form10q-85809_msex.htm


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended June 30, 2007

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, NJ  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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨
Accelerated filer þ
Non-accelerated filer ¨

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 August 1, 2007: Common Stock, No Par Value: 13,203,379 shares outstanding.







 
INDEX


PAGE
     
 
     
 
1
     
 
2
     
 
3
     
 
4
     
 
5
     
11
     
17
     
17
     
 
     
18
     
18
     
18
     
18
     
18
     
19
     
19
     
 
19


 
 MIDDLESEX WATER COMPANY            
CONDENSED CONSOLIDATED STATEMENTS OF INCOME       
(Unaudited)
(In thousands except per share amounts)
        
                         
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Operating Revenues
  $
21,745
    $
21,037
    $
40,732
    $
39,267
 
                                 
Operating Expenses:
                               
Operations
   
10,143
     
10,012
     
20,335
     
19,658
 
Maintenance
   
1,037
     
794
     
2,015
     
1,533
 
Depreciation
   
1,875
     
1,713
     
3,720
     
3,381
 
Other Taxes
   
2,411
     
2,369
     
4,662
     
4,573
 
                                 
Total Operating Expenses
   
15,466
     
14,888
     
30,732
     
29,145
 
                                 
Operating Income
   
6,279
     
6,149
     
10,000
     
10,122
 
                                 
Other Income:
                               
Allowance for Funds Used During Construction
   
140
     
115
     
252
     
228
 
Other Income
   
282
     
41
     
508
     
99
 
Other Expense
    (8 )     (13 )     (12 )     (14 )
                                 
Total Other Income, net
   
414
     
143
     
748
     
313
 
                                 
Interest Charges
   
1,698
     
1,808
     
3,081
     
3,323
 
                                 
Income before Income Taxes
   
4,995
     
4,484
     
7,667
     
7,112
 
                                 
Income Taxes
   
1,682
     
1,517
     
2,583
     
2,332
 
                                 
Net Income
   
3,313
     
2,967
     
5,084
     
4,780
 
                                 
Preferred Stock Dividend Requirements
   
62
     
62
     
124
     
124
 
                                 
Earnings Applicable to Common Stock
  $
3,251
    $
2,905
    $
4,960
    $
4,656
 
                                 
Earnings per share of Common Stock:
                               
Basic
  $
0.25
    $
0.25
    $
0.38
    $
0.40
 
Diluted
  $
0.24
    $
0.25
    $
0.37
    $
0.40
 
                                 
Average Number of
                               
Common Shares Outstanding :
                               
Basic
   
13,191
     
11,611
     
13,184
     
11,602
 
Diluted
   
13,522
     
11,942
     
13,515
     
11,933
 
                                 
Cash Dividends Paid per Common Share
  $
0.1725
    $
0.1700
    $
0.3450
    $
0.3400
 
                                 
                                 
                                 
See Notes to Condensed Consolidated Financial Statements.
                         
                                 
1

 
MIDDLESEX WATER COMPANY 
CONDENSED CONSOLIDATED BALANCE SHEETS 
(Unaudited) 
(In thousands) 
       
June 30,
   
December 31,
 
ASSETS
 
 
2007
   
2006
 
UTILITY PLANT:
Water Production
  $
97,588
    $
95,324
 
 
 
 
Transmission and Distribution
   
250,753
     
243,959
 
 
 
 
General
   
24,627
     
25,153
 
 
 
 
Construction Work in Progress
   
8,216
     
6,131
 
 
 
 
TOTAL
   
381,184
     
370,567
 
 
 
 
Less Accumulated Depreciation
   
62,199
     
59,694
 
 
 
 
UTILITY PLANT - NET
   
318,985
     
310,873
 
     
 
               
CURRENT ASSETS:
Cash and Cash Equivalents
   
2,519
     
5,826
 
 
 
 
Accounts Receivable, net
   
10,470
     
8,538
 
 
 
 
Unbilled Revenues
   
5,559
     
4,013
 
 
 
 
Materials and Supplies (at average cost)
   
1,445
     
1,306
 
 
 
 
Prepayments
   
1,636
     
1,229
 
 
 
 
TOTAL CURRENT ASSETS
   
21,629
     
20,912
 
     
 
               
DEFERRED CHARGES
Unamortized Debt Expense
   
2,954
     
3,014
 
AND OTHER ASSETS:
Preliminary Survey and Investigation Charges
   
5,026
     
3,436
 
 
 
 
Regulatory Assets
   
20,387
     
18,342
 
 
 
 
Restricted Cash
   
6,227
     
6,850
 
 
 
 
Non-utility Assets - Net
   
6,656
     
6,255
 
 
 
 
Other
   
410
     
585
 
 
 
 
TOTAL DEFERRED CHARGES AND OTHER ASSETS
   
41,660
     
38,482
 
 
 
