UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2016

 

OR

 

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

 

For the transition period from _________________ to______________________

 

Commission File Number     0-422

 

MIDDLESEX WATER COMPANY

(Exact name of registrant as specified in its charter)

New Jersey

(State of incorporation)

22-1114430

(IRS employer identification no.)

 

1500 Ronson Road, Iselin, New Jersey 08830

(Address of principal executive offices, including zip code)

(732) 634-1500

(Registrant's telephone number, including area code)

 

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

Yes þ      No ¨

 

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

Yes þ      No ¨

 

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

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

 

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

Yes ¨      No þ

The number of shares outstanding of each of the registrant's classes of common stock, as of April 30, 2016: Common Stock, No Par Value: 16,241,484 shares outstanding.

 

 

 

INDEX

 

 

PART I. FINANCIAL INFORMATION PAGE
     
Item 1. Financial Statements (Unaudited):  
     
  Condensed Consolidated Statements of Income 1
     
  Condensed Consolidated Balance Sheets 2
     
  Condensed Consolidated Statements of Cash Flows 3
     
  Condensed Consolidated Statements of Capital Stock and Long-Term Debt 4
     
  Notes to Unaudited Condensed Consolidated Financial Statements 5
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
     
Item 3. Quantitative and Qualitative Disclosures of Market Risk 19
     
Item 4. Controls and Procedures 19
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 20
     
Item 1A. Risk Factors 20
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
     
Item 3. Defaults upon Senior Securities 20
     
Item 4. Mine Safety Disclosures 20
     
Item 5. Other Information 20
     
Item 6. Exhibits 20
     
SIGNATURES 21

 

 

Index 

 MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share amounts)

 

   Three Months Ended March 31,
   2016  2015
       
Operating Revenues  $30,579   $28,780 
           
Operating Expenses:          
Operations and Maintenance   15,828    16,087 
Depreciation   3,137    2,947 
Other Taxes   3,312    3,061 
           
Total Operating Expenses   22,277    22,095 
           
Operating Income   8,302    6,685 
           
Other Income (Expense):          
Allowance for Funds Used During Construction   61    82 
Other Income   48    39 
Other Expense   (18)   (66)
           
Total Other Income, net   91    55 
           
Interest Charges   978    1,058 
           
Income before Income Taxes   7,415    5,682 
           
Income Taxes   2,625    2,046 
           
Net Income   4,790    3,636 
           
Preferred Stock Dividend Requirements   36    36 
           
Earnings Applicable to Common Stock  $4,754   $3,600 
           
Earnings per share of Common Stock:          
Basic  $0.29   $0.22 
Diluted  $0.29   $0.22 
           
Average Number of Common Shares Outstanding:          
Basic   16,233    16,132 
Diluted   16,389    16,288 
           
Cash Dividends Paid per Common Share  $0.1988   $0.1925 

 

See Notes to Condensed Consolidated Financial Statements    

1 

Index 

 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

 

      March  31,  December 31,
ASSETS     2016  2015
UTILITY PLANT:  Water Production  $143,353   $142,794 
   Transmission and Distribution   401,011    398,363 
   General   61,617    61,322 
   Construction Work in Progress   9,528    5,734 
   TOTAL   615,509    608,213 
   Less Accumulated Depreciation   129,041    126,343 
   UTILITY PLANT - NET   486,468    481,870 
              
CURRENT ASSETS:  Cash and Cash Equivalents   3,646    3,469 
   Accounts Receivable, net   9,530    10,060 
   Unbilled Revenues   6,539    6,246 
   Materials and Supplies (at average cost)   2,895    2,600 
   Prepayments   1,992    2,035 
   TOTAL CURRENT ASSETS   24,602    24,410 
              
DEFERRED CHARGES  Preliminary Survey and Investigation Charges   2,278    2,199 
AND OTHER ASSETS:  Regulatory Assets   58,271    58,552 
   Operations Contracts, Developer and Other Receivables   2,902    2,921 
   Restricted Cash   439    439 
   Non-utility Assets - Net   9,254    9,199 
   Federal Income Tax Receivable   1,408    1,408 
   Other   341    385 
   TOTAL DEFERRED CHARGES AND OTHER ASSETS   74,893    75,103 
   TOTAL ASSETS  $585,963   $581,383 
              
CAPITALIZATION AND LIABILITIES          
CAPITALIZATION:  Common Stock, No Par Value  $151,337   $150,763 
   Retained Earnings   57,459    55,931 
   TOTAL COMMON EQUITY   208,796    206,694 
   Preferred Stock   2,436    2,436 
   Long-term Debt   131,445    132,908 
   TOTAL CAPITALIZATION   342,677    342,038 
              
