primarily related to higher overtime resulting from severe winter weather in our Middlesex System and higher average labor rates; and
·Operation and maintenance expenses for all other categories increased $0.2 million.
Depreciation
Depreciation expense for the year ended December 31, 2014 increased $0.5 million from the same period in 2013 due to a higher level of utility plant in service.
Other Taxes
Other taxes for the year ended December 31, 2014 were consistent with the same period in 2013, primarily due to lower revenue related taxes on lower taxable revenues in our Middlesex system offset by higher payroll taxes.
Other Income (Expense), net
Other Income, net for the year ended December 31, 2014 decreased $0.5 million from the same period in 2013, primarily due to business development costs at our TESI subsidiary.
Interest Charges
Interest charges for the year ended December 31, 2014 decreased $0.2 million from the same period in 2013, primarily due to lower average interest rates on long-term debt and lower average long-term debt outstanding.
Income Taxes
Income taxes for the year ended December 31, 2014 increased $1.3 million from the same period in 2013, primarily due to increased operating income in 2014 as compared to 2013 and a higher effective tax rate, resulting from Middlesex’s subsidiaries who pay state income taxes contributing a higher percentage of 2014 consolidated pre-tax income.
Net Income and Earnings Per Share
Net income for the year ended December 31, 2014 increased $1.8 million from the same period in 2013. Basic and diluted earnings per share increased to $1.14 and $1.13, respectively for the year ended December 31, 2014 as compared to $1.04 and $1.03, respectively, for the year ended December 31, 2013.
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Results of Operations for 2013 Compared to 2012
Operating Revenues
Operating revenues for the year ended December 31, 2013 increased $4.4 million from the same period in 2012. This increase was primarily related to the following factors:
·Middlesex System revenues increased $1.7 million due to:
oSales to GMS customers increased by $1.6 million primarily due to the July 2012 base water rate increase and partially offset by decreased GMS customer demand resulting from:
§Greater than expected precipitation events during the second and third quarters of 2013;
§Hess, Middlesex's largest GMS customer, ceasing its oil refining operations at its Port Reading, New Jersey facility in February 2013;
oContract Sales to municipalities were consistent with 2012, primarily due to the July 2012 base water rate increase offset by the loss of Sayreville as a customer in August 2013; and
oOperating revenues for all other categories increased $0.1 million;
·Tidewater System revenues increased $0.8 million, primarily due to:
oIncreased fixed service charges and increased fees from new water customer connections; and
oThe June 2012 implementation of the final component of its base water rate increase;
oPartially offsetting the increases above was lower customer demand resulting from greater than expected precipitation events during the second and third quarters of 2013;
·USA’s revenues increased $1.2 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 $0.3 million, primarily from scheduled increases in the fixed fees paid under contract with the City of Perth Amboy;
·TESI’s revenues increased $0.3 million, primarily due to the June 2012 base wastewater rate increase; and
·All other subsidiaries’ revenues increased $0.1 million.
Operation and Maintenance Expense
Operation and maintenance expenses for the year ended December 31, 2013 increased $0.3 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 in 2013 and higher average labor rates. These increases were partially offset by a workforce reduction in our Delaware operations in March 2012;
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·Variable production costs increased $0.6 million, primarily from higher water treatment costs due to increased precipitation 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 $0.8 million increase in direct costs for billable supplemental services;
·Employee benefit expenses decreased $2.0 million due primarily due to an amendment of the Other Benefits Plan which increases contributions by future retirees; and
·All other operation and maintenance expense categories increased $0.1 million.
Depreciation
Depreciation expense for the year ended December 31, 2013 increased $0.6 million from the same period in 2012 due to a higher level of utility plant in service.
Other Taxes
Other taxes for the year ended December 31, 2013 increased $0.2 million from the same period in 2012, primarily due to increased revenue related taxes on higher taxable revenues in our Middlesex system.
Other Income, net
Other Income, net for the year ended December 31, 2013 decreased $0.8 million from the same period in 2012, primarily due to costs incurred in 2013 related to potential projects at Middlesex and TESI, lower Allowance for Funds Used During Construction, resulting from lower average construction work in progress balances, and lower rental income partially offset by higher interest income.
Interest Charges
Interest charges for the year ended December 31, 2013 decreased $0.9 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 December 2012 and January 2013.
Income Taxes
Income taxes for the year ended December 31, 2013 increased $1.2 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 year ended December 31, 2013 increased $2.2 million from the same period in 2012. Basic and diluted earnings per share increased to $1.04 and $1.03, respectively, for the year ended December 31, 2013 as compared to $0.90 for the year ended December 31, 2012.
Liquidity and Capital Resources
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 the Results of Operations section above.
For the year ended December 31, 2014, cash flows from operating activities decreased $1.2 million to $32.6 million. The decrease in cash flows from operating activities primarily resulted from the timing of vendor and interest payments partially offset by higher earnings and timing of income tax payments. The $32.6 million of net cash flow from operations enabled us to fund all of our utility plant expenditures internally for the period.
For the year ended December 31, 2013, cash flows from operating activities increased $4.2 million to $33.8 million. Increased earnings and higher accounts payable, partially offset by higher income tax payments, were the primary reasons for the increase in cash flow. The $33.8 million of net cash flow from operations enabled us to fund all of our utility plant expenditures internally for the period.
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Increases in certain operating costs impact our liquidity and capital resources. We continually monitor the need for timely rate filing to minimize the lag between the time we experience increased operating and capital costs and the time we receive appropriate rate relief. There can be no assurances however that our regulated subsidiaries’ respective Utility Commissions will approve base water and/or wastewater rate increase requests in whole or in part or when the decisions will be rendered.
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 our dividend reinvestment program (DRP) and, when market conditions are favorable, proceeds from sales offerings to the public of our common stock.
The table below summarizes our estimated capital expenditures for the years 2015-2017.
Our estimated capital expenditures for the items listed above are primarily comprised of the following:
·Distribution System-Projects associated with installation and relocation of water mains and service lines, construction of water storage tanks, installation and replacement of hydrants and meters and our RENEW Program, which is our initiative to clean and cement all unlined mains in the Middlesex System. In connection with our RENEW Program, we expect to spend $5.1 million in 2015 and $5.0 million in both 2016 and 2017.
·Production System-Projects associated with our water production and water treatment plants.
·Computer Systems-Purchase of hardware and software.
·Other-Purchase of vehicles and other transportation equipment, tools, furniture, laboratory equipment, security requirements and other general infrastructure needs.
The actual amount and timing of capital expenditures is dependent on customer growth, residential new home construction and sales and project scheduling.
To pay for our capital program in 2015, we plan on utilizing:
·Internally generated funds;
·Proceeds from the DRP;
·Funds available and held in trust under existing New Jersey State Revolving Fund (SRF) loans (currently, $1.4 million) and, once the loan transaction is complete, proceeds from the 2015 New Jersey SRF program (up to $5.0 million). SRF programs provide low cost financing for projects that meet certain water quality and system improvement benchmarks;
·Remaining funds available ($7.0 million as of December 31, 2014) under Tidewater’s October 2014 loan (see “Long-term Debt” below for further discussion of this loan); and
·Short-term borrowings, if necessary, through $60.0 million of available lines of credit with several financial institutions. As of December 31, 2014, there remains $41.0 million available to draw upon.
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Sources of Liquidity
Short-term Debt. The Company had established lines of credit aggregating $60.0 million throughout 2014. At December 31, 2014, the outstanding borrowings under these credit lines were $19.0 million at a weighted average interest rate of 1.17%.
The weighted average daily amounts of borrowings outstanding under the Company’s credit lines and the weighted average interest rates on those amounts were $27.4 million and $27.7 million at 1.41% and 1.41% for the years ended December 31, 2014 and 2013, respectively.
Long-term Debt. Subject to regulatory approval, the Company periodically issues long-term debt to fund its investments in utility plant and other assets. To the extent possible, the Company finances qualifying capital projects under SRF loan programs in New Jersey and Delaware. These government programs provide financing at interest rates that are typically below rates available in the broader financial markets. A portion of the borrowings under the New Jersey SRF is interest-free. We participated in the New Jersey SRF loan program during 2014 and have qualified to participate in the 2015 New Jersey SRF program with an expected closing date in May 2015.
In October 2014, Tidewater completed a $15.0 million debt transaction. In December 2014 and February 2015, Tidewater borrowed $8.0 million and $3.0 million, respectively, under the loan agreement, which allows Tidewater to borrow, in increments at its discretion, until April 30, 2015. The interest rate on the $11.0 million is 4.46%. The proceeds were used to pay down short-term debt and for other general corporate purposes. The interest rate on any borrowings from the remaining $4.0 million proceeds will be set at the time of the borrowing. Those funds are expected to be used to fund a portion of Tidewater’s ongoing capital program. The final maturity date of all borrowings under this loan agreement is April 1, 2040.