 
TOTAL ASSETS
  $
382,274
    $
370,267
 
                       
CAPITALIZATION AND LIABILITIES
               
CAPITALIZATION:
Common Stock, No Par Value
  $
104,953
    $
104,248
 
 
 
 
Retained Earnings
   
25,399
     
25,001
 
 
 
 
Accumulated Other Comprehensive Income, net of tax
   
80
     
94
 
 
 
 
TOTAL COMMON EQUITY
   
130,432
     
129,343
 
 
 
 
Preferred Stock
   
3,958
     
3,958
 
 
 
 
Long-term Debt
   
130,073
     
130,706
 
 
 
 
TOTAL CAPITALIZATION
   
264,463
     
264,007
 
     
 
               
CURRENT
Current Portion of Long-term Debt
   
2,556
     
2,501
 
LIABILITIES:
Notes Payable
   
800
     
 
 
 
 
Accounts Payable
   
7,502
     
5,491
 
 
 
 
Accrued Taxes
   
7,988
     
6,684
 
 
 
 
Accrued Interest
   
1,912
     
1,880
 
 
 
 
Unearned Revenues and Advanced Service Fees
   
707
     
601
 
 
 
 
Other
   
1,183
     
984
 
 
 
 
TOTAL CURRENT LIABILITIES
   
22,648
     
18,141
 
     
 
               
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
               
     
 
               
DEFERRED CREDITS
Customer Advances for Construction
   
20,501
     
19,246
 
AND OTHER LIABILITIES:
Accumulated Deferred Investment Tax Credits
   
1,774
     
1,813
 
 
 
 
Accumulated Deferred Income Taxes
   
18,053
     
15,779
 
 
 
 
Employee Benefit Plans
   
17,688
     
16,388
 
 
 
 
Regulatory Liability - Cost of Utility Plant Removal
   
6,501
     
6,200
 
 
 
 
Other
   
514
     
527
 
 
 
 
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES
   
65,031
     
59,953
 
     
 
               
CONTRIBUTIONS IN AID OF  CONSTRUCTION 
     
30,132
     
28,166
 
 
 
 
TOTAL CAPITALIZATION AND LIABILITIES
  $
382,274
    $
370,267
 
                       
See Notes to Condensed Consolidated Financial Statements.
               
                       

2

MIDDLESEX WATER COMPANY      
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Unaudited)      
(In thousands)      
             
   
Six Months Ended June 30,
 
   
2007
   
2006
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net Income
  $
5,084
    $
4,780
 
Adjustments to Reconcile Net Income to
               
Net Cash Provided by Operating Activities:
               
Depreciation and Amortization
   
4,029
     
3,762
 
Provision for Deferred Income Taxes and ITC
   
235
      (98 )
Equity Portion of AFUDC
    (121 )     (105 )
   Cash Surrender Value of Life Insurance 
     (205 )       (104
Gain on Sale of Real Estate
    (212 )    
-
 
Changes in Assets and Liabilities:
               
Accounts Receivable
    (1,555 )    
431
 
Unbilled Revenues
    (1,546 )     (1,196 )
Materials & Supplies
    (139 )     (195 )
Prepayments
    (407 )     (795 )
Other Assets
    (194 )     (295 )
Accounts Payable
   
2,011
      (1,056 )
Accrued Taxes
   
1,312
     
1,361
 
Accrued Interest
   
32
     
28
 
Employee Benefit Plans
   
1,300
     
920
 
Unearned Revenue & Advanced Service Fees
   
106
     
19
 
Other Liabilities
   
186
      (73 )
                 
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
9,916
     
7,384
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Utility Plant Expenditures, Including AFUDC of $131 in 2007 and $123 in 2006
    (8,774 )     (12,019 )
Restricted Cash
   
647
     
98
 
Proceeds from Real Estate Dispositions
   
273
     
-
 
Preliminary Survey & Investigation Charges
    (1,590 )     (754 )
                 
NET CASH USED IN INVESTING ACTIVITIES
    (9,444 )     (12,675 )
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Redemption of Long-term Debt
    (711 )     (555 )
Proceeds from Issuance of Long-term Debt
   
133
     
1
 
Net Short-term Bank Borrowings
   
800
     
8,600
 
Deferred Debt Issuance Expenses
    (30 )    
-
 
Common Stock Issuance Expense
    (15 )    
-
 
Restricted Cash
    (23 )     (11 )
Proceeds from Issuance of Common Stock
   
705
     
767
 
Payment of Common Dividends
    (4,547 )     (3,943 )
Payment of Preferred Dividends
    (124 )     (124 )
Construction Advances and Contributions-Net
   
33
      (126 )
                 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    (3,779 )    
4,609
 
NET CHANGES IN CASH AND CASH EQUIVALENTS
    (3,307 )     (682 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
5,826
     
2,984
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $
2,519
    $
2,302
 
                 
                 
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
               
Utility Plant received as Construction Advances and Contributions
  $
2,811
    $
2,095
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
               
   Cash Paid During the Year for:
               
Interest
  $
3,098
    $
3,319
 
Interest Capitalized
  $ (131 )   $ (123 )
Income Taxes
  $
1,518
    $
2,040
 
                 
See Notes to Condensed Consolidated Financial Statements.
               