CURRENT  Current Portion of Long-term Debt   5,691    5,739 
LIABILITIES:  Notes Payable   2,000    3,000 
   Accounts Payable   6,500    6,525 
   Accrued Taxes   12,877    9,126 
   Accrued Interest   418    1,104 
   Unearned Revenues and Advanced Service Fees   890    880 
   Other   2,159    1,945 
   TOTAL CURRENT LIABILITIES   30,535    28,319 
              
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)          
              
DEFERRED CREDITS  Customer Advances for Construction   20,174    20,461 
AND OTHER LIABILITIES:  Accumulated Deferred Investment Tax Credits   812    832 
   Accumulated Deferred Income Taxes   68,950    67,702 
   Employee Benefit Plans   36,119    36,515 
   Regulatory Liability - Cost of Utility Plant Removal   11,034    10,876 
   Other   2,006    1,597 
   TOTAL DEFERRED CREDITS AND OTHER LIABILITIES   139,095    137,983 
              
CONTRIBUTIONS IN AID OF CONSTRUCTION   73,656    73,043 
   TOTAL CAPITALIZATION AND LIABILITIES  $585,963   $581,383 

 

See Notes to Condensed Consolidated Financial Statements.  

2 

Index 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

       

   Three Months Ended March 31,
   2016  2015
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Income  $4,790   $3,636 
Adjustments to Reconcile Net Income to          
Net Cash Provided by Operating Activities:          
Depreciation and Amortization   3,356    3,256 
Provision for Deferred Income Taxes and Investment Tax Credits   1,315    581 
Equity Portion of Allowance for Funds Used During Construction (AFUDC)   (40)   (50)
Cash Surrender Value of Life Insurance   —    (48)
Stock Compensation Expense   141    116 
Changes in Assets and Liabilities:          
Accounts Receivable   530    (618)
Unbilled Revenues   (293)   (250)
Materials & Supplies   (295)   37 
Prepayments   43    446 
Accounts Payable   (25)   600 
Accrued Taxes   3,751    3,593 
Accrued Interest   (686)   (680)
Employee Benefit Plans   19    1,000 
Unearned Revenue & Advanced Service Fees   10    12 
Other Assets and Liabilities   (281)   (200)
           
NET CASH PROVIDED BY OPERATING ACTIVITIES   12,335    11,431 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Utility Plant Expenditures, Including AFUDC of $21 in 2015, $32 in 2015   (6,672)   (4,885)
Restricted Cash   —    977 
           
NET CASH USED IN INVESTING ACTIVITIES   (6,672)   (3,908)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Redemption of Long-term Debt   (1,092)   (1,046)
Proceeds from Issuance of Long-term Debt   —    3,000 
Net Short-term Bank Borrowings   (1,000)   (4,000)
Proceeds from Issuance of Common Stock   433    372 
Payment of Common Dividends   (3,226)   (3,105)
Payment of Preferred Dividends   (36)   (36)
Construction Advances and Contributions-Net   (565)   (335)
           
NET CASH USED IN  FINANCING ACTIVITIES   (5,486)   (5,150)
NET CHANGES IN CASH AND CASH EQUIVALENTS   177    2,373 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   3,469    2,673 
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $3,646   $5,046 
           
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:          
Utility Plant received as Construction Advances and Contributions  $891   $766 
Long term Debt Deobligation  $419   $— 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:          
   Cash Paid During the Year for:          
Interest  $1,774   $1,847 
Interest Capitalized  $21   $32 
Income Taxes  $1   $— 

 

See Notes to Condensed Consolidated Financial Statements.

3 

Index 

MIDDLESEX WATER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK

AND LONG-TERM DEBT

(Unaudited)

(In thousands)

 

   March 31,  December 31,
   2016  2015
Common Stock, No Par Value          
Shares Authorized - 40,000          
Shares Outstanding -  2016 - 16,240  $151,337   $150,763 
  2015 - 16,225          
           
Retained Earnings   57,459    55,931 
TOTAL COMMON EQUITY  $208,796   $206,694 
           
Cumulative Preferred Stock, No Par Value:          
Shares Authorized - 126          
Shares Outstanding - 24          
   Convertible:          
Shares Outstanding, $7.00 Series - 10   1,007    1,007 
Shares Outstanding, $8.00 Series - 3   349    349 
   Nonredeemable:          
Shares Outstanding, $7.00 Series -   1   80    80 
Shares Outstanding, $4.75 Series - 10   1,000    1,000 
TOTAL PREFERRED STOCK  $2,436   $2,436 
           