In May 2014, Middlesex borrowed approximately $3.8 million through the New Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey SRF loan program and issued first mortgage bonds designated as Series VV (approximately $2.8 million) and Series WW (approximately $0.9 million). The interest rate on the Series VV bond is zero and the interest rate on the Series WW bond ranges from 3.0% to 5.0% depending on the serial maturity date. The final maturity date for both bonds is August 1, 2033. Proceeds were recorded as Restricted Cash and can only be used for the Middlesex 2014 RENEW project, which is part of a program to clean and cement all unlined mains in the Middlesex system. As of December 31, 2014, there remains $1.4 million of proceeds available to Middlesex.
In 2014, Tidewater borrowed $0.6 million, which represented the balance of a $1.1 million project specific loan with the Delaware SRF at an interest rate of 3.45% and final maturity of August 1, 2031.
In May 2013, Middlesex borrowed $3.9 million through the NJEIT under the New Jersey SRF loan program and issued First Mortgage Bonds (Bonds) designated as Series TT ($2.9 million) and Series UU ($1.0 million). The interest rate on the Series TT Bonds is zero and the interest rate on the Series UU Bonds ranges from 3.0% to 3.25% depending on the serial maturity date. The final maturity date for the Bonds is August 1, 2032. Proceeds were used for the Middlesex 2013 RENEW Program.
Substantially all of the Utility Plant of the Company is subject to the lien of its mortgage, which includes debt service and capital ratio covenants. The Company is in compliance with all of its mortgage covenants and restrictions.
Common Stock. The Company periodically issues shares of common stock in connection with its DRP. The Company raised $1.5 million through the issuance of 0.1 million shares under the DRP during 2014. In February 2015, the Company filed a petition with the NJBPU seeking approval to increase the number of shares authorized under the DRP from 2.3 million shares to 3.0 million shares.
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Contractual Obligations
In the course of normal business activities, the Company enters into a variety of contractual obligations and commercial commitments. Some of these items result in direct obligations on the Company’s balance sheet while others are commitments, some firm and some based on uncertainties, which are disclosed in the Company’s consolidated financial statements.
The table below presents our known contractual obligations for the periods specified as of December 31, 2014.
* Does not include Premium on Long-term Debt
The table above does not reflect any anticipated cash payments for postretirement benefit plan obligations. The effect on the timing and amount of these payments resulting from potential changes in actuarial assumptions and returns on plan assets cannot be estimated. In 2014, the Company contributed $5.3 million to its postretirement benefit plans and expects to contribute approximately $5.0 million in 2015.
Adoption of Tangible Property Treasury Regulations
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 are required to be adopted for the tax year beginning January 1, 2014, 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 has undertaken a comprehensive study to support the integration of the new regulations into its tax policies prospectively, and to determine the level of deductibility for income tax purposes, if any, 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. Initial information obtained from the study, while preliminary and therefore inconclusive at this time, indicates there may be up to $6.8 million of refundable taxes previously paid to the IRS. Absent specific IRS guidelines, the Company is in the process of reviewing and assessing the results of the preliminary study. However, it is probable that any net tax benefits that may result from adopting, partially or in full, the findings from the study and results in a change in the accounting method for these type of expenditures will be considered in determining the revenue requirement used to set base rates for the Company in a future regulatory proceeding, after formal adoption by the Company of the tangible property regulations. The Company will adopt the regulations by filing a change in accounting method request with its 2014 Federal income tax return due no later than September 15, 2015. Consequently, due to the uncertainty regarding the amount of any net tax benefit, as well as the regulatory treatment probability described above, adoption of the new regulations will not have a significant impact on the Company’s financial statements or effective tax rate.
Critical Accounting Policies and Estimates
The application of accounting policies and standards often requires the use of estimates, assumptions and judgments. The Company regularly evaluates these estimates, assumptions and judgments, including those related to the calculation of pension and postretirement benefits, unbilled revenues, and the recoverability of certain assets, including regulatory assets. The Company bases its estimates, assumptions and judgments on historical experience and current operating environment. Changes in any of the variables that are used for the Company’s estimates, assumptions and judgments may lead to significantly different financial statement results.
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Our critical accounting policies are set forth below.
Regulatory Accounting
We maintain our books and records in accordance with accounting principles generally accepted in the United States of America. Middlesex and certain of its subsidiaries, which account for approximately 88% of Operating Revenues and 99% of Total Assets, are subject to regulation in the states in which they operate. Those companies are required to maintain their accounts in accordance with regulatory authorities’ rules and guidelines, which may differ from other authoritative accounting pronouncements. In those instances, the Company follows the guidance in the Financial Accounting Standards Board Accounting Standards Codification Topic 980 Regulated Operations (Regulatory Accounting).
In accordance with Regulatory Accounting, costs and obligations are deferred if it is probable that these items will be recognized for rate-making purposes in future rates. Accordingly, we have recorded costs and obligations, which will be amortized over various future periods. Any change in the assessment of the probability of rate-making treatment will require us to change the accounting treatment of the deferred item. We have no reason to believe any of the deferred items that are recorded will be treated differently by the regulators in the future.
Revenues
Revenues from metered customers include amounts billed on a cycle basis and unbilled amounts estimated from the last meter reading date to the end of the accounting period. The estimated unbilled amounts are determined by utilizing factors which may include historical consumption usage, current weather patterns and economic conditions. Differences between estimated revenues and actual billings are recorded in a subsequent period.
Revenues from unmetered customers are billed at a fixed tariff rate in advance at the beginning of each service period and are recognized in revenue ratably over the service period.
Revenues from the Perth Amboy management contract are comprised of fixed and variable fees. Fixed fees, which have been set for the life of the contract, are billed monthly and recorded as earned. Variable fees, which are based on billings and other factors, are recorded upon approval of the amount by Perth Amboy. The variable fees are not a material component of the management contract.
Revenues from USA’s operations and maintenance contract for the Avalon water utility, sewer utility and storm water system are fixed for the life of the contract, are billed monthly and recorded as earned. USA also provides services to Avalon in addition to the base services provided under the operation and maintenance contract. These additional services are recorded as earned and billed upon approval of Avalon.
Retirement Benefit Plans
The costs for providing retirement benefits are dependent upon numerous factors, including actual plan experience and assumptions of future experience. Future retirement benefit plan obligations and expense will depend on future investment performance, changes in future discount rates and various other demographic factors related to the population participating in the Company’s retirement benefit plans, all of which can change significantly in future years.
We maintain a noncontributory defined benefit pension plan (Pension Plan) which covers all currently active employees who were hired prior to April 1, 2007. In addition, the Company maintains an unfunded supplemental plan for its executive officers.
The Company has a retirement benefit plan other than pensions (Other Benefits Plan) for substantially all of its retired employees. Employees hired after March 31, 2007 are not eligible to participate in the Other Benefits Plan. Coverage includes healthcare and life insurance.
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The allocation by asset category of retirement benefit plan assets at December 31, 2014 and 2013 is as follows:
The discount rate, compensation increase rate and long-term rate of return utilized for determining our postretirement benefit plans’ future obligations as of December 31, 2014 are as follows:
The Company adopted the use of the recently issued Society of Actuaries’ mortality table (RP 2014). RP 2014 was used in the determination of our postretirement benefit obligations as of December 31, 2014 and costs for 2015. Use of the RP 2014 mortality table, which extends the assumed life expectancies of our postretirement benefit plan participants, resulted in significant increases to our postretirement benefit obligations as of December 31, 2014 and is expected to increase our costs in 2015.
For the 2014 valuation, costs and obligations for our Other Benefits Plan assumed a 9.0% annual rate of increase in the per capita cost of covered healthcare benefits in 2015 with the annual rate of increase declining 1.0% per year for 2016-2018 and 0.5% per year for 2019-2020, resulting in an annual rate of increase in the per capita cost of covered healthcare benefits of 5% by year 2020.
The following is a sensitivity analysis for certain actuarial assumptions used in determining projected benefit obligations (PBO) and expenses for our postretirement benefit plans:
Pension Plan
Other Benefits Plan
The discount rates used at our December 31 measurement date for determining future postretirement benefit plans’ obligations and costs are determined based on market rates for long-term, high-quality corporate bonds specific to our Pension Plan and Other Benefits Plan’s asset allocation. The expected long-term rate of return for Pension Plan and Other Benefits Plan assets is determined based on historical returns and our asset allocation.
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Recent Accounting Standards
See Note 1(q) of the Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.