3


MIDDLESEX WATER COMPANY       
CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL STOCK    
AND LONG-TERM DEBT       
(Unaudited)        
(In thousands)        
      
June 30,
   
December 31,
 
      
2007
   
2006
 
Common Stock, No Par Value    
         
 Shares Authorized -               40,000   
         
 Shares Outstanding - 2007 - 13,200    
$
104,953
    $
104,248
 
                                        2006 - 13,168    
             
                     
Retained Earnings   
 
25,399
     
25,001
 
Accumulated Other Comprehensive Income, net of tax 
 
80
     
94
 
       $
130,432
    $
129,343
 
                     
Cumulative Preference Stock, No Par Value:  
             
 Shares Authorized -           100   
             
 Shares Outstanding - None   
             
Cumulative Preferred Stock, No Par Value  
             
 Shares Authorized -       139   
             
 Shares Outstanding -          37   
             
Convertible:   
             
 Shares Outstanding, $7.00 Series - 14  
 
1,457
     
1,457
 
 Shares Outstanding, $8.00 Series - 12  
 
1,399
     
1,399
 
Nonredeemable:   
             
 Shares Outstanding, $7.00 Series - 1  
 
102
     
102
 
 Shares Outstanding, $4.75 Series - 10  
 
1,000
     
1,000
 
    TOTAL PREFERRED STOCK   $
3,958
    $
3,958
 
                     
Long-term Debt   
             
8.05%, Amortizing Secured Note, due December 20, 2021  
$
2,849
    $
2,896
 
6.25%, Amortizing Secured Note, due May 22, 2028  
 
8,785
     
8,995
 
6.44%, Amortizing Secured Note, due August 25, 2030  
 
6,487
     
6,627
 
6.46%, Amortizing Secured Note, due September 19, 2031  
 
6,766
     
6,907
 
4.22%, State Revolving Trust Note, due December 31, 2022 
 
707
     
739
 
3.30% to 3.60%, State Revolving Trust Note, due May 1, 2025 
 
3,168
     
3,100
 
3.49%, State Revolving Trust Note, due January 25, 2027  
 
603
     
598
 
4.03%, State Revolving Trust Note, due December 1, 2026  
 
974
     
914
 
4.00% to 5.00%, State Revolving Trust Bond, due September 1, 2021 
 
730
     
730
 
0.00%, State Revolving Fund Bond, due September 1, 2021  
 
567
     
577
 
First Mortgage Bonds:   
             
 5.20%, Series S, due October 1, 2022  
 
12,000
     
12,000
 
 5.25%, Series T, due October 1, 2023  
 
6,500
     
6,500
 
 6.40%, Series U, due February 1, 2009  
 
15,000
     
15,000
 
 5.25%, Series V, due February 1, 2029  
 
10,000
     
10,000
 
 5.35%, Series W, due February 1, 2038  
 
23,000
     
23,000
 
 0.00%, Series X, due September 1, 2018  
 
636
     
647
 
 4.25% to 4.63%, Series Y, due September 1, 2018  
 
820
     
820
 
 0.00%, Series Z, due September 1, 2019  
 
1,428
     
1,455
 
 5.25% to 5.75%, Series AA, due September 1, 2019  
 
1,890
     
1,890
 
 0.00%, Series BB, due September 1, 2021  
 
1,774
     
1,805
 
 4.00% to 5.00%, Series CC, due September 1, 2021  
 
2,090
     
2,090
 
 5.10%, Series DD, due January 1, 2032  
 
6,000
     
6,000
 
 0.00%, Series EE, due September 1, 2024  
 
7,420
     
7,482
 
 3.00% to 5.50%, Series FF, due September 1, 2024  
 
8,735
     
8,735
 
 0.00%, Series GG, due September 1, 2026  
 
1,750
     
1,750
 
 4.00% to 5.00%, Series HH, due September 1, 2026  
 
1,950
     
1,950
 
    SUBTOTAL LONG-TERM DEBT  
 
132,629
     
133,207
 
    Less: Current Portion of Long-term Debt 
  (2,556 )     (2,501 )
     TOTAL LONG-TERM DEBT 
$
130,073
    $
130,706
 
                           
See Notes to Condensed Consolidated Financial Statements.
               