Long-term Debt:          
   8.05%, Amortizing Secured Note, due December 20, 2021  $1,578   $1,629 
   6.25%, Amortizing Secured Note, due May 19, 2028   5,110    5,215 
   6.44%, Amortizing Secured Note, due August 25, 2030   4,037    4,107 
   6.46%, Amortizing Secured Note, due September 19, 2031   4,317    4,387 
   4.22%, State Revolving Trust Note, due December 31, 2022   376    376 
   3.60%, State Revolving Trust Note, due May 1, 2025   2,267    2,267 
   3.30% State Revolving Trust Note, due March 1, 2026   450    469 
   3.49%, State Revolving Trust Note, due January 25, 2027   483    501 
   4.03%, State Revolving Trust Note, due December 1, 2026   651    651 
   4.00% to 5.00%, State Revolving Trust Bond, due August 1, 2021   247    254 
   0.00%, State Revolving Fund Bond, due August 1, 2021   198    203 
   3.64%, State Revolving Trust Note, due July 1, 2028   294    294 
   3.64%, State Revolving Trust Note, due January 1, 2028   97    97 
   3.45%, State Revolving Trust Note, due August 1, 2031   1,040    1,066 
   6.59%, Amortizing Secured Note, due April 20, 2029   4,563    4,651 
   7.05%, Amortizing Secured Note, due January 20, 2030   3,458    3,521 
   5.69%, Amortizing Secured Note, due January 20, 2030   7,094    7,222 
   4.45%, Amortizing Secured Note, due April 20, 2040   14,597    14,707 
   3.75%, State Revolving Trust Note, due July 1, 2031   2,303    2,303 
   3.75%, State Revolving Trust Note, due November 30, 2030   1,216    1,216 
   First Mortgage Bonds:          
 0.00%, Series X, due September 1, 2018   158    162 
 4.25% to 4.63%, Series Y, due September 1, 2018   179    185 
 0.00%, Series Z, due September 1, 2019   438    446 
 5.25% to 5.75%, Series AA, due September 1, 2019   565    565 
 0.00%, Series BB, due September 1, 2021   708    723 
 4.00% to 5.00%, Series CC, due September 1, 2021   875    895 
 0.00%, Series EE, due August 1, 2023   3,055    3,132 
 3.00% to 5.50%, Series FF, due August 1, 2024   3,690    3,690 
 0.00%, Series GG, due August 1, 2026   976    993 
 4.00% to 5.00%, Series HH, due August 1, 2026   1,020    1,300 
 0.00%, Series II, due August 1, 2024   771    789 
 3.40% to 5.00%, Series JJ, due August 1, 2027   904    1,010 
 0.00%, Series KK, due August 1, 2028   1,146    1,167 
 5.00% to 5.50%, Series LL, due August 1, 2028   1,365    1,365 
 0.00%, Series MM, due August 1, 2030   1,404    1,437 
 3.00% to 4.375%, Series NN, due August 1, 2030   1,675    1,675 
 0.00%, Series OO, due August 1, 2031   2,358    2,408 
 2.00% to 5.00%, Series PP, due August 1, 2031   815    815 
 5.00%, Series QQ, due October 1, 2023   9,915    9,915 
 3.80%, Series RR, due October 1, 2038   22,500    22,500 
 4.25%, Series SS, due October 1, 2047   23,000    23,000 
 0.00%, Series TT, due August 1, 2032   2,509    2,559 
 3.00% to 3.25%, Series UU, due August 1, 2032   935    935 
 0.00%, Series VV, due August 1, 2033   2,529    2,577 
 3.00% to 5.00%, Series WW, due August 1, 2033   900    900 
SUBTOTAL LONG-TERM DEBT   138,766    140,279 
Add: Premium on Issuance of Long-term Debt   1,654    1,707 
Less: Unamortized Debt Expense   (3,284)   (3,339)
Less: Current Portion of Long-term Debt   (5,691)   (5,739)
TOTAL LONG-TERM DEBT  $131,445   $132,908 

 

See Notes to Condensed Consolidated Financial Statements.    

4 

Index 

 

MIDDLESEX WATER COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Basis of Presentation and Recent Developments

 

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

 

The consolidated notes within the 2015 Annual Report on Form 10-K (the 2015 Form 10-K) are applicable to these financial statements and, in the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (including normal recurring accruals) to present fairly the financial position as of March 31, 2016 and the results of operations and cash flows for the three month periods ended March 31, 2016 and 2015. Information included in the Condensed Consolidated Balance Sheet as of December 31, 2015, has been derived from the Company’s audited financial statements for the year ended December 31, 2015 included in the 2015 Form 10-K.

 

Recent Accounting Guidance

 

Consolidation - In February 2015, the Financial Accounting Standards Board (FASB) issued guidance that amends the consolidation analysis for variable interest entities (“VIEs”) as well as voting interest entities. The amendments under the new guidance modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities and eliminate the presumption that a general partner should consolidate a limited partnership. This guidance was effective January 1, 2016. The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

Debt Issuance Costs - In April 2015, the FASB issued an update to authoritative guidance related to the presentation of debt issuance costs on the balance sheet, requiring companies to present debt issuance costs as a direct deduction from the carrying value of debt. The guidance was effective January 1, 2016. As a result of adopting this guidance, the December 31, 2015 balance sheet was revised, which resulted in decreases of $3.3 million to deferred charges and other assets and long-term debt, respectively. Unamortized debt expense of $3.3 million was included in long-term debt as of March 31, 2016. The adoption of this guidance had no impact on the Company’s statements of income or cash flows.