ITEM 7A.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT 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, variable rate long-term and 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 $5.9 million of the current portion of 42 existing long-term debt instruments will mature. The Company manages its interest rate risk related to existing variable-rate long-term and short-term debt by limiting our variable rate exposure. Applying a hypothetical change in the rate of interest charged by 10% on those fixed- and variable-rate 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 the 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.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Middlesex Water Company
We have audited the accompanying consolidated balance sheets and consolidated statements of capital stock and long-term debt of Middlesex Water Company (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, common stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Middlesex Water Company as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Middlesex Water Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 5, 2015 expressed an unqualified opinion.
/s/ Baker Tilly Virchow Krause, LLP
Philadelphia, Pennsylvania
March 5, 2015
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MIDDLESEX WATER COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
See Notes to Consolidated Financial Statements.
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MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
See Notes to Consolidated Financial Statements.
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MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See Notes to Consolidated Financial Statements.
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MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF CAPITAL STOCK
AND LONG-TERM DEBT
(In thousands)
See Notes to Consolidated Financial Statements.
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MIDDLESEX WATER COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(In thousands)
See Notes to Consolidated Financial Statements.
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MIDDLESEX WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization, Summary of Significant Accounting Policies and Recent Developments
(a) Organization - Middlesex Water Company (Middlesex) 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.
Middlesex Water Company has operated as a water utility in New Jersey since 1897, in Delaware, through our wholly-owned subsidiary, Tidewater, since 1992 and in Pennsylvania, through our wholly-owned subsidiary, Twin Lakes, since 2009. We are in the business of collecting, treating, distributing and selling water for domestic, commercial, municipal, industrial and fire protection purposes. We also operate New Jersey municipal water, wastewater and storm water systems under contract and provide unregulated water and wastewater services in New Jersey and Delaware through our subsidiaries. We also have an investment in a joint venture, Ridgewood Green RME, LLC, that owns and operates facilities which optimize the production of electricity at the Village of Ridgewood, New Jersey wastewater treatment plant and other municipal facilities. Our rates charged to customers for water and wastewater services, the quality of services we provide and certain other matters are regulated in New Jersey, Delaware and Pennsylvania by the New Jersey Board of Public Utilities (NJBPU), Delaware Public Service Commission (DEPSC) and Pennsylvania Public Utilities Commission (PAPUC), respectively. Our USA, USA-PA and White Marsh subsidiaries are not regulated utilities.
Certain reclassifications have been made to the prior year financial statements to conform with current period presentation. The reclassifications are immaterial to the overall presentation of our consolidated financial statements.
(b) Principles of Consolidation - 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. Other financial investments in which the Company holds a 50% or less voting interest and cannot exercise control over the operation and policies of the investments are accounted for under the equity method of accounting. Under the equity method of accounting, the Company records its investment interests in Non Utility Assets and its percentage share of the earnings or losses of the investees in Other Income (Expense).
(c) System of Accounts - Middlesex, Pinelands Water and Pinelands Wastewater maintain their accounts in accordance with the Uniform System of Accounts prescribed by the NJBPU. Tidewater, TESI and Southern Shores maintain their accounts in accordance with DEPSC requirements. Twin Lakes maintains its accounts in accordance with PAPUC requirements.
(d) Regulatory Accounting - We maintain our books and records in accordance with accounting principles generally accepted in the United States of America. Middlesex and certain of its subsidiaries, which account for 88% of Operating Revenues and 99% of Total Assets, are subject to regulation in the state in which they operate. Those companies are required to maintain their accounts in accordance with regulatory authorities’ rules and guidelines, which may differ from other authoritative accounting pronouncements. In those instances, the Company follows the guidance provided in Accounting Standards Codification (ASC) 980, Regulated Operations.
In accordance with ASC 980, Regulated Operations, costs and obligations are deferred if it is probable that these items will be recognized for rate-making purposes in future rates. Accordingly, we have recorded costs and obligations, which will be amortized over various future periods. Any change in the assessment of the probability of rate-making treatment will require us to change the accounting treatment of the deferred item. We have no
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reason to believe any of the deferred items that are recorded will be treated differently by the regulators in the future. For additional information, see Note 2 - Rate and Regulatory Matters.
(e) Retirement Benefit Plans - We maintain a noncontributory defined benefit pension plan (Pension Plan) which covers substantially all active employees who were hired prior to April 1, 2007. In addition, the Company maintains an unfunded supplemental plan for its executive officers. The Company has a retirement benefit plan other than pensions (Other Benefits Plan) for 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.
The Company’s costs for providing retirement benefits are dependent upon numerous factors, including actual plan experience and assumptions of future experience. Retirement benefit plan obligations and expense are determined based on investment performance, discount rates and various other demographic factors related to the population participating in the Company’s retirement benefit plans, all of which can change significantly in future years. For more information on the Company’s Retirement Benefit Plans, see Note 7 - Employee Benefit Plans.
(f) Utility Plant - Utility Plant is stated at original cost as defined for regulatory purposes. Property accounts are charged with the cost of betterments and major replacements of property. Cost includes direct material, labor and indirect charges for pension benefits and payroll taxes. The cost of labor, materials, supervision and other expenses incurred in making repairs and minor replacements and in maintaining the properties is charged to the appropriate expense accounts. At December 31, 2014, there was no event or change in circumstance that would indicate that the carrying amount of any long-lived asset was not recoverable.
(g) Depreciation - Depreciation is computed by each regulated member of the Company utilizing a rate approved by the applicable regulatory authority. The Accumulated Provision for Depreciation is charged with the cost of property retired, less salvage. The following table sets forth the range of depreciation rates for the major utility plant categories used to calculate depreciation for the years ended December 31, 2014, 2013 and 2012. These rates have been approved by the NJBPU, DEPSC or PAPUC:
Non-regulated fixed assets consist primarily of office buildings, furniture and fixtures, and transportation equipment. These assets are recorded at original cost and depreciation is calculated based on the estimated useful lives, ranging from 3 to 40 years.
(h) Preliminary Survey and Investigation (PS&I) Costs - In the design of water and wastewater systems that the Company ultimately intends to construct, own and operate certain expenditures are incurred to advance those project activities. These PS&I costs are recorded as deferred charges on the balance sheet because these costs are expected to be recovered through future rates charged to customers as the underlying projects are placed into service as utility plant. If it is subsequently determined that costs for a project recorded as PS&I are not recoverable through rates charged to our customers, the applicable PS&I costs are recorded as Other Expense on the income statement at that time.
(i) Customers’ Advances for Construction (CAC) - Utility plant and/or cash advances are provided to the Company by customers, real estate developers and builders in order to extend utility service to their properties. These transactions are recorded as CAC. Contractual Refunds of CACs in the form of cash are made by the Company and are based on either additional operating revenues generated from new customers or as new customers are connected to the respective system. After all refunds are made and/or contract terms have expired, any remaining balance is transferred to Contributions in Aid of Construction.
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Contributions in Aid of Construction (CIAC) - CIAC include direct non-refundable contributions of utility plant and/or cash and the portion of CAC that becomes non-refundable.
CAC and CIAC are not depreciated in accordance with regulatory requirements. In addition, these amounts reduce the investment base for purposes of setting rates.
(j) Allowance for Funds Used During Construction (AFUDC) - Middlesex and its regulated subsidiaries capitalize AFUDC, which represents the cost of financing projects during construction. AFUDC is added to the construction costs of individual projects exceeding specific cost and construction period thresholds established for each company and then depreciated along with the rest of the utility plant’s costs over its estimated useful life. AFUDC is calculated using each company’s weighted cost of debt and equity as approved in their most recent respective regulatory rate order. The AFUDC rates for the years ended December 31, 2014, 2013 and 2012 for Middlesex and Tidewater are as follows:
(k) Accounts Receivable - We record bad debt expense based on historical write-offs combined with an evaluation of current conditions. The allowance for doubtful accounts was $0.7 million and $0.6 million as of December 31, 2014 and 2013, respectively. For each of the years ended December 31, 2014, 2013, and 2012, bad debt expense was $0.7 million. For the years ended December 31, 2014, 2013, and 2012, write-offs were $0.6 million, $0.9 million and $0.6 million, respectively. Receivables not expected to be received in 2015 are included as non-current assets in Operations Contracts, Developer and Other Receivables.
(l) Revenues - Retail customer invoices for regulated utility service are typically comprised of two components; a fixed service charge and a volumetric or consumption charge. Revenues from retail customers, except Tidewater fixed service charges, include amounts billed in arrears on a cycle basis and unbilled amounts estimated from the last meter reading date to the end of the accounting period. The estimated unbilled amounts are determined by utilizing factors which include historical volumetric or consumption usage and current climate and economic conditions. Actual billings may differ from our estimates. Tidewater customers are billed in advance for their fixed service charge and these revenues are recognized as the service is provided to the customer.
Southern Shores is an unmetered system. Customers are billed a fixed service charge in advance at the beginning of each month and revenues are recognized as earned.