4


MIDDLESEX WATER COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies

Organization – 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), and Utility Service Affiliates  (Perth Amboy) Inc. (USA-PA). 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 2006 Form 10-K are applicable to these financial statements and, in the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (including normal recurring accruals) to present fairly the financial position as of June 30, 2007, the results of operations for the three and six month periods ended June 30, 2007 and 2006, and cash flows for the six month periods ended June 30, 2007 and 2006. Information included in the Balance Sheet as of December 31, 2006, has been derived from the Company’s audited financial statements for the year ended December 31, 2006.

Certain reclassifications have been made to the prior year financial statements to conform with the current period presentation.

Recent Accounting Pronouncements–  In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48) “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”, to clarify certain aspects of accounting for uncertain tax positions, including recognition and measurement of those tax positions. This interpretation was effective for fiscal years beginning after December 15, 2006 (January 1, 2007 for the Company). The adoption of this interpretation had no impact on the Company’s financial position, results of operations, or cash flows.

In September 2006, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 06-5, “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” (“EITF 06-5”). EITF 06-5 provides clarification for determining the amounts that could be realized by policyholders in accounting for life insurance contracts.  EITF 06-5 is effective for fiscal years beginning after December 15, 2006 (January 1, 2007 for the Company).  Adoption of EITF 06-5 had no material impact on the Company’s consolidated financial statements.





Note 2 Rate Matters

Middlesex filed for an $8.9 million or 16.5% base rate increase with the New Jersey Board of Public Utilities (BPU) on April 18, 2007.  The requested increase is intended to recover increased costs of operations,

5


maintenance, labor and benefits, purchased power, purchased water and taxes, as well as capital investment of approximately $23.0 million since June 2005.  We cannot predict whether the BPU will ultimately approve, deny, or reduce the amount of our request.  We do not expect a decision on this matter until the first quarter of 2008.

In accordance with the tariff established for Southern Shores, an annual rate increase of 3% was implemented on January 1, 2007. The increase cannot exceed the lesser of the regional Consumer Price Index or 3%. The contracted rate schedule is set to expire on December 31, 2007. The Company is in the process of renegotiating the rate schedule.

Note 3 – Capitalization

Common Stock–During the six months ended June 30, 2007, there were 31,680, common shares (approximately $0.6 million) issued under the Company’s Dividend Reinvestment and Common Stock Purchase Plan (DRP). Middlesex received approval from the BPU in June 2007 to increase the number of shares authorized under the DRP from 1.7 million to 2.3 million shares.

In May 2007, the Company received shareholders approval to increase the number of authorized shares of common stock from 20 million shares to 40 million shares.

Long-term Debt– Middlesex received approval from the BPU to issue up to $4.0 million of first mortgage bonds through the New Jersey Environmental Infrastructure Trust under the New Jersey State Revolving Fund (SRF) program. The Company expects to complete the transaction in November 2007.  Proceeds from this financing will be used for the ongoing main cleaning and lining project in 2008.




Note 4 – Earnings Per Share

Basic earnings per share (EPS) are computed on the basis of the weighted average number of shares outstanding during the period presented.  Diluted EPS assumes the conversion of both the Convertible Preferred Stock $7.00 Series and the Convertible Preferred Stock $8.00 Series.
 
   
(In Thousands Except per Share Amounts)
Three Months Ended June 30,
 
Basic:
 
2007
   
Shares
   
2006
   
Shares
 
Net Income
  $
3,313
     
13,191
    $
2,967
     
11,611
 
Preferred Dividend
    (62 )  
 
      (62 )  
 
 
Earnings Applicable to Common Stock
  $
3,251
     
13,191
    $
2,905
     
11,611
 
                                 
Basic EPS
  $
0.25
            $
0.25
         
                                 
Diluted:
                               
Earnings Applicable to Common Stock
  $
3,251
     
13,191
    $
2,905
     
11,611
 
$7.00 Series Preferred Dividend
   
24
     
167
     
24
     
167
 
$8.00 Series Preferred Dividend
   
24
     
164
     
24
     
164
 
Adjusted Earnings Applicable to  Common Stock
  $
3,299
     
13,522
    $
2,953
     
11,942
 
                                 
Diluted EPS
  $
0.24
            $
0.25
         

6


 
   
Six Months Ended June 30,
 
Basic:
 
2007
   
Shares
   
2006
   
Shares
 
Net Income
  $
5,084
     
13,184
    $
4,780
     
11,602
 
Preferred Dividend
    (124 )  
 
      (124 )  
 
 
Earnings Applicable to Common Stock
  $
4,960
     
13,184
    $
4,656
     
11,602
 
                                 
Basic EPS
  $
0.38
            $
0.40
         
                                 
Diluted:
                               