 

Deferred Income Taxes – In November 2015, the FASB issued guidance on the classification of deferred tax assets and deferred tax liabilities, requiring entities to present them as noncurrent on the balance sheet. This guidance was effective January 1, 2016 and did not have a material impact on the Company’s balance sheet.

 

Revenue Recognition - In May 2014, the FASB issued an update to authoritative guidance related to revenue from contracts with customers. The update replaces most of the existing guidance with a single set of principles for recognizing revenue from contracts with customers. The FASB has deferred the effective date of these new revenue recognition standards by one year to January 1, 2018. The Company is currently analyzing the impact this standard will have on our financial statements.

 

Inventory - In July 2015, the FASB issued guidance on simplifying the measurement of inventory. The new guidance replaces the current lower of cost or market test with a lower of cost or net realizable value test when cost is determined on a first-in, first-out or average cost basis. The guidance is effective January 1, 2017 with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

 

5 

Index 

Recognition and Measurement of Financial Assets and Financial Liabilities - In January 2016, the FASB issued guidance which (i) requires all investments in equity securities, including other ownership interests such as partnerships, unincorporated joint ventures and limited liability companies, to be carried at fair value through net income, (ii) requires an incremental recognition and disclosure requirement related to the presentation of fair value changes of financial liabilities for which the fair value option has been elected, (iii) amends several disclosure requirements, including the methods and significant assumptions used to estimate fair value or a description of the changes in the methods and assumptions used to estimate fair value, and (iv) requires disclosure of the fair value of financial assets and liabilities measured at amortized cost at the amount that would be received to sell the asset or paid to transfer the liability. The guidance is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. The guidance is required to be applied retrospectively with a cumulative effect adjustment to retained earnings for initial application of the guidance at the date of adoption (modified retrospective method). The Company is currently analyzing the impact this standard will have on our financial statements.

 

Accounting for Share-Based Payments - In March 2016, the FASB issued guidance which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective January 1, 2017. The Company is currently analyzing the impact this standard will have on our financial statements.

 

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

 

Note 2 – Rate and Regulatory Matters

 

Middlesex-In April 2016, Middlesex filed a petition with the New Jersey Board of Public Utilities (the NJBPU) seeking approval to set a tariff rate under a purchased water adjustment clause to recover additional costs of less than $0.1 million for the purchase of treated water from a non-affiliated regulated water utility. We cannot predict whether the NJBPU will ultimately approve, deny or reduce the amount of the request.

 

Tidewater - Effective January 1, 2016, Tidewater increased its Delaware Public Service Commission-approved Distribution System Improvement Charge (DSIC) rate, which is expected to generate $0.2 million of annual revenues. A DSIC is a rate-mechanism that allows water utilities to recover investments in, and generate a return on, qualifying capital improvements to their water distribution system made between base rate proceedings.

 

Pinelands - In April 2016, the NJBPU approved $0.2 million and $0.1 million increases, respectively, in Pinelands Water and Pinelands Wastewater’s annual base water and wastewater rates. In October 2015, the companies had filed petitions with the NJBPU seeking permission to increase base rates by approximately $0.5 million per year. The rate filings were necessitated by capital infrastructure investments the companies have made, or have committed to make, increased operations and maintenance costs and lower non-fixed fee revenues. The Pinelands Water base water rate increase will be phased-in over two years.

 

Twin Lakes - In November 2015, Twin Lakes filed a petition with the Pennsylvania Public Utilities Commission (the PAPUC) seeking permission to increase its base water rates by approximately $0.2 million per year. This request was necessitated by capital infrastructure investments Twin Lakes has made, or committed to make, and increased operations and maintenance costs. In March 2016, Twin Lakes, along with the regulatory agencies intervening in the rate matter, submitted a joint petition of settlement with the administrative law judge (ALJ), which recommends a $0.1 million rate increase to be phased in over two years. We cannot predict whether the ALJ or, ultimately, the PAPUC will approve, deny, or change the amount of the settlement. A final decision is expected during the second quarter of 2016.

 

6 

Index 

Note 3 – Capitalization

 

Common Stock

During the three months ended March 31, 2016 and 2015, there were 15,488 common shares (approximately $0.4 million) and 16,172 common shares (approximately $0.4 million), respectively, issued under the Middlesex Water Company Investment Plan.

 

Long-term Debt

In February 2016, Tidewater closed on a $1.2 million loan with the Delaware State Revolving Fund (SRF) program which allows, but does not obligate, Tidewater to draw against a General Obligation Note to fund the replacement of the water distribution system in a manufactured home community. The interest rate on all draws is 2.0% with a final repayment maturity date of February 1, 2036. Tidewater expects to draw down the loan proceeds during the second quarter of 2016.