Customers in portions of the TESI system are billed a fixed service charge in arrears.
Revenues from the City of Perth Amboy management contract are comprised of fixed and variable fees. Fixed fees, which have been set for the life of the contract, are billed monthly and recorded as earned. Variable fees, which are not significant, are recorded upon approval of the amount by the City of Perth Amboy.
Revenues from USA’s operations and maintenance contract for the Borough of Avalon, New Jersey (Avalon) water utility, sewer utility and storm water system are fixed for the life of the contract, are billed monthly and recorded as earned. USA also provides services to Avalon in addition to the base services provided under the operation and maintenance contract. These additional services are recorded as earned and billed upon approval of Avalon.
(m) Deferred Charges and Other Assets - Unamortized Debt Expense is amortized over the lives of the related issues. Restricted Cash represents proceeds from loans entered into through state financing programs and is held in trusts. The proceeds are restricted for specific capital expenditures and debt service requirements.
(n) Income Taxes - Middlesex files a consolidated federal income tax return for the Company and income taxes are allocated based on the separate return method. Investment tax credits have been deferred and are amortized
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over the estimated useful life of the related property. For more information on income taxes, see Note 3 - Income Taxes.
(o) Statements of Cash Flows - For purposes of reporting cash flows, the Company considers all highly liquid investments with original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents represent bank balances and money market funds with investments maturing in less than 90 days.
(p) Use of Estimates - Conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from those estimates.
(q) Recent Accounting Pronouncements
Revenue Recognition - In May 2014, the Financial Accounting Standards Board 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 guidance will be effective for the Company beginning January 1, 2017. Early adoption is not permitted. The new guidance must be applied retrospectively to each prior period presented or retrospectively via a cumulative effect upon the date of initial application. We are currently evaluating the impact that the adoption will have on our consolidated financial statements and related disclosures.
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.
(r) Recent Developments
Middlesex and Tidewater Implement Base Water Rate Increases - In the second quarter of 2014, Middlesex and Tidewater implemented base water rate increases of $4.2 million and $0.8 million, respectively. These increases were necessitated by capital investments made, increased operations and maintenance costs and Middlesex industrial and wholesale customer losses, for which we were given appropriate recognition in the base water rate increases. See Note 2 - Rate and Regulatory Matters below for further discussion of these base water rate increases.
Dover Air Force Base - In April 2014, the DEPSC approved Tidewater’s 50-year agreement with the United States Department of Defense for the privatization of the water system of Dover Air Force Base (DAFB) in Dover, Delaware. On October 1, 2014, Tidewater assumed ownership of the DAFB water utility assets and began providing regulated water service to DAFB under Tidewater’s DEPSC approved tariff rates.
Note 2 - Rate and Regulatory Matters
Rate Matters
Middlesex - In June 2014, Middlesex’s petition to the NJBPU seeking permission to increase base water rates was partially approved, granting an increase in annual operating revenues of $4.2 million. The originally-filed base water rate increase request of $10.6 million, filed in November 2013 (subsequently revised to $8.1 million, primarily resulting from lower employee benefit plan costs), was necessitated by capital investments Middlesex had made, or committed to make, increased operations and maintenance costs and reduced revenues resulting from the expiration of a wholesale water sales contract with the Borough of Sayreville, New Jersey in August 2013. In addition, Middlesex’s largest retail water customer, Hess Corporation, ceased its oil refining operations at its Port Reading, New Jersey facility in February 2013. 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 $208.6 million, based on a return on equity of 9.75%. The rate increase became effective on July 20, 2014.
In May 2014, 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 investments in, and generate a return
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on, capital improvements to their water distribution system made between base rate proceedings. In August 2014, the Foundational Filing was approved by the NJBPU, which allows Middlesex to implement a DSIC rate 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 $3.6 million. The DSIC rate for the first six-month period costs is expected to become effective in May 2015 and generate $0.3 million of annual revenues.
In July 2012, the NJBPU approved an $8.1 million increase in Middlesex’s annual base water rates. A base rate increase request of $11.3 million was filed in January 2012 seeking recovery of increased costs of operations, chemicals, fuel, electricity, taxes, labor and benefits, and decreases in industrial and commercial customer demand patterns, as well as capital investment in utility plant.
Tidewater - The DEPSC approved a $0.8 million increase in Tidewater’s annual base water rates, effective August 19, 2014. The originally-filed base water rate increase request of $3.9 million, filed in November 2013 (subsequently revised to $2.5 million, primarily resulting from lower employee benefit plan costs), was necessitated by capital investments Tidewater had made, or committed to make, as well as increased operations and maintenance costs. In connection with the rate increase application, Tidewater implemented a DEPSC approved 6.5% interim rate increase, subject to refund, on February 6, 2014. Since the final required and approved rate increase was less than the interim rate increase, Tidewater refunded $0.4 million of previously deferred revenues to customers in the form of a one-time credit to each customer account.
Effective January 1, 2015, Tidewater implemented a DEPSC-approved DSIC rate increase which is expected to generate revenues of less than $0.1 million annually.
In June 2012, the DEPSC approved a $3.9 million increase in Tidewater’s annual base water rates. A base rate increase request of $6.9 million was filed in September 2011 seeking recovery of increased costs for operations, maintenance and taxes, as well as capital investment.
TESI - On October 1, 2013, TESI closed on its DEPSC-approved purchase of the wastewater utility assets of the Plantations development (the Plantations) for $0.4 million and began providing wastewater services to the 600 residential customers in the Plantations in Delaware. Upon commencing service to the Plantations, annual revenues were approximately $0.2 million. In October 2014, TESI implemented a 33.5% Plantations base wastewater rate increase (approximately $0.1 million annually).
In June 2012, the DEPSC approved a $0.6 million increase in TESI’s annual base wastewater rates, a portion of which is to be phased in through 2015. A base rate increase request of $0.8 million was filed in July 2011 seeking recovery of increased operation and maintenance costs, as well as capital investment.
Pinelands - In March 2013, the NJBPU approved a combined $0.2 million increase in Pinelands Water and Pinelands Wastewater’s annual base water and wastewater 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 water service, which is approximately 50% of the approved increase, was phased-in over one year.
Southern Shores - Under the terms of a multi-year DEPSC-approved agreement expiring in 2020, customer rates will increase on January 1st of each year to generate additional annual revenue of $0.1 million with each increase.
Twin Lakes - The PAPUC approved a $0.1 million, three-year phased-in base water rate increase effective March 3, 2012. This increase was designed to recover capital investment in the upgrade and renovation of the Twin Lakes System, as well as increased operating costs.
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Regulatory Matters
We have recorded certain costs as regulatory assets because we expect full recovery of, or are currently recovering, these costs in the rates we charge customers. These deferred costs have been excluded from rate base and, therefore, we are not earning a return on the unamortized balances. These items are detailed as follows:
Retirement benefits include pension and other retirement benefits that have been recorded on the Consolidated Balance Sheet in accordance with the guidance provided in ASC 715, Compensation - Retirement Benefits. These amounts represent obligations in excess of current funding, which the Company believes will be fully recovered in rates set by the regulatory authorities.
The recovery period for income taxes is dependent upon when the temporary differences between the tax and book treatment of various items reverse.
The Company uses composite depreciation rates for its regulated utility assets, which is currently an acceptable method under generally accepted accounting principles and is widely used in the utility industry. Historically, under the composite depreciation method, the anticipated costs of removing assets upon retirement are provided for over the life of those assets as a component of depreciation expense. The Company recovers certain asset retirement costs through rates charged to customers as an approved component of depreciation expense. As of December 31, 2014 and 2013, the Company has approximately $10.3 million and $9.6 million, respectively, of expected costs of removal recovered currently in rates in excess of actual costs incurred as regulatory liabilities.
The Company is recovering in current rates acquisition premiums totaling $0.6 million over the remaining lives of the underlying Utility Plant. These deferred costs have been included in rate base as utility plant and a return is being earned on the unamortized balances during the recovery periods.