Earnings Applicable to Common Stock
  $
4,960
     
13,184
    $
4,656
     
11,602
 
$7.00 Series Preferred Dividend
   
49
     
167
     
49
     
167
 
$8.00 Series Preferred Dividend
   
48
     
164
     
48
     
164
 
Adjusted Earnings Applicable to  Common Stock
  $
5,057
     
13,515
    $
4,753
     
11,933
 
                                 
Diluted EPS
  $
0.37
            $
0.40
         

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 and Delaware. 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 and Delaware with respect to utility services within these States. The other segment is primarily comprised of non-regulated contract services for the operation and maintenance of municipal and private water and wastewater systems in New Jersey and Delaware.  Inter-segment transactions relating to operational costs are treated as pass-through expenses. Finance charges on inter-segment loan activities are based on interest rates that are below what would normally be charged by a third party lender.
 
   
(In Thousands)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
Operations by Segments:
 
2007
   
2006
   
2007
   
2006
 
Revenues:
                       
   Regulated
  $
19,776
    $
18,663
    $
36,462
    $
34,663
 
   Non – Regulated
   
2,081
     
2,404
     
4,427
     
4,664
 
Inter-segment Elimination
    (112 )     (30 )     (157 )     (60 )
Consolidated Revenues
  $
21,745
    $
21,037
    $
40,732
    $
39,267
 
 
Operating Income:
                               
   Regulated
  $
5,951
    $
5,746
    $
9,416
    $
9,449
 
   Non – Regulated
   
328
     
403
     
584
     
673
 
Consolidated Operating Income
  $
6,279
    $
6,149
    $
10,000
    $
10,122
 
                                 
Net Income:
                               
   Regulated
  $
3,140
    $
2,740
    $
4,777
    $
4,407
 
   Non – Regulated
   
173
     
227
     
307
     
373
 
Consolidated Net Income
  $
3,313
    $
2,967
    $
5,084
    $
4,780
 

7



                         
Capital Expenditures:
                       
   Regulated
  $
5,024
    $
7,209
    $
8,549
    $
11,801
 
   Non – Regulated
   
130
     
200
     
225
     
218
 
Total Capital Expenditures
  $
5,154
    $
7,409
    $
8,774
    $
12,019
 
                             
   
As of
June 30,
2007
   
As of
December 31,
2006
                 
Assets:
                               
   Regulated
  $
377,728
    $
366,149
                 
   Non – Regulated
   
7,540
     
6,808
                 
Inter-segment Elimination
    (2,994 )     (2,690 )                
Consolidated Assets
  $
382,274
    $
370,267
                 


Note 6 – Short-term Borrowings

As of June 30, 2007, the Company has established lines of credit aggregating $40.0 million. At June 30, 2007, the outstanding borrowings under these credit lines were $0.8 million at a weighted average interest rate of 6.62%.

The weighted average daily amounts of borrowings outstanding under the Company’s credit lines and the weighted average interest rates on those amounts were $0.2 million and $9.2 million at 6.62% and 5.91% for the three months ended June 30, 2007 and 2006, respectively. The weighted average daily amounts of borrowings outstanding under the Company’s credit lines and the weighted average interest rates on those amounts were $0.1 million and $7.6 million at 6.62% and 5.82% for the six months ended June 30, 2007 and 2006, respectively.

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

Note 7 – Commitments and Contingent Liabilities

Guarantees - USA-PA operates the City of Perth Amboy, New Jersey (Perth Amboy) water and wastewater systems under contract through June 30, 2018. The agreement was effected under New Jersey’s Water Supply Public/Private Contracting Act and the New Jersey Wastewater Public/Private Contracting Act. Under the agreement, USA-PA receives a fixed fee and in addition, a variable fee based on increased system billing. Scheduled fixed fee payments for 2007 are $7.8 million. The fixed fees will increase over the term of the contract to $10.2 million per year.

In connection with the agreement, Perth Amboy, through the Middlesex County Improvement Authority, issued approximately $68.0 million in three series of bonds. Middlesex guaranteed one of those series of bonds, designated the Series C Serial Bonds, in the principal amount of approximately $26.3 million. Perth Amboy guaranteed the two other series of bonds. The Series C Serial Bonds have various maturity dates with the final maturity date on September 1, 2015. As of June 30, 2007, approximately $23.4 million of the Series C Serial Bonds remained outstanding.

Middlesex is obligated to perform under the guarantee in the event notice is received from the Series C Serial Bonds trustee of an impending debt service deficiency. If Middlesex funds any debt service obligations as

8


guarantor, Perth Amboy is required to reimburse the Company. There are other provisions in the agreement that make it unlikely that we would be required to perform under the guarantee, such as scheduled annual rate increases for water and wastewater services as well as rate increases that may be implemented at anytime by Perth Amboy. In the event revenues from customers could not satisfy the reimbursement requirements, Perth Amboy has Ad Valorem taxing powers, which could be used to raise the needed amount.