 

In March 2016, the NJBPU approved Middlesex’s request to borrow up to $16.0 million through the New Jersey Environmental Infrastructure Trust (NJEIT) under the New Jersey SRF loan program. Middlesex expects to close on this borrowing in November 2016.  Proceeds will be used for the Middlesex 2016 RENEW Program, which is our ongoing initiative to eliminate all unlined mains in the Middlesex system.

 

In 2016, the NJEIT de-obligated principal payments of $0.4 million on several series of SRF loans.

 

Fair Value of Financial Instruments

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

 

   March 31, 2016  December 31, 2015
   Carrying  Fair  Carrying  Fair
   Amount  Value  Amount  Value
First Mortgage Bonds  $84,388   $87,626   $85,143   $87,972 
SRF Bonds  $446   $448   $457   $459 

 

For other long-term debt for which there was no quoted market price and there is not an active trading market, it was not practicable to estimate their fair value (for details, including carrying value, interest rate and due date on these series of long-term debt, please refer to those series noted as “Amortizing Secured Note” and “State Revolving Trust Note” on the Condensed Consolidated Statements of Capital Stock and Long-Term Debt). The carrying amount of these instruments was $53.9 million and $54.7 million at March 31, 2016 and December 31, 2015, respectively. Customer advances for construction have carrying amounts of $20.2 million and $20.5 million at March 31, 2016 and December 31, 2015, 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.

 

7 

Index 

 

Note 4 – Earnings Per Share

 

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

 

   (In Thousands Except per Share Amounts)
   Three Months Ended March 31,
   2016  2015
Basic:    Income  Shares  Income  Shares
Net Income  $4,790    16,233   $3,636    16,132 
Preferred Dividend   (36)        (36)     
Earnings Applicable to Common Stock  $4,754    16,233   $3,600    16,132 
                     
Basic EPS  $0.29        $0.22      
                     
Diluted:                    
Earnings Applicable to Common Stock  $4,754    16,233   $3,600    16,132 
$7.00 Series Preferred Dividend   17    115    17    115 
$8.00 Series Preferred Dividend   6    41    6    41 
Adjusted Earnings Applicable to  Common Stock  $4,777    16,389   $3,623    16,288 
                     
Diluted EPS  $0.29        $0.22      

 

Note 5 – Business Segment Data

 

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

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   (In Thousands)
   Three Months Ended
   March 31,
Operations by Segments:  2016  2015
Revenues:          
   Regulated  $26,949   $24,905 
   Non – Regulated   3,734    3,992 
Inter-segment Elimination   (104)   (117)
Consolidated Revenues  $30,579   $28,780 
           
Operating Income:          
   Regulated  $7,733   $6,165 
   Non – Regulated   569    520 
Consolidated Operating Income  $8,302   $6,685 
           
Net Income:          
   Regulated  $4,492   $3,377 
   Non – Regulated   298    259 
Consolidated Net Income  $4,790   $3,636 
           
Capital Expenditures:          
  Regulated  $6,660   $4,885 
   Non – Regulated   12    — 
Total Capital Expenditures  $6,672   $4,885 

 

   As of  As of
    March 31,  December 31,
    2016  2015
Assets:          
   Regulated  $582,408   $581,321 
   Non – Regulated   7,754    6,436 
Inter-segment Elimination   (4,199)   (6,374)
Consolidated Assets  $585,963   $581,383 

 

Note 6 – Short-term Borrowings

 

As of March 31, 2016, the Company has established lines of credit aggregating $60.0 million. At March 31, 2016, the outstanding borrowings under these credit lines were $2.0 million at a weighted average interest rate of 1.41%.

 

The weighted average daily amounts of borrowings outstanding under the Company’s credit lines and the weighted average interest rates on those amounts were $3.0 million and $17.9 million at 1.41% and 1.17% for the three months ended March 31, 2016 and 2015, respectively.

 

The maturity dates for the $2.0 million outstanding as of March 31, 2016 are all in April 2016 and are extendable at the discretion of the Company.

 

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

 

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Note 7 – Commitments and Contingent Liabilities

 

Water Supply

Middlesex has an agreement with the New Jersey Water Supply Authority (NJWSA) for the purchase of untreated water through November 30, 2023, which provides for an average purchase of 27.0 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, 2021, 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 15.0 million gallons of treated water annually.

 

Purchased water costs are shown below:

 

   (In Thousands)
   Three Months Ended
   March 31,
   2016  2015
       
Treated  $801   $730 
Untreated   666    642 
Total Costs  $1,467   $1,372 

 

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 operate a leachate pretreatment facility, owned by Monmouth County, 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. 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 if necessary, 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 remaining operational commitment of AWM. As of March 31, 2016 and December 31, 2015, the liability recognized in Other Non-Current Liabilities on the balance sheet for the guaranty is approximately $0.2 million.

 

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Construction

The Company has budgeted approximately $47.3 million for its construction program in 2016. The actual timing and amount of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain projects.