Note 3 - Income Taxes
Income tax expense differs from the amount computed by applying the statutory rate on book income subject to tax for the following reasons:
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Income tax expense is comprised of the following:
The statutory review periods for income tax returns for the years prior to 2011 have been closed. In the event that there is interest and penalties associated with income tax adjustments in future examinations, these amounts will be reported under interest expense and other expense, respectively. There are no unrecognized tax benefits resulting from prior period tax positions. The Company is not aware of any uncertain tax positions that could result in a future tax liability.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax purposes. The components of the net deferred tax liability are as follows:
Adoption of Tangible Property Treasury Regulations
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 are required to be adopted for the tax year beginning January 1, 2014, 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 has undertaken a comprehensive study to support the integration of the new regulations into its tax policies prospectively, and to determine the level of deductibility for income tax purposes, if any, 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. Initial information obtained from the study, while preliminary and therefore inconclusive at this time, indicates there may be up to $6.8 million of refundable taxes previously paid to the IRS. Absent specific IRS guidelines, the Company is in the process of reviewing and assessing the results of the preliminary study. However, it is probable that any net tax benefits that may result from adopting, partially or in full, the findings from the study and results in a change in the accounting method for these type of expenditures will be considered in determining the revenue requirement used to set base rates for the Company in a future regulatory proceeding, after formal adoption by the Company of the tangible property regulations. The Company will adopt the regulations by filing a change in accounting method request with its 2014 Federal income tax return due no later than September 15, 2015. Consequently, due to the uncertainty regarding the amount of any net tax benefit, as well as the regulatory treatment probability described above, adoption of the new regulations will not have a significant impact on the Company’s financial statements or effective tax rate.
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Note 4 - 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 27.0 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 3.0 mgd of treated water with provisions for additional purchases.
Tidewater contracts with the City of Dover, Delaware to purchase treated water 15.0 million gallons annually.
Purchased water costs are shown below:
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 is being financed by Monmouth County and began in September 2014. In addition, Middlesex entered into agreements with AWM and Natural Systems Utilities, Inc. (NSU), the parent company of AWM, whereby, 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 December 31, 2014 and December 31, 2013, the liability recognized in Other Non-Current Liabilities on the balance sheet for the guaranty is approximately $0.3 million and $0.4 million, respectively.
Construction -The Company may spend up to $28.6 million in 2015, $33.9 million in 2016 and $33.1 million in 2017 on its construction program. The actual amount and timing of capital expenditures is dependent on customer growth, residential new home construction and sales and project scheduling. There is no assurance that projected customer growth and residential new home construction and sales will occur.
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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 5 - Short-term Borrowings
Information regarding the Company’s short-term borrowings for the years ended December 31, 2014 and 2013 is summarized below:
The maturity dates for the Notes Payable as of December 31, 2014 are all in January 2015 and are extendable at the discretion of the Company.
Interest rates for short-term borrowings are below the prime rate with no requirement for compensating balances.
Note 6 - Capitalization
All the transactions discussed below related to the issuance of securities were approved by either the NJBPU or DEPSC, except where otherwise noted.
Common Stock
The number of shares authorized under the Dividend Reinvestment and Common Stock Purchase Plan (DRP) is 2.3 million shares. In February 2015, the Company filed a petition with the NJBPU seeking approval to increase the number of shares authorized under the DRP from 2.3 million shares to 3.0 million shares. The cumulative number of shares issued under the DRP at December 31, 2014 is 2.2 million. For the years ended December 31, 2014, 2013 and 2012, the Company raised approximately $1.5 million, $1.7 million and $1.6 million, respectively, through the issuance of shares under the DRP.
The Company issues shares under a restricted stock plan for certain management employees, which is described in Note 7 - Employee Benefit Plans.
The Company maintains a stock plan for its outside directors (the Outside Director Stock Compensation Plan). For the years ended December 31, 2014, 2013 and 2012, 5,082, 5,432 shares and 5,768 shares, respectively, of common stock were granted and issued to the Company’s outside directors under the Outside Director Stock Compensation Plan and 76,915 shares remain available for future awards. The maximum number of shares authorized for grant under the Outside Director Stock Compensation Plan is 100,000.
In the event dividends on the preferred stock are in arrears, no dividends may be declared or paid on the common stock of the Company. At December 31, 2014, no preferred stock dividends were in arrears.
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Preferred Stock
If four or more quarterly dividends are in arrears, the preferred shareholders, as a class, are entitled to elect two members to the Board of Directors in addition to Directors elected by holders of the common stock.
At December 31, 2014 and 2013, there were 0.1 million shares of preferred stock authorized and less than 0.1 million shares of preferred stock outstanding. There were no preferred stock dividends in arrears.
The Company may not pay any dividends on its common stock unless full cumulative dividends to the preceding dividend date for all outstanding shares of preferred stock have been paid or set aside for payment. All such preferred dividends have been paid. In addition, if Middlesex were to liquidate, holders of preferred stock would be paid back the stated value of their preferred shares before any distributions could be made to common stockholders.
The conversion feature of the no par $7.00 Series Cumulative and Convertible Preferred Stock allows the security holders to exchange one convertible preferred share for twelve shares of the Company's common stock. In addition, the Company may redeem up to 10% of the outstanding convertible stock in any calendar year at a price equal to the fair value of twelve shares of the Company's common stock for each share of convertible stock redeemed. In 2014, 4,293 shares (approximately $0.5 million) of the Company’s no par $7.00 Series Cumulative and Convertible Preferred Stock were converted into 51,516 shares of common stock.
The conversion feature of the no par $8.00 Series Cumulative and Convertible Preferred Stock allows the security holders to exchange one convertible preferred share for 13.714 shares of the Company's common stock. The preferred shares are convertible into common stock at the election of the security holder or Middlesex. In 2013, 4,000 shares (approximately $0.5 million) of the Company’s no par $8.00 Series Cumulative and Convertible Preferred Stock were converted into 54,856 shares of common stock.
Long-term Debt
In October 2014, Tidewater completed a $15.0 million debt transaction. In December 2014 and February 2015, Tidewater borrowed $8.0 million and $3.0 million, respectively, under the loan agreement, which allows Tidewater to borrow, in increments at its discretion, until April 30, 2015. The interest rate on the $11.0 million is 4.46%. The proceeds were used to pay down short-term debt and for other general corporate purposes. The interest rate on any borrowings from the remaining $4.0 million proceeds will be set at the time of the borrowing. Those funds are expected to be used to fund a portion of Tidewater’s ongoing capital program. The final maturity date of all borrowings under this loan agreement is April 1, 2040.
In May 2014, Middlesex borrowed approximately $3.8 million through the New Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey State Revolving Fund (SRF) loan program and issued first mortgage bonds designated as Series VV (approximately $2.8 million) and Series WW (approximately $0.9 million). The interest rate on the Series VV bond is zero and the interest rate on the Series WW bond ranges from 3.0% to 5.0% depending on the serial maturity date. The final maturity date for both bonds is August 1, 2033. Proceeds were recorded as Restricted Cash and can only be used for the Middlesex 2014 RENEW project, which is part of a program to clean and cement all unlined mains in the Middlesex system. As of December 31, 2014, there remains $1.4 million of proceeds available to Middlesex.
In 2014, Tidewater borrowed $0.6 million, which represented the balance of a $1.1 million project specific loan with the Delaware SRF at an interest rate of 3.45% and final maturity of August 1, 2031.
In May 2013, Middlesex borrowed $3.9 million through the NJEIT under the New Jersey SRF loan program and issued First Mortgage Bonds (Bonds) designated as Series TT ($2.9 million) and Series UU ($1.0 million). The interest rate on the Series TT Bonds is zero and the interest rate on the Series UU Bonds 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 used for the Middlesex 2013 RENEW Program.
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Bond Series QQ through SS are term bonds with single maturity dates subsequent to 2019. Principal repayments for all series of the Company’s long-term debt except for Bond Series X and Y extend beyond 2019. The aggregate annual principal repayment obligations for all long-term debt over the next five years are shown below:
The weighted average interest rate on all long-term debt at both December 31, 2014 and 2013 was 3.99% and 4.23%, respectively. Except for the Amortizing Secured Notes, all of the Company’s outstanding long-term debt has been issued through the NJEDA ($55.4 million), the NJEIT program ($33.8 million) and the Delaware SRF program ($9.8 million).
Restricted cash proceeds are from various New Jersey SRF loans and are held in trusts until authorized for distribution. Series VV and WW proceeds can only be used for the 2014 RENEW Program. All other restricted cash proceeds are for debt service requirements on the New Jersey SRF loans.
In 2013 and 2012, the NJEIT de-obligated principal payments of $0.1 million and $0.3 million, respectively, on several series of SRF long-term debt. There were no de-obligated principal payments in 2014.
Substantially all of the Utility Plant of the Company is subject to the lien of its mortgage, which includes debt service and capital ratio covenants. The Company is in compliance with all of its mortgage covenants and restrictions.
Earnings Per Share
The following table presents the calculation of basic and diluted earnings per share (EPS) for the three years ended December 31, 2014. Basic EPS is computed on the basis of the weighted average number of shares outstanding. Diluted EPS assumes the conversion of both the Convertible Preferred Stock $7.00 Series and $8.00 Series.
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Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments for which it is practicable to estimate that value. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, 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 Bonds and SRF Notes 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 and SRF 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:
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 Consolidated Statements of Capital Stock and Long-Term Debt). The carrying amount of these instruments was $50.8 million and $45.0 million at December 31, 2014 and 2013, respectively. Customer advances for construction have a carrying amount of $22.0 million and $21.8 million at December 31, 2014 and 2013, respectively. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases.