Water Supply - Middlesex has an agreement with the New Jersey Water Supply Authority (NJWSA) for the purchase of untreated water through November 30, 2023, which provides for an average purchase of 27 million gallons per 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, 2011, provides for the minimum purchase of 3 mgd of treated water with provisions for additional purchases.

Purchased water costs are shown below:

   
(In Thousands)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Purchased Water
                       
Treated
  $
539
    $
473
    $
999
    $
935
 
Untreated
   
529
     
492
     
1,128
     
1,059
 
Total Costs
  $
1,068
    $
965
    $
2,127
    $
1,994
 

Construction – The Company expects to spend approximately $32.1 million on its construction program in 2007.

Litigation – In July 2005, Tidewater received a notice of violation and request for corrective action issued by the Delaware State Fire Marshal regarding the alleged failure of one of the community water systems operated by Tidewater to meet Delaware fire protection requirements.  Tidewater appealed the Fire Marshal’s decision with the Delaware State Fire Prevention Commission (the “SFPC”) and, in November 2005, the SFPC denied Tidewater’s appeal.  In December 2005, Tidewater filed an appeal of the SFPC’s decision with the Sussex County Superior Court in Delaware, which is still pending.  There are approximately 67 of our other systems that may not meet the Delaware Fire Marshal’s recent interpretation of the fire protection requirements.  If the Delaware Fire Marshal’s interpretation of the regulations is upheld upon appeal, we may be required to make corrections to the system at issue and the Delaware Fire Marshal could issue notices of violation and requests for corrective action for some or all of the approximately 67 other community systems.  At this time, we cannot predict how many community water systems would ultimately require corrective action if our appeal is unsuccessful nor can we predict the timing and the cost of any required corrective actions. We will apply to the PSC to increase base rates to recover the costs of any such corrective actions.  However, if corrective actions need to be taken at several community water systems, our costs could be significant, and to the extent the PSC does not approve rate increases to offset these costs, or if there is a significant delay in receiving approval for such rate increases, such costs could have a material adverse effect on our operating results.

9



The Court action is currently on hold while the parties, with the assistance of a mediator, have met in an attempt to resolve as many open issues as possible.  If any significant issues remain open after these discussions, they will be referred back to the Court for ultimate decision.

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 Retirement Benefit Plans

Pension – The Company has a noncontributory defined benefit pension plan, which covers all employees with more than 1,000 hours of service. The Company contributed $1.5 million of cash to the plan on August 3, 2007. 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.

Postretirement Benefits Other Than Pensions– The Company maintains a postretirement benefit plan other than pensions for substantially all of its retired employees. Coverage includes healthcare and life insurance. Retiree contributions are dependent on credited years of service. The Company expects to make cash contributions to the plan of approximately $1.6 million beginning in the third quarter of 2007.

The following table sets forth information relating to the Company’s periodic costs for its retirement plans.

   
(In Thousands)
 
   
Pension Benefits
   
Other Benefits
 
   
Three Months Ended June 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Service Cost
  $
320
    $
334
    $
205
    $
189
 
Interest Cost
   
453
     
425
     
224
     
201
 
Expected Return on Assets
    (456 )     (402 )     (120 )     (83 )
Amortization of Unrecognized Losses
   
66
     
62
     
84
     
111
 
Amortization of Unrecognized Prior Service Cost
   
-
     
3
     
-
     
-
 
Amortization of Transition Obligation
   
2
     
-
     
34
     
34
 
Net Periodic Benefit Cost
  $
385
    $
422
    $
427
    $
452
 
             
   
Pension Benefits
   
Other Benefits
 
   
Six Months Ended June 30,
 
   
2007
   
2006
   
2007
   
2006
 
                                 
Service Cost
  $
639
    $
644
    $
411
    $
366
 
Interest Cost
   
907
     
855
     
448
     
419
 
Expected Return on Assets
    (913 )     (816 )     (241 )     (174 )
Amortization of Unrecognized Losses
   
131
     
119
     
169
     
240
 

10



Amortization of Unrecognized Prior Service Cost
   
-
     
3
     
-
     
-
 
Amortization of Transition Obligation
   
5
     
-
     
68
     
68
 
Net Periodic Benefit Cost
  $
769
    $
805
    $
855
    $
919
 
                                 

Note 9 – Stock Based Compensation

The Company maintains a Restricted Stock Plan, under which 63,837 shares of the Company's common stock are held in escrow by the Company as of June 30, 2007 for key employees. Such stock is subject to 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 this plan is 240,000 shares. There were no grants, vesting or forfeitures of restricted stock during the six months ended June 30, 2007.