 

Litigation

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

 

Change in Control Agreements

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

 

Note 8 – Employee Benefit Plans

 

Pension Benefits

The Company’s Pension Plan covers all active employees hired prior to April 1, 2007. Employees hired after March 31, 2007 are not eligible to participate in this plan, but do participate in a defined contribution plan that provides an annual contribution at the discretion of the Company, based upon a percentage of the participants’ compensation. In order to be eligible for contribution, the eligible employee must be employed by the Company on December 31st of the year to which the contribution relates. For the three months ended March 31, 2016, the Company made Pension Plan cash contributions of $0.5 million. For the three months ended March 31, 2015, the Company did not make any Pension Plan cash contributions. The Company expects to make Pension Plan cash contributions of approximately $2.8 million over the remainder of the current year. The Company also maintains an unfunded supplemental retirement benefit plan for certain active and retired Company officers and currently pays $0.3 million in annual benefits to the retired participants.

 

Other Postretirement Benefits

The Company’s retirement plan other than pensions (Other Benefits Plan) covers substantially all of its current retired employees. Employees hired after March 31, 2007 are not eligible to participate in this plan. Coverage includes healthcare and life insurance. For the three months ended March 31, 2016, the Company made Other Benefits Plan cash contributions of $0.2 million. For the three months ended March 31, 2015, the Company did not make any Other Benefits Plan cash contributions. The Company expects to make Other Benefits Plan cash contributions of approximately $1.3 million over the remainder of the current year.

 

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

 

   (In Thousands)
   Pension Benefits  Other Benefits
   Three Months Ended March 31,
   2016  2015  2016  2015
             
Service Cost  $577   $639   $275   $343 
Interest Cost   761    724    488    480 
Expected Return on Assets   (1,004)   (980)   (558)   (527)
Amortization of Unrecognized Losses   357    411    443    565 
Amortization of Unrecognized Prior Service Cost (Credit)   —    —    (432)   (432)
Net Periodic Benefit Cost  $691   $794   $216   $429 

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Note 9 – Income Taxes

 

As part of its 2014 Federal income tax return, the Company adopted the final Internal Revenue Service (IRS) regulations pertaining to the tax deductibility of costs that qualify as repairs on tangible property. The adoption resulted in a net reduction of $17.6 million in taxes previously remitted to the IRS, for which the Company has already sought and received refunds pertaining to tax years 2012 through 2014 in accordance with IRS regulations. Subsequently, the Company’s 2014 federal income tax return was selected for examination by the IRS. It is unknown at this time whether the results of this examination will result in any changes to the filed Federal income tax return.

 

 

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

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of Middlesex Water Company (Middlesex or the Company) included elsewhere herein and with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Forward-Looking Statements

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

 

-statements as to expected financial condition, performance, prospects and earnings of the Company;
-statements regarding strategic plans for growth;
-statements regarding the amount and timing of rate increases and other regulatory matters, including the recovery of certain costs recorded as regulatory assets;
-statements as to the Company’s expected liquidity needs during the upcoming fiscal year and beyond and statements as to the sources and availability of funds to meet its liquidity needs;
-statements as to expected customer rates, consumption volumes, service fees, revenues, margins, expenses and operating results;
-statements as to financial projections;
-statements as to the expected amount of cash contributions to fund the Company’s retirement benefit plans, anticipated discount rates and rates of return on retirement benefit plan assets;
-statements as to the ability of the Company to pay dividends;
-statements as to the Company’s compliance with environmental laws and regulations and estimations of the materiality of any related costs;
-statements as to the safety and reliability of the Company’s equipment, facilities and operations;
-statements as to the Company’s plans to renew municipal franchises and consents in the territories it serves;
-statements as to trends; and
-statements regarding the availability and quality of our water supply.

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

 

-the effects of general economic conditions;
-increases in competition in the markets served by the Company;
-the ability of the Company to control operating expenses and to achieve efficiencies in its operations;
-the availability of adequate supplies of water;
-actions taken by government regulators, including decisions on rate increase requests;
-new or additional water quality standards;
-weather variations and other natural phenomena;
-acts of war or terrorism;
-significant changes in the pace of housing development in Delaware;
-the availability and cost of capital resources; and
-other factors discussed elsewhere in this quarterly report.

 

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

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For an additional discussion of factors that may affect the Company’s business and results of operations, see Item 1A. - Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

 

Overview

 

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

 

Our New Jersey water utility system (the Middlesex System) provides water services to approximately 61,000 retail customers, primarily in central New Jersey. The Middlesex System also provides water service under contract to municipalities in central New Jersey with a total population of approximately 219,000. Our Bayview subsidiary provides water services in Downe Township, New Jersey. Our other New Jersey subsidiaries, Pinelands Water Company (Pinelands Water) and Pinelands Wastewater Company (Pinelands Wastewater) (collectively, Pinelands), provide water and wastewater services to residents in Southampton Township, New Jersey.