Note 7 - Employee Benefit Plans
Pension 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 can participate in a defined contribution profit sharing 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. In addition, the Company maintains an unfunded supplemental plan for its executive officers. The Accumulated Benefit Obligation for the Company’s Pension Plan at December 31, 2014 and 2013 was $61.9 million and $47.5 million, respectively.
Other Benefits
The Company’s 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. Accrued retirement benefit costs are recorded each year. Effective January 1, 2013, the Company amended a provision of the Other Benefits Plan that requires employees retiring in 2013 and beyond to contribute a higher percentage towards their healthcare insurance 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.
Regulatory Treatment of Over/Underfunded Retirement Obligations
Because the Company is subject to regulation in the states in which it operates, it is required to maintain its accounts in accordance with the regulatory authority’s rules and guidelines, which may differ from other
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authoritative accounting pronouncements. In those instances, the Company follows the guidance of ASC 980, Regulated Operations. Based on prior regulatory practice, and in accordance with the guidance in ASC 980, Regulated Operations, the Company records underfunded Pension Plan and Other Benefits Plan obligation costs, which otherwise would be recognized in Other Comprehensive Income under ASC 715, Compensation - Retirement Benefits, as a Regulatory Asset, and expects to recover those costs in rates charged to customers.
The Company uses a December 31 measurement date for all of its employee benefit plans. The table below sets forth information relating to the Company’s Pension Plan and Other Benefits Plan for 2014 and 2013.
*See discussion of Other Benefits Plan amendment in “Other Benefits” above.
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Amounts that are expected to be amortized from Regulatory Assets into Net Periodic Benefit Cost in 2015 are as follows:
The discount rate and compensation increase rate for determining our postretirement benefit plans’ benefit obligations and costs as of December 31, 2014, 2013 and 2012, respectively, are as follows:
The compensation increase assumption for the Other Benefits Plan is attributable to life insurance provided to qualifying employees upon their retirement. The insurance coverage will be determined based on the employee’s base compensation as of their retirement date.
The Company adopted the use of the recently issued Society of Actuaries’ mortality table (RP 2014). RP 2014 was used in the determination of our postretirement benefit obligations as of December 31, 2014 and costs for 2015. Use of the RP 2014 mortality table, which extends the assumed life expectancies of our postretirement benefit plan participants, resulted in significant increases to our postretirement benefit obligations as of December 31, 2014 and is expected to increase our costs in 2015.
For the 2014 valuation, costs and obligations for our Other Benefits Plan assumed a 9.0% annual rate of increase in the per capita cost of covered healthcare benefits in 2015 with the annual rate of increase declining 1.0% per year for 2016-2018 and 0.5% per year for 2019-2020, resulting in an annual rate of increase in the per capita cost of covered healthcare benefits of 5% by year 2020.
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A one-percentage point change in assumed healthcare cost trend rates would have the following effects on the Other Benefits Plan:
The following benefit payments, which reflect expected future service, are expected to be paid:
Benefit Plans Assets
The allocation of plan assets at December 31, 2014 and 2013 by asset category is as follows:
Two outside investment firms each manage a portion of the Pension Plan asset portfolio. One of those investment firms also manages the Other Benefits Plan asset portfolio. Quarterly meetings are held between the Company’s Pension Committee of the Board of Directors and the investment managers to review their performance and asset allocation. If the actual asset allocation is outside the targeted range, the Pension Committee reviews current market conditions and advice provided by the investment managers to determine the appropriateness of rebalancing the portfolio.
The objective of the Company is to maximize the long-term return on retirement plan assets, relative to a reasonable level of risk, maintain a diversified investment portfolio and maintain compliance with the Employee Retirement Income Security Act of 1974. The expected long-term rate of return is based on the various asset categories in which plan assets are invested and the current expectations and historical performance for these categories.
Equity securities include Middlesex common stock in the amounts of $0.9 million (1.8% of total Pension Plan assets) and $0.8 million (1.8 % of total Pension Plan assets) as of December 31, 2014 and 2013, respectively.
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Fair Value Measurements
Accounting guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:
·Level 1 - Inputs to the valuation methodology are unadjusted quoted market prices for identical assets or liabilities in accessible active markets.
·Level 2 - Inputs to the valuation methodology that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. If the asset or liability has a specified contractual term, the Level 2 input must be observable for substantially the full term of the asset or liability.
·Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Certain investments in cash and cash equivalents, equity securities, and commodities are valued based on quoted market prices in active markets and are classified as Level 1 investments. Certain investments in cash and cash equivalents, equity securities and fixed income securities are valued using prices received from pricing vendors that utilize observable inputs and are therefore classified as Level 2 investments.
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The following table presents Middlesex’s Pension Plan assets measured and recorded at fair value within the fair value hierarchy as of December 31, 2014 (amounts in thousands):
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The following table presents Middlesex’s Pension Plan assets measured and recorded at fair value within the fair value hierarchy as of December 31, 2013 (amounts in thousands):
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The following table presents Middlesex’s Other Benefits Plan assets measured and recorded at fair value within the fair value hierarchy as of December 31, 2014 (amounts in thousands):
The following table presents Middlesex’s Other Benefits Plan assets measured and recorded at fair value within the fair value hierarchy as of December 31, 2013 (amounts in thousands):
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Benefit Plans Contributions
For the Pension Plan, Middlesex made total cash contributions of $3.6 million in 2014 and expects to make approximately $3.3 million of cash contributions in 2015.
For the Other Benefits Plan, Middlesex made total cash contributions of $1.7 million in 2014 and expects to make approximately $1.7 million of cash contributions in 2015.
401(k) Plan
The Company has a 401(k) defined contribution plan, which covers substantially all employees with more than 1,000 hours of service. Under the terms of the Plan, the Company matches 100% of a participant’s contributions, which do not exceed 1% of a participant’s compensation, plus 50% of a participant’s contributions exceeding 1%, but not more than 6%. The Company’s matching contributions were $0.6 million, $0.5 million and $0.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.
For those employees hired after March 31, 2007 and still actively employed on December 31, 2014, the Company approved and will fund discretionary contribution of $0.3 million, which was based on 5.0% of eligible 2014 compensation. For the years ended December 31, 2013 and 2012, the Company made discretionary contributions of $0.3 million and $0.2 million, respectively, for those qualifying employees.
Stock-Based Compensation
The Company has a stock compensation plan for certain management employees (the 2008 Restricted Stock Plan). The Company maintains an escrow account for 0.1 million shares of the Company's common stock for the 2008 Restricted Stock Plan. Such stock is subject to an agreement requiring forfeiture by the employee in the event of termination of employment within five years of the award other than as a result of retirement, death, disability or change in control. The maximum number of shares authorized for grant under the 2008 Restricted Stock Plan is 0.3 million shares, for which 0.2 million remain as unissued shares.
The Company recognizes compensation expense at fair value for the restricted stock awards in accordance with
ASC 718, Compensation - Stock Compensation. Compensation expense is determined by the market value of the stock on the date of the award and is being amortized over a five-year period.
The following table presents information on the 2008 Restricted Stock Plan:
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The fair value of vested restricted shares was $0.5 million, $0.5 million and $0.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Note 8 - Business Segment Data
The Company has identified two reportable segments. One is the regulated business of collecting, treating and distributing water on a retail and wholesale basis to residential, commercial, industrial and fire protection customers in parts of New Jersey, 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 the states of New Jersey, Delaware and Pennsylvania with respect to utility service 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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Note 9 - Quarterly Operating Results - Unaudited
Operating results for each quarter of 2014 and 2013 are as follows:
The information above, in the opinion of the Company, includes all adjustments consisting only of normal recurring accruals necessary for a fair presentation of such amounts. The business of the Company is subject to seasonal fluctuation with the peak period usually occurring during the summer months. The quarterly earnings per share amounts above may differ from previous filings due to the effects of rounding.
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(1) 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.
As required by Rule 13a-15 under 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 for the quarter ended December 31, 2014. Based upon that evaluation the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded:
(a) Disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) No changes in internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
Accordingly, management believes the consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
(2) Management’s Report on Internal Control Over Financial Reporting
The management of Middlesex Water Company (Middlesex or the Company) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13A-15(f) and 15d-15(f). Middlesex’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors of adequate preparation and fair presentation of the published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the adequacy of financial statement preparation and presentation. Middlesex’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Based on our assessment, we believe that as of December 31, 2014, the Company’s internal control over financial reporting is operating as designed and is effective based on those criteria.
Middlesex’s independent registered public accounting firm has audited the effectiveness of our internal control over financial reporting as of December 31, 2014 as stated in their report which is included herein.