The Company recognizes compensation expense at fair value for its restricted stock awards in accordance with SFAS 123(R), “Share Based Payment.  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. Compensation expense for the three and six months ended June 30, 2007 and 2006 was $0.1 million.  Total unearned compensation related to restricted stock was $0.7 million at June 30, 2007.

Note 10 – Other Comprehensive Income

Comprehensive income was as follows:

   
(In Thousands)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Net Income
  $
3,313
    $
2,967
    $
5,084
    $
4,780
 
                                 
Other Comprehensive Income:
                               
Change in Value of Equity Investments,
  Net of Income Tax
    (23 )    
---
      (14 )    
---
 
     Other Comprehensive Income
    (23 )    
---
      (14 )    
---
 
                                 
Comprehensive Income
  $
3,290
    $
2,967
    $
5,070
    $
4,780
 


 

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 the Company included elsewhere herein and with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

11



Forward-Looking Statements
 
Certain statements contained in this annual 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;
 
-
statements regarding expectations and events concerning capital expenditures;
 
-
statements as to the Company’s expected liquidity needs during fiscal 2007 and beyond and statements as to the sources and availability of funds to meet its liquidity needs;
 
-
statements as to expected rates, consumption volumes, service fees, revenues, margins, expenses and operating results;
 
-
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 financial projections;
 
-
statements as to the ability of the Company to pay dividends;
 
-
statements as to the Company’s plans to renew municipal franchises and consents in the territories it serves;
 
-
expectations as to the amount of cash contributions to fund the Company’s retirement benefit plans, including statements as to anticipated discount rates and rates of return on plan assets;
 
-
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 base rate increase requests;
 
-
new or additional water quality standards;
 
-
weather variations and other natural phenomena;
 
-
the existence of attractive acquisition candidates and the risks involved in pursuing those acquisitions;
 
-
acts of war or terrorism;
 
-
significant changes in the housing starts 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
 

12


release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws.
 
For an additional discussion of factors that may affect the Company’s business and results of operations, see Item 1A. - Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
 
Overview

The Company has operated as a water utility in New Jersey since 1897, and in Delaware, through our wholly-owned subsidiary, Tidewater, since 1992. We are in the business of collecting, treating, distributing and selling water for residential, irrigation, commercial, municipal, industrial and fire protection purposes. We also operate a New Jersey municipal water and wastewater system under contract and provide wastewater services in New Jersey and Delaware through our subsidiaries. Our utility companies are regulated as to rates charged to customers for water and wastewater services in New Jersey and Delaware, as to the quality of service provided and as to certain other matters. Our USA, USA-PA and White Marsh subsidiaries are not regulated utilities.

Our New Jersey water utility system (the Middlesex System) provides water services to approximately 59,300 retail, commercial and fire service 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 303,000. Through our subsidiary, USA-PA, we operate the water supply system and wastewater collection system for the City of Perth Amboy, New Jersey. Pinelands Water and Pinelands Wastewater provide water and wastewater services to residents in Southampton Township, New Jersey.

Tidewater and Southern Shores provide water services to approximately 31,000 retail customers in New Castle, Kent, and Sussex Counties, Delaware. Our TESI subsidiary provides regulated wastewater service to approximately 190 residential retail customers. White Marsh serves approximately 5,400 customers under unregulated operating contracts with various owners of small water and wastewater systems in Kent and Sussex Counties.

USA provides customers both inside and outside of our service territories a service line maintenance program called LineCareSM. In the first quarter of 2007 we introduced a similar program for wastewater customers called LineCare+SM.

The majority of our revenue is generated from regulated water services to customers in our franchise 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 since the end of the last billing cycle. Fixed service charges are billed in advance by our subsidiary, Tidewater, and are recognized in revenue as the service is provided.
 
Our ability to increase operating income and net income is based significantly on four factors: weather, adequate and timely rate relief, effective cost management, and customer growth. These factors are evident in the discussions below which compare our results of operations with prior periods.

Recent Developments

Rate Increases

13



Middlesex filed for an $8.9 million, or 16.5% base rate increase with the New Jersey Board of Public Utilities (BPU) on April 18, 2007. The requested increase is intended to recover increased costs of operations, maintenance, labor and benefits, purchased power, purchased water and taxes, as well as capital investment of approximately $23.0 million since rates were last established in 2005. We cannot predict whether the BPU will ultimately approve, deny, or reduce the amount of our request.  We do not expect a decision on this matter until the first quarter of 2008.

In accordance with the tariff established for Southern Shores, an annual rate increase of 3% was implemented on January 1, 2007.  The increase cannot exceed the lesser of the regional Consumer Price Index or 3%. The contracted rate schedule is set to expire on December 31, 2007.  The Company is in the process of renegotiating the rate schedule.