 

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

 

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

 

USA operates the Borough of Avalon, New Jersey’s (Avalon) water utility, sewer utility and storm water system. 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, provide water services to approximately 42,000 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. subsidiary provides wastewater services to approximately 3,400 residential retail customers.

 

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

 

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

 

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

 

Recent Developments

 

Pinelands Water and Pinelands Wastewater Base Water and Wastewater Rate Increases - In April 2016, the New Jersey Board of Public Utilities (the NJBPU) approved $0.2 million and $0.1 million increases, respectively, in Pinelands Water and Pinelands Wastewater’s annual base water and wastewater rates. In October 2015, the companies had filed petitions with the NJBPU seeking permission to increase base rates by approximately $0.5 million. The rate filings were necessitated by capital infrastructure investments the companies have made, or have committed to make, increased operations and maintenance costs and lower non-fixed fee revenues. The Pinelands Water base water rate increase will be phased-in over two years.

 

Twin Lakes Base Water Rate Increase Request - In November 2015, Twin Lakes filed a Petition with the Pennsylvania Public Utilities Commission (the PAPUC) seeking permission to increase its base water rates by approximately $0.2 million per year. This request was necessitated by capital infrastructure investments Twin Lakes has made, or committed to make, and increased operations and maintenance costs. In March 2016, Twin Lakes, along with the regulatory agencies intervening in the rate matter, submitted a joint petition of settlement with the administrative law judge (ALJ), which recommends a $0.1 million rate increase to be phased in over two years. We cannot predict whether the ALJ, or ultimately, the PAPUC will approve, deny, or change the amount of the settlement. A final decision is expected during the second quarter of 2016.

 

Tidewater Distribution System Improvement Charge (DSIC) - Effective January 1, 2016, Tidewater increased its Delaware Public Service Commission-approved DSIC rate, which is expected to generate $0.2 million of annual revenues. A DSIC is a rate-mechanism that allows water utilities to recover investments in, and generate a return on, qualifying capital improvements to their water distribution system made between base rate proceedings.

 

Outlook

 

Revenues in 2016 are expected to be favorably impacted by the following:

·The full year effect of Middlesex’s August 2015 $5.0 million rate increase;
·Rate increases for Pinelands Water and Pinelands Wastewater (see “Recent Developments” above regarding Pinelands Water and Pinelands Wastewater base water and wastewater rate increases);
·If approved, a rate increase for Twin Lakes (see “Recent Developments” above regarding Twin Lakes base rate increase request); and
·The implementation of the Tidewater DSIC effective since January 1, 2016 (see “Recent Developments” above regarding Tidewater’s DSIC).

 

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 higher discount rate will result in lower employee benefit plan expense in 2016. 

 

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Index 

 

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

 

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

 

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

 

·Operate municipal and industrial water and wastewater systems under contract;

 

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

 

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

 

Operating Results by Segment

 

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

 

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

 

Results of Operations – Three Months Ended March 31, 2016

 

   (In Thousands) 
   Three Months Ended March 31, 
   2016   2015 
   Regulated   Non-
Regulated		   Total   Regulated   Non-
Regulated		   Total 
Revenues  $26,935   $3,644   $30,579   $24,878   $3,902   $28,780 
Operations and maintenance expenses   12,883    2,945    15,828    12,830    3,257    16,087 
Depreciation expense   3,092    45    3,137    2,904    43    2,947 
Other taxes   3,227    85    3,312    2,979    82    3,061 
  Operating income   7,733    569    8,302    6,165    520    6,685 
                               
Other income, net   92    (1)   91    55    —    55 
Interest expense   978    —    978    1,058    —    1,058 
Income taxes   2,355    270    2,625    1,807    239    2,046 
  Net income  $4,492   $298   $4,790   $3,355   $281   $3,636 

 

Operating Revenues

 

Operating revenues for the three months ended March 31, 2016 increased $1.8 million from the same period in 2015. This increase was primarily related to the following factors:

 

·Middlesex System revenues increased $1.8 million, primarily due to the following:
oSales to General Metered Service customers increased by $1.5 million, primarily resulting from a NJBPU-approved rate increase implemented in August 2015;
oSales to Contract customers increased by $0.3 million primarily due to higher water demand;
·Tidewater System revenues increased $0.1 million due to additional customers ($0.2 million), partially offset by lower water demand ($0.1 million);

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Index 

 

·USA’s revenues decreased $0.3 million due to lower supplemental service revenues earned under our contract to operate the Avalon water utility, sewer utility and storm water system (see corresponding decrease in USA’s operation and maintenance expenses below); and
·All other revenues increased $0.2 million.

 

Operation and Maintenance Expense

 

Operation and maintenance expenses for the three months ended March 31, 2016 decreased $0.3 million from the same period in 2015, primarily related to the following factors:

 

·Employee benefit expenses decreased $0.2 million, primarily due to lower retirement plan costs resulting from a higher discount rate than in the prior year used in the calculation of our 2016 net periodic plan costs;
·Decreased cold weather main break activity, as compared to 2015, resulted in lower costs of $0.1 million in our Middlesex System;
·USA’s operation and maintenance costs decreased $0.2 million, primarily due to lower expenditures for billable supplemental services under USA’s contract to serve Avalon (see corresponding decrease in USA’s operating revenues above); and
·Higher labor costs of $0.2 million, primarily due to higher average labor rates and lower capitalized labor at Tidewater.

 

Depreciation

 

Depreciation expense for the three months ended March 31, 2016 increased $0.2 million from the same period in 2015 due to a higher level of utility plant in service.

 

Other Taxes

 

Other taxes for the three months ended March 31, 2016 increased $0.3 million from the same period in 2015, primarily due to higher revenue related taxes on increased revenues in our Middlesex system.

 

Other Income, net

 

Other Income, net for the three months ended March 31, 2016 remained consistent with the same period in 2015.

 

Interest Charges

 

Interest charges for the three months ended March 31, 2016 decreased $0.1 million from the same period in 2015, primarily due to lower average long-term and short-term debt outstanding.

 

Income Taxes

 

Income taxes for the three months ended March 31, 2016 increased $0.6 million from the same period in 2015, primarily due to increased pre-tax income in 2016 as compared to 2015.

 

Net Income and Earnings Per Share

 

Net income for the three months ended March 31, 2016 increased $1.2 million as compared with the same period in 2015. Basic and diluted earnings per share were $0.29 and $0.22 for the three months ended March 31, 2016 and 2015, respectively.

 

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Liquidity and Capital Resources

 

Operating Cash Flows

 

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

 

For the three months ended March 31, 2016, cash flows from operating activities increased $0.9 million to $12.3 million. The increase in cash flows from operating activities primarily resulted from higher earnings and increased customer payments offset by higher postretirement employee benefit plan funding. The $12.3 million of net cash flow from operations enabled us to fund all utility plant expenditures internally for the period.

 

Investing Cash Flows

 

For the three months ended March 31, 2016, cash flows used in investing activities increased $2.8 million to $6.7 million. The increase in cash flows used in investing activities resulted from increased utility plant expenditures and lower restricted cash inflows.

 

For further discussion on the Company’s future capital expenditures and expected funding sources, see “Capital Expenditures and Commitments” below.

 

Financing Cash Flows

 

For the three months ended March 31, 2016, cash flows used in financing activities increased $0.3 million to $5.5 million. The increase in cash flows used in financing activities resulted from lower net cash inflows from long-term debt, as the Company did not exercise any draws on existing long-term debt financing arrangements in the first quarter of 2016, partially offset by decreased short-term debt refunding.

 

Capital Expenditures and Commitments

 

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

 

The capital investment program for 2016 is currently estimated to be $47.3 million. Through March 31, 2016, we have expended $6.7 million and expect to incur approximately $40.6 million for capital projects for the remainder of 2016.

 

We currently project that we may expend approximately $112 million for capital projects in 2017 and 2018. The actual amount and timing of capital expenditures is dependent on project scheduling and refinement of engineering estimates for certain capital projects.

 

To fund our capital program for the remainder of 2016, we plan on utilizing:

·Internally generated funds;
·Proceeds from the sale of common stock through the Investment Plan;
·Proceeds from the 2016 New Jersey and Delaware State Revolving Fund (SRF) programs (up to $16.0 million and $1.2 million, respectively). The New Jersey SRF loan has an expected closing date in November 2016. Tidewater closed on its $1.2 million Delaware SRF loan in February 2016; and
·Short-term borrowings, if necessary, through $60.0 million of available lines of credit with several financial institutions. As of March 31, 2016, there remains $58.0 million to draw upon.

 

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

 

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Item 3. Quantitative and Qualitative Disclosures of Market Risk

 

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

 

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

 

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

 

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

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

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

 

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

 

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Index 

PART II.  OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

The information about risk factors does not differ materially from those set forth in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6.

Exhibits

 

10.32(a) Extension of the Expiration Date of the Line of Credit included in the Amended and Restated Loan Agreement between registrant, registrant’s subsidiaries and PNC Bank, N.A. (filed as Exhibit 10.32 of the Company’s 2015 First Quarter Form 10-Q)
   
31.1 Section 302 Certification by Dennis W. Doll pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.

 

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

 

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

 

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

 

101.INS XBRL Instance Document

 

101.SCH XBRL Schema Document

 

101.CAL XBRL Calculation Linkbase Document

 

101.LAB XBRL Labels Linkbase Document

 

101.PRE XBRL Presentation Linkbase Document

 

101.DEF XBRL Definition Linkbase Document

 

20 

Index 

 

SIGNATURES

 

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

 

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

 

 

Date: May 3, 2016

 

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