/s/ Dennis W. Doll /s/ A. Bruce O’Connor
Dennis W. Doll A. Bruce O’Connor
President and Vice President, Treasurer and
Chief Executive Officer Chief Financial Officer
Iselin, New Jersey
March 5, 2015
Index
(3) Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Middlesex Water Company
We have audited Middlesex Water Company’s (the “Company”) internal control over financial reporting as of December 31, 2014 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Middlesex Water Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Middlesex Water Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and consolidated statements of capital stock and long-term debt and the related consolidated statements of income, common stockholders’ equity, and cash flows of Middlesex Water Company and our report dated March 5, 2015 expressed an unqualified opinion.
/s/ Baker Tilly Virchow Krause, LLP
Philadelphia, Pennsylvania
March 5, 2015
Index
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information with respect to Directors of Middlesex Water Company is included in Middlesex Water Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders and is incorporated herein by reference.
Information regarding the Executive Officers of Middlesex Water Company is included under Item 1. in Part I of this Annual Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
This Information for Middlesex Water Company is included in Middlesex Water Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
This information for Middlesex Water Company is included in Middlesex Water Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
This information for Middlesex Water Company is included in Middlesex Water Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
This information for Middlesex Water Company is included in Middlesex Water Company’s Proxy Statement for the 2015 Annual Meeting of Stockholders and is incorporated herein by reference.
Index
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
1.The following Financial Statements and Supplementary Data are included in Part II- Item 8. of this
Annual Report:
Consolidated Balance Sheets at December 31, 2014 and 2013.
Consolidated Statements of Income for each of the three years in the period ended
December 31, 2014.
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2014.
Consolidated Statements of Capital Stock and Long-term Debt as of December 31, 2014 and 2013.
Consolidated Statements of Common Stockholders’ Equity for each of the three years in the period ended December 31, 2014.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
All Schedules are omitted because of the absence of the conditions under which they are required or because the required information is shown in the financial statements or notes thereto.
3. Exhibits
See Exhibit listing immediately following the signature page.
Index
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MIDDLESEX WATER COMPANY
By: /s/ Dennis W. Doll
Dennis W. Doll
President and Chief Executive Officer
Date: March 5, 2015
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrant and in the capacities indicated on March 5, 2015.
By: /s/ A. Bruce O’Connor
A. Bruce O’Connor
Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
By: /s/ Dennis W. Doll
Dennis W. Doll
Chairman of the Board, President, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ James F. Cosgrove Jr.
James F. Cosgrove Jr.
Director
By: /s/ John C. Cutting
John C. Cutting
Director
By: /s/ Steven M. Klein
Steven M. Klein
Director
By: /s/ Amy B. Mansue
Amy B. Mansue
Director
By: /s/ John R. Middleton, M.D.
John R. Middleton, M.D.
Director
By: /s/ Walter G. Reinhard
Walter G. Reinhard
Director
By: /s/ Jeffries Shein
Jeffries Shein
Director
Index
EXHIBIT INDEX
Exhibits designated with an asterisk (*) are filed herewith. The exhibits not so designated have heretofore been filed with the Commission and are incorporated herein by reference to the documents indicated in the previous filing columns following the description of such exhibits. Exhibits designated with a dagger (t) are management contracts or compensatory plans.
Exhibit No.
Document Description
Previous
Registration
No.
Filing’s
Exhibit
No.
3.1 Certificate of Amendment to the Restated Certificate of Incorporation, filed with the State of New Jersey on June 19, 1997, included as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed April 30, 2010.
3.2 Certificate of Amendment to the Restated Certificate of Incorporation, filed with the State of New Jersey on May 27, 1998, filed as Exhibit 3.1 of the Company’s 1998 Form 10-K.
3.3 Certificate of Correction of Middlesex Water Company filed with the State of New Jersey on April 30, 1999, filed as Exhibit 3.3 of the Company’s 2003 Form 10-K/A-2.
3.4 Certificate of Amendment to the Restated Certificate of Incorporation Middlesex Water Company, filed with the State of New Jersey on February 17, 2000, filed as Exhibit 3.4 of the Company’s 2003 Form 10-K/A-2.
3.5 Certificate of Amendment to the Restated Certificate of Incorporation Middlesex Water Company, filed with the State of New Jersey on June 5, 2002, filed as Exhibit 3.5 of the Company’s 2003 Form 10-K/A-2.
3.6 Certificate of Amendment to the Restated Certificate of Incorporation, filed with the State of New Jersey on June 10, 1998, filed as Exhibit 3.1 of the Company’s 1998 Form 10-K.
3.7 Bylaws of the Company, as amended, filed as Exhibit 4.1 of the Company’s 2010 Second Quarter Form 10-Q.
4.1 Form of Common Stock Certificate. 2-55058 2(a)
10.1 Copy of Purchased Water Agreement between the Company and Elizabethtown Water Company, filed as Exhibit 10 of the Company’s 2006 First Quarter Form 10-Q.
10.2 Copy of Mortgage, dated April 1, 1927, between the Company and Union County Trust Company, as Trustee, as supplemented by Supplemental Indentures, dated as of October 1, 1939 and April 1, 1949. 2-15795 4(a)-4(f)
10.3 Copy of Supplemental Indenture, dated as of July 1, 1964 and June 15, 1991, between the Company and Union County Trust Company, as Trustee. 33-54922 10.4-10.9
10.4 Copy of Supply Agreement, dated as of July 27, 2011, between the Company and the Old Bridge Municipal Utilities Authority filed as Exhibit No. 10.4 of the Company’s 2011 Third Quarter Form 10-Q.
Index
EXHIBIT INDEX
Exhibit No.
Document Description
Previous
Registration
No.
Filing’s
Exhibit
No.
10.5 Copy of Supply Agreement, dated as of July 14, 1987, between the Company and the Marlboro Township Municipal Utilities Authority, as amended. 33-31476 10.13
10.6
Copy of Water Purchase Contract, dated as of
September 25, 2003, between the Company and the New Jersey Water Supply Authority, filed as Exhibit No. 10.7 of the Company’s 2003 Form 10-K.
10.7 Copy of Treating and Pumping Agreement, dated April 9, 1984, between the Company and the Township of East Brunswick. 33-31476 10.17
10.8 Copy of Supply Agreement, dated June 4, 1990, between the Company and Edison Township. 33-54922 10.24
10.9 Copy of amended Supply Agreement, between the Company and the Borough of Highland Park, filed as Exhibit No. 10.1 of the Company’s 2006 First Quarter Form 10-Q.
(t)10.10 Copy of Supplemental Executive Retirement Plan, filed as Exhibit 10.13 of the Company’s 1999 Third Quarter Form 10-Q.
(t)10.11(a)
Copy of 2008 Restricted Stock Plan, filed as Appendix A to the Company’s Definitive Proxy Statement, dated and filed
April 11, 2008.
(t)10.11(b) Copy of 2008 Outside Director Stock Compensation Stock Plan, filed as Appendix B to the Company’s Definitive Proxy Statement, dated and filed April 11, 2008.
(t)10.12(a) Change in Control Termination Agreement between Middlesex Water Company and Dennis W. Doll, filed as Exhibit 10.13(a) of the Company’s 2008 Form 10-K.
(t)10.12(b) Change in Control Termination Agreement between Middlesex Water Company and A. Bruce O’Connor, filed as Exhibit 10.13(b) of the Company’s 2008 Form 10-K.
(t)10.12(c) Change in Control Termination Agreement between Middlesex Water Company and Richard M. Risoldi, filed as Exhibit 10.13(d) of the Company’s 2008 Form 10-K.
(t)10.12(d) Change in Control Termination Agreement between Middlesex Water Company and Lorrie B. Ginegaw, filed as Exhibit 10.13(e) of the Company’s 2011 Form 10-K.
(t)10.12(e) Change in Control Termination Agreement between Tidewater Utilities, Inc. and Gerard L. Esposito, filed as Exhibit 10.13(g) of the Company’s 2008 Form 10-K.
(t)10.12(f) Change in Control Termination Agreement between Middlesex Water Company and Bernadette M. Sohler, filed as Exhibit 10.13(h) of the Company’s 2008 Form 10-K.
(t)10.12(g) Change in Control Termination Agreement between Middlesex Water Company and Jay L. Kooper, filed as Exhibit 10.13(g) of the Company’s 2014 Second Quarter Form 10-Q.
Index
EXHIBIT INDEX
Exhibit No.
Document Description
Previous
Registration
No.
Filing’s
Exhibit
No.
10.13 Copy of Transmission Agreement, dated October 16, 1992, between the Company and the Township of East Brunswick. 33-54922 10.23
10.14 Copy of Supplemental Indenture dated October 15, 1998 between Middlesex Water Company and First Union National Bank, as Trustee. Copy of Loan Agreement dated November 1, 1998 between the New Jersey Environmental Infrastructure Trust and Middlesex Water Company (Series X), filed as Exhibit No. 10.22 of the Company’s 1998 Third Quarter Form 10-Q.