Operating Results by Segment

The Company has two operating segments, Regulated and Non-Regulated. Our Regulated segment contributed 91% of total revenues and 95% of net income for the six months ended June 30, 2007 and 88% of total revenues and 92% of net income for the six months ended June 30, 2006. 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 consist of the following companies: Regulated-Middlesex, Tidewater, Pinelands, Southern Shores, and TESI; Non-Regulated- USA, USA-PA, and White Marsh.

Results of Operations – Three Months Ended June 30, 2007

   
(In Thousands)
 
   
Three Months Ended June 30,
 
   
2007
   
2006
 
   
Regulated
   
Non-Regulated
   
Total
   
Regulated
   
Non-Regulated
   
Total
 
Revenues
  $
19,776
    $
1,969
    $
21,745
    $
18,663
    $
2,374
    $
21,037
 
Operations and maintenance expenses
   
9,631
     
1,549
     
11,180
     
8,921
     
1,885
     
10,806
 
Depreciation expense
   
1,842
     
33
     
1,875
     
1,683
     
30
     
1,713
 
Other taxes
   
2,352
     
59
     
2,411
     
2,313
     
56
     
2,369
 
  Operating income
   
5,951
     
328
     
6,279
     
5,746
     
403
     
6,149
 
                                                 
Other income
   
414
     
---
     
414
     
143
     
---
     
143
 
Interest expense
   
1,672
     
26
     
1,698
     
1,784
     
24
     
1,808
 
Income taxes
   
1,553
     
129
     
1,682
     
1,365
     
152
     
1,517
 
  Net income
  $
3,140
    $
173
    $
3,313
    $
2,740
    $
227
    $
2,967
 

Operating revenues for the three months ended June 30, 2007 increased $0.7 million, or 3.4%, from the same period in 2006 due to customer growth and rate relief in our Delaware service territories. The implementation of a 15% interim rate increase in June 2006 and the additional 12% final increase on February 28, 2007 provided an additional $1.0 million of revenues. Customer growth and higher consumption contributed $0.3 million of revenues.  Fees charged to new customers for initial connection to our Delaware water systems were lower by $0.4 million as new residential and commercial development has slowed in our Delaware service territories. Consumption revenues in our Middlesex system were lower by $0.1 million. USA-PA’s fees for managing the Perth Amboy water and wastewater systems were $0.3 million lower than the same period in 2006 due to lower

14


pass-through charges.  There was an equal and offsetting amount of lower expenses connected with this management contract.

While we anticipate continued organic customer and consumption growth, particularly in our Delaware systems, such growth and increased consumption cannot be guaranteed. Revenues from our water systems are highly dependent on the effects of weather, which may adversely impact future consumption despite customer growth. Customer growth in both the regulated water and wastewater businesses are dependent upon economic conditions surrounding new housing as well as developer construction timetables. Since early 2007, we have experienced a slow down in the rate of customer growth in Delaware.  Appreciable organic customer and consumption growth is less likely in our New Jersey systems due to the extent to which our service territory is developed.

Operation and maintenance expenses increased $0.4 million or 3.5%. Labor costs were $0.2 million higher due wage increases and increased headcount to meet the needs of the growing Delaware customer base.  Water production costs were $0.2 million higher due to increased sales in Delaware and higher unit costs for water, electric power and treatment costs in New Jersey.

Depreciation expense increased $0.2 million, or 9.5%, primarily as a result of a higher level of utility plant in service since June 30, 2006.  The $0.2 million increase in other income resulted from the sale of non-utility property.  Interest expense decreased by $0.1 million commensurate with lower short-term borrowings compared to the prior year period.

Income taxes increased $0.2 million as a result of increased operating income as compared to the prior year.

Net income increased by 11.7% from $3.0 million to $3.3 million. However, due to a higher number of shares outstanding, basic earnings per share were $0.25 for the three months ended June 30, 2007 compared to $0.25 for the same period in 2006.  Diluted earnings per share were $0.24 and $0.25 for three months ended June 30, 2007 and 2006. Middlesex sold and issued 1.5 million shares of its common stock in November 2006.

Results of Operations – Six Months Ended June 30, 2007

   
(In Thousands)
 
   
Six Months Ended June 30,
 
   
2007
   
2006
 
   
Regulated
   
Non-Regulated
   
Total
   
Regulated
   
Non-Regulated
   
Total
 
Revenues
  $
36,462
    $
4,270
    $
40,732
    $
34,663
    $
4,604
    $
39,267
 
Operations and maintenance expenses
   
18,846
     
3,504
     
22,350
     
17,432
     
3,759
     
21,191
 
Depreciation expense
   
3,656
     
64
     
3,720
     
3,324
     
57
     
3,381
 
Other taxes
   
4,544
     
118
     
4,662
     
4,458
     
115
     
4,573
 
  Operating income
   
9,416
     
584
     
10,000
     
9,449
     
673