Middlesex Water Company Annual Report 2007

FY2007 Annual Report · Middlesex Water Company

Loading PDF…

2007 Annual Report

Creating Opportunities
Through Full Service Solutions

A Provider of Water, Wastewater and Related Products and Services

Company Profile

Middlesex Water Company was incorporated as a water utility company
in 1897 and owns and operates regulated water utility and wastewater
systems in New Jersey and Delaware. The Company also operates water
and wastewater systems under contract on behalf of municipal and private
clients in New Jersey and Delaware. The Company’s common stock
trades on the NASDAQ Global Select Market under the symbol MSEX.

Our Mission
Middlesex Water Company and its affiliates are committed to providing
service in water, wastewater and related areas, in a safe, reliable and
efficient manner.

Our Values
• Integrity • A Strong Customer Focus • Continuous Improvement
• Teamwork • Social Responsibility • A Results-Driven Work Ethic

Financial Highlights

(Millions of Dollars, Except per Share Data)

Operating Revenues
Operation and

Maintenance Expenses

Depreciation
Income and Other Taxes
Interest Charges
Net Income
Earnings Applicable to
Common Stock

Basic Earnings
per Share
Diluted Earnings
per Share

Cash Dividends Paid

per Share
Utility Plant
Return on Average

Common Equity

2007

$86.1

46.2
7.5
15.4
6.6
11.8

11.6

0.88

0.87

0.69
398.6

8.9%

2006

Change

$81.1

$5.0

43.3
7.1
14.4
7.0
10.0

9.8

0.83

0.82

0.68
370.6

2.9
0.4
1.0
(0.4)
1.8

1.8

0.05

0.01
28.0

9.4%

(0.5%)

Safe Harbor - This Annual Report contains forward-looking statements on a number of subjects.

They are based on the Company’s current expectations and are subject to a number of risks and

uncertainties. Actual results could differ materially. Our SEC filings identify factors that could

86.1

81.1

Operating Revenues
(Millions of Dollars)

64.1

74.6

71.0

11.8

10.0

Net Income
(Millions of Dollars)

8.4

8.5

6.6

Earnings and Dividends
(Per Share)
■ Earnings
■ Dividends

.82

.87

.73

.71

.67

.66

.68

.69

.65

.61

12.0

9.0

6.0

3.0

.80

.70

.60

.50

.40

affect those results. Please refer to those documents for additional information.

Middlesex Water Company provides

regulated and non-regulated water,

wastewater and related services

to a population of over 400,000

in New Jersey and Delaware.

We have grown from a single

water utility to nine distinct

operating units meeting a full

range of residential, commercial,

industrial and municipal water

and wastewater needs. In 2007,

the Company received approval to

begin operations in Maryland.

New Jersey

Newark

Trenton

Creating Opportunities
Through Full Service Solutions

Clark

Rahway

UNION COUNTY
MIDDLESEX COUNTY

Edison

South
Plainfield

Colonia

Iselin

Avenel

Carteret

Port
Reading
n
e
r
a
w
e
S

e
g
rid
b
d
o
o
W

Metuchen

Edison

n
w
ela
p
o
H

Perth
Amboy

Keasbey

Edison

Highland
Park

Raritan
Center

South
Amboy

Sayreville

East
Brunswick

Old
Bridge

Pinelands Water
Company

Pinelands Wastewater
Company

Bayview System

Atlantic
City

M ID

N T Y

N T Y
D LE S E X C O
U T H C O

Marlboro

Dover

Delaware

Tidewater
Utilities, Inc.

Tidewater
Environmental
Services, Inc.

White Marsh
Environmental
Systems, Inc.

Middlesex Water Company retail service area

Middlesex Water Company existing service
under contract (Edison, Highland Park,
Old Bridge, Marlboro, Rahway, Sayreville)

Middlesex Water Company treatment and
pumping contract (East Brunswick)

Utility Service Affiliates operating
contract (Perth Amboy)

Pinelands Water Company
Pinelands Wastewater Company

Bayview System

Tidewater Utilities, Inc.
Tidewater Environmental Services, Inc.
White Marsh Environmental Systems, Inc.

2 0 0 7 A n n u a l R e p o r t 1

To Our Shareholders

Your company continued to move forward in 2007 with our plans

to take further advantage of developing opportunities in the water,

wastewater and related services arenas. We progressed in several areas

in 2007 and are pleased to report positive results in these areas that

benefit our customers, employees and shareholders.

The financial results for the year met our projections and we

delivered customer growth in both water and wastewater connections

in the face of slower growth in the national housing market and

the resulting impact on the demand for new water and wastewater

services. Our financial results provided for an increase in the dividend

on the common stock of the Company as well as growth in overall

revenues and earnings.

Our acquisition of the wastewater collection and treatment systems

of the Town of Milton, Delaware added 1,200 customers to our growing

regulated wastewater business. The wastewater business continues to

be a large strategic focus for us and therefore, one that we continue to

Executive Committee (left to right):

Dennis W. Doll, President and Chief Executive Officer; James P. Garrett, Vice President - Human Resources;

Richard M. Risoldi, Vice President - Subsidiary Operations; Bernadette M. Sohler, Vice President –

Corporate Affairs; Ronald F. Williams, Vice President - Operations and Chief Operating Officer;

Gerard L. Esposito, President, Tidewater Utilities, Inc.; A. Bruce O’Connor, Vice President and Chief

Financial Officer; Kenneth J. Quinn, Vice President, General Counsel, Secretary and Treasurer.

2 M i d d l e s e x Wa t e r C o m p a n y

left to right:

Dennis W. Doll
President and Chief Executive Officer

J. Richard Tompkins
Chairman of the Board

“The wastewater
business continues
to be a large strategic
focus for us
and therefore,
one that we continue
to aggressively
develop.”

Creating Opportunities
Through Full Service Solutions

A Comprehensive Suite of Solutions

Over the years, our professional capabilities have expanded to meet the changing

needs of customers, property owners, developers and municipalities. We have

built a reputation for delivering sound, technical and full service solutions and

have developed end-to-end capabilities to deliver a wide range of services.

A partial listing of our services includes:

• Water Production, Treatment and

• Water and Wastewater Contract Operations

Distribution

• Water and Sewer Line Maintenance

• Wastewater Collection and Treatment

• Utility Billing and Collections

• Ownership and Operation of Utilities

• Community Irrigation

• Plant Design and Build Upgrades

• Well Rehabilitation and Repair

• Plant Operations and Maintenance

• Engineering and Construction

• Public/Private Partnerships

Water Production,
Treatment and
Distribution

System Design
and
Construction

Wastewater
Collection and
Treatment

Service Line
Maintenance

Contract
Operations

2 0 0 7 A n n u a l R e p o r t 3

To Our Shareholders

aggressively develop. Obtaining high quality solutions

for affordable wastewater services continues to be a

challenge for municipalities and developers in the areas

we are looking to serve.

Service quality was enhanced in several areas,

together with improvements to water and wastewater

operations that provided greater efficiencies. We also

continued to expand and improve upon the training

programs necessary to further develop the technical

and management skills of our employees.

The following summary and report illustrates

certain details of these achievements and their impact

on our long-term planning and capabilities in the

areas of water and wastewater services.

Financial Management

CUSTOMERS

71%: New Jersey
93,000

29%: Delaware
38,000

74%: Regulated
97,000

26%: Non-Regulated
34,000

15% USA-PA (Water/Wastewater)
7% Utility Service Affiliates (LineCaresm)
4% White Marsh Environmental Systems, Inc.

45% Middlesex
4% Pinelands Water/Wastewater
24% Tidewater (includes Southern Shores)
1% Tidewater Environmental Services, Inc.

Timely recovery of cost increases through the regulatory

October of 2007. This negotiated outcome resulted

process is a significant focus of our management.

in timely recovery of capital expenditures and

In April 2007 we filed a request with the New Jersey

operating cost increases since rates had been previously

Board of Public Utilities for an increase in base rates

established. This favorable outcome benefits both

and were awarded a $5.0 million or 9.1% increase in

customers and shareholders by strengthening the

Employees receive performance

management, supervisory

skills, technical and other

types of training. In 2007,

we centralized our training

programs and professional

development to ensure more

effective utilization of

training resources.

An example of a

sequential batch

reactor tank operating

in Delaware which

processes 51,000

gallons of wastewater

per day.

4 M i d d l e s e x Wa t e r C o m p a n y

Creating Opportunities
Through Full Service Solutions

“Through the regulatory process,
we continually strive to balance
customer needs for high quality
service at affordable rates and
shareholder needs for appropriate
returns on investment.”

our regulated water utility in Delaware, arranged for

$1.1 million under a similar state program in Delaware.

Operational Excellence

The extension of our cross training practices for water

and wastewater operating personnel to the Tidewater

systems in Delaware has helped improve the quality

of service and added to the capabilities of our service

in these areas. Given the increasing geographic spread

financial position of the company and helping to

of the facilities we own and operate in Delaware and

ensure our ability to continue to meet the infrastructure

planned facilities related to ongoing negotiations in

needs of present and future customers. Through the

Maryland, efficient and cost-effective deployment of

regulatory process, we continually strive to balance

water and wastewater personnel is important to our

customer needs for high quality service at affordable

success. In addition to our focus on continuing to

rates and shareholder needs for appropriate returns

build solid technical skills, we are improving the

on investment.

workflows inherent in various operational processes

The 2007 Capital Program was financed mainly

and backing up those processes with enhancements

through internally generated funds with some added

in our use of technology.

financing through first mortgage bonds. Middlesex

We had recently announced we are implementing

Water issued $3.5 million of bonds through the New

improved technology across a variety of our business

Jersey Environmental Infrastructure Trust and Tidewater,

processes. This initiative will enable us to more

Supplying high quality

water to our customers

requires continuous

monitoring and

maintenance of

our facilities.

We utilize GIS Technology,

which combines mapping

software with database

management tools, to

collect, organize and

share information.

2 0 0 7 A n n u a l R e p o r t 5

To Our Shareholders

58.9

effectively manage our operations from an end-to-end

business process perspective with greater transparency

Total Water Production
(Million Gallons per Day)

of data and tighter integration of our various

operational and administrative functions. Our goal

is to ultimately translate these efforts into further

enhancements in service to our customers and further

enhancements to shareholder value. In addition to

various planned business process and technology

enhancements, we consolidated our separate accounting

and customer service functions from Delaware to

New Jersey in 2007. This initiative is providing greater

consistency in the application of policies and procedures

and improved efficiencies in a variety of areas.

The management of company-wide training and

safety programs has been consolidated in 2007 under

the Human Resources function to ensure that these

needs are provided in a consistent and efficient manner

47.4 Middlesex

0.5 Pinelands

5.8 Tidewater

5.2 USA-PA

throughout all operating locations. We believe these

Expanding Capabilities

programs will help achieve our growth, operational

As we compete and negotiate for new business

excellence and financial goals, while ensuring a safe

within and beyond our existing geographic borders

working environment for our employees.

in New Jersey and Delaware, we find a strong need

In October, we

consolidated our

customer call center

functions to a single

location at the

Company’s New

Jersey headquarters.

As our business grows more complex,

managing employee safety has

become an increasing priority.

Our new safety program ensures

consistent application and compliance

with Federal and State standards

and the identification of safety

training and equipment for employees

throughout the company.

6 M i d d l e s e x Wa t e r C o m p a n y

Creating Opportunities
Through Full Service Solutions

this expansion with an adequate infrastructure and

affordable utility services. In addition, they strive to

preserve the quality of life and the natural environment

that their residents enjoy.