10.15 Copy of Supplemental Indenture dated October 15, 1998 between Middlesex Water Company and First Union National Bank, as Trustee. Copy of Loan Agreement dated November 1, 1998 between the State of New Jersey Environmental Infrastructure Trust and Middlesex Water Company (Series Y), filed as Exhibit No. 10.23 of the Company’s 1998 Third Quarter Form 10-Q.
10.16 Copy of Operation, Maintenance and Management Services Agreement dated January 1, 1999 between the Company, City of Perth Amboy, Middlesex County Improvement Authority and Utility Service Affiliates, Inc. 333-66727 10.24
10.17 Copy of Supplemental Indenture dated October 15, 1999 between Middlesex Water Company and First Union National Bank, as Trustee and copy of Loan Agreement dated November 1, 1999 between the State of New Jersey and Middlesex Water Company (Series Z), filed as Exhibit No. 10.25 of the Company’s 1999 Form 10-K.
10.18 Copy of Supplemental Indenture dated October 15, 1999 between Middlesex Water Company and First Union National Bank, as Trustee and copy of Loan Agreement dated November 1, 1999 between the New Jersey Environmental Infrastructure Trust and Middlesex Water Company (Series AA), filed as Exhibit No. 10.26 of the Company’s 1999 Form 10-K.
10.19 Copy of Supplemental Indenture dated October 15, 2001 between Middlesex Water Company and First Union National Bank, as Trustee and copy of Loan Agreement dated November 1, 2001 between the State of New Jersey and Middlesex Water Company (Series BB). Filed as Exhibit No. 10.22 of the Company’s 2001 Form 10-K.
Index
EXHIBIT INDEX
Exhibit No.
Document Description
Previous
Registration
No.
Filing’s
Exhibit
No.
10.20 Copy of Supplemental Indenture dated October 15, 2001 between Middlesex Water Company and First Union National Bank, as Trustee and copy of Loan Agreement dated November 1, 2001 between the New Jersey Environmental Infrastructure Trust and Middlesex Water Company (Series CC). Filed as Exhibit No. 10.22 of the Company’s 2001 Form 10-K.
10.21 Copy of Supplemental Indenture dated October 15, 2004 between Middlesex Water Company and Wachovia Bank, as Trustee and copy of Loan Agreement dated November 1, 2004 between the State of New Jersey and Middlesex Water Company (Series EE), filed as Exhibit No. 10.26 of the Company’s 2004 Form 10-K.
10.22 Copy of Supplemental Indenture dated October 15, 2004 between Middlesex Water Company and Wachovia Bank, as Trustee and copy of Loan Agreement dated November 1, 2004 between the New Jersey Environmental Infrastructure Trust and Middlesex Water Company (Series FF), filed as Exhibit No. 10.27 of the Company’s 2004 Form 10-K.
*10.23 Copy of Promissory Notes and Amendment to Combination Water Utility Real Estate Mortgage and Security Agreement, by Tidewater Utilities, Inc., dated October 15, 2015.
10.24 Copy of Supply Agreement, between the Company and the City of Rahway, filed as Exhibit No. 10.2 of the Company’s 2006 First Quarter Form 10-Q.
10.25 Copy of Supplemental Indenture dated October 15, 2006 between Middlesex Water Company and U.S. Bank National Association, as Trustee and copy of Loan Agreement dated November 1, 2006 between the State of New Jersey and Middlesex Water Company (Series GG), filed as Exhibit No. 10.30 of the Company’s 2006 Form 10-K.
10.26 Copy of Supplemental Indenture dated October 15, 2006 between Middlesex Water Company and U.S. Bank National Association, as Trustee and copy of Loan Agreement dated November 1, 2006 between the New Jersey Environmental Infrastructure Trust and Middlesex Water Company (Series HH), filed as Exhibit No. 10.31 of the Company’s 2006 Form 10-K.
10.27 Copy of Loan Agreement By and Between New Jersey Environmental Infrastructure Trust and Middlesex Water Company dated as of November 1, 2007 (Series II), filed as Exhibit No. 10.32 of the Company’s 2007 Form 10-K.
Index
EXHIBIT INDEX
Exhibit No.
Document Description
Previous
Registration
No.
Filing’s
Exhibit
No.
10.28 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 November 1, 2007 (Series JJ), filed as Exhibit 10.33 of the Company’s 2007 Form 10-K.
10.29 Copy of Loan Agreement By and Between New Jersey Environmental Infrastructure Trust and Middlesex Water Company dated as of November 1, 2008 (Series KK), filed as Exhibit 10.34 of the Company’s 2008 Form 10-K.
10.30 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 November 1, 2008 (Series LL) ), filed as Exhibit 10.35 of the Company’s 2008 Form 10-K.
10.31
Registration Statement, Form S-3, under Securities Act of 1933 filed July 23, 2009, relating to the Dividend
Reinvestment and Common Stock Purchase Plan.
333-160757
10.32 Renewal of Amended and Restated Line of Credit Note between registrant and PNC Bank, originally filed as Exhibit 10.33 of the Company’s 2013 Second Quarter Form 10-Q.
10.33 Uncommitted Line of Credit Letter Agreement and Master Promissory Note between registrant and Bank of America, N.A, filed as Exhibit 10.33 of the Company’s 2014 Second Quarter Form 10-Q.
10.34 Uncommitted Line of Credit Letter Agreement between registrant’s wholly-owned subsidiary Utility Services Affiliates (Perth Amboy) Inc. and Bank of America, N.A, filed as Exhibit 10.34 of the Company’s 2014 Second Quarter Form 10-Q.
*10.35 Amended Promissory Note for a committed line of credit between registrant’s wholly-owned subsidiary Tidewater Utilities, Inc. and CoBank, ACB.
10.36 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 December 1, 2010 (Series MM), filed as Exhibit 10.41 of the Company’s 2010 Form 10-K.
10.37 Copy of Loan Agreement By and Between New Jersey Environmental Infrastructure Trust and Middlesex Water Company dated as of December 1, 2010 (Series NN), filed as Exhibit 10.42 of the Company’s 2010 Form 10-K.
Index
EXHIBIT INDEX
Exhibit No.
Document Description
Previous
Registration
No.
Filing’s
Exhibit
No.
10.38 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, 2012 (Series OO), filed as Exhibit 10.43 of the Company’s 2012 Second Quarter Form 10-Q.
10.39 Copy of Loan Agreement by and Between New Jersey Environmental Infrastructure Trust and Middlesex Water Company dated as of May 1, 2012 (Series PP), filed as Exhibit 10.44 of the Company’s 2012 Second Quarter Form 10-Q.
10.40 Copy of Loan Agreement By and Between the New Jersey Economic Development Authority and Middlesex Water Company dated as of November 1, 2012 (Series QQ, RR & SS), filed as Exhibit 10.41 of the Company’s 2012 Form 10-K.
10.41 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), filed as Exhibit 10.42 of the Company’s 2013 Second Quarter Form 10-Q.
10.42 Copy of Loan Agreement by and Between New Jersey Environmental Infrastructure Trust and Middlesex Water Company dated as of May 1, 2013 (Series UU), filed as Exhibit 10.43 of the Company’s 2013 Second Quarter Form 10-Q.
10.43 Copy of Loan Agreement by and Between New Jersey Environmental Infrastructure Trust and Middlesex Water Company dated as of May 1, 2014 (Series VV), filed as Exhibit 10.43 of the Company’s 2014 Second Quarter Form 10-Q.
10.42 Copy of Loan Agreement by and Between New Jersey Environmental Infrastructure Trust and Middlesex Water Company dated as of May 1, 2014 (Series WW) , filed as Exhibit 10.43 of the Company’s 2014 Second Quarter Form 10-Q.
*21 Middlesex Water Company Subsidiaries.
*23.1 Consent of Independent Registered Public Accounting Firm, Baker Tilly Virchow Krause, LLP.
*31 Section 302 Certification by Dennis W. Doll pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
*31.1 Section 302 Certification by A. Bruce O’Connor pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
*32 Section 906 Certification by Dennis W. Doll pursuant to 18 U.S.C.§1350.
*32.1 Section 906 Certification by A. Bruce O’Connor pursuant to 18 U.S.C.§1350.
Index
EXHIBIT INDEX
Exhibit No.
Document Description
Previous
Registration
No.
Filing’s
Exhibit
No.
101.INS XBRL Instance Document
101.LAB XBRL Labels Linkbase Document
101.PRE XBRL Presentation Linkbase Document
101.DEF XBRL Definition Linkbase Document
101.SCH XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document