We have developed the technical and management

capabilities in water and wastewater to creatively address

the issues that challenge both municipalities and devel-

opers. Furthermore, we look to provide solutions under

regulation, public/private partnerships, operating contracts

Wastewater is treated through a membrane bio-reactor process

which treats water to a high level effluent quality. Effluent is disposed

through rapid infiltration basins, a land based disposal alternative

that recharges aquifers and ensures groundwater is a renewable

resource for future generations.

for innovative quality water and wastewater services

or new structures that circumstances may require.

for municipalities, developers and others. The types

Our contract operations business continues to

of problems these entities face require innovative

expand as we not only acquire new contracts, but as we

operational and financial solutions that can be

also continually seek to further improve the profitability

provided through our expanded capabilities.

of existing contracts. Our capabilities in the contract

Our acquisition of the wastewater system in the

operations business have matured to the extent we

Town of Milton, Delaware is an illustration of this

manage the day-to-day operations of water and

type of solution. Similarly, we are engaged in a variety

wastewater systems of varying size and complexity.

of discussions with other potential customers to provide

We have developed expertise in certain industrial

innovative solutions to the challenges they face.

applications of wastewater treatment as well and seek

Municipalities are keenly aware of the challenges

to obtain more of this business as our reputation in

presented by rapid growth and they struggle to balance

this area continues to develop.

Water provided through

the Company and its

subsidiaries delivers

quality of life, public

health protection,

fire protection and

the infrastructure

that supports a

solid economy.

In 2007, we announced the

acquisition of the wastewater

collection and treatment system

of the Town of Milton, DE.

2 0 0 7 A n n u a l R e p o r t 7

To Our Shareholders

Our Reputation as a Utility Service Provider

company as an attractive long-term investment

Our reputation serves to benefit both those customers

as critical water and wastewater services emerge

we serve presently and those that we propose to serve

as a higher priority for those we serve and those

in the future. We work to educate the communities

we intend to serve.

we serve and others about the wise use of water

We thank you for your loyalty and we look

and the obligation that we all have to protect the

forward to sharing our future progress.

environment. We give credit to our employees who

are responsible for our excellent reputation, through

their effort in providing services and also in their

community support. We take pride in being part

of community activities and find them rewarding

from both a personal and professional prospective.

Although we continue to seek expansion beyond

our present geographic borders, we view our water

and wastewater services as a local business that must

adequately address the various local needs of the

communities that choose to partner with us.

Our commitment to supporting the communities

we serve is an important part of our company

values and serves to help us understand and

address those needs effectively.

We see your company as a solid provider of

quality services in the increasingly complex and

dynamic investor-owned water and wastewater

industry. Similarly, we continue to see your

J. Richard Tompkins

Chairman of the Board

Dennis W. Doll

President and Chief Executive Officer

Middlesex Water Company Named
One of America’s Most Trustworthy Companies

Middlesex Water Company has been named one of
the nation’s Top 100 Most Trustworthy Publicly Traded
Firms by Audit Integrity, Inc., an independent firm that
rates companies on the quality of their corporate
integrity. This list, reported on by Forbes, ranks 8,000
public firms on their financial reporting and corporate
governance. To view the report and methodology
used, please visit www.auditintegrity.com.

Middlesex Water

employees gave back

to the community by

participating in Tooling

Around the Township,

a project to fix homes for

the elderly and disabled.

Employees visit schools

educating young students

about the water cycle

and careers in the water

industry.

8 M i d d l e s e x Wa t e r C o m p a n y

Middlesex Water Company

CONSOLIDATED SELECTED FINANCIAL DATA
(In Thousands, Except per Share Amounts)

2007

2006

2005

2004

2003

Operating Revenues

Operating Expenses:

Operations and Maintenance
Depreciation
Other Taxes

Total Operating Expenses

Operating Income
Other Income, Net
Interest Charges
Income Taxes

Net Income
Preferred Stock Dividend

$086,114

$081,061

$074,613

$070,991

$064,111

46,240
7,539
9,664

63,443

22,671
1,527
6,619
5,736

11,843
248

43,345
7,060
9,338

59,743

21,318
774
7,012
5,041

10,039
248

42,156
6,460
8,779

57,395

17,218
740
6,245
3,237

8,476
251

39,984
5,846
8,228

54,058

16,933
795
5,468
3,814

8,446
255

36,195
5,363
7,816

49,374

14,737
358
5,227
3,237

6,631
255

Earnings Applicable to Common Stock

$011,595

$009,791

$008,225

$008,191

$006,376

Earnings per Share:

Basic
Diluted

Average Shares Outstanding:

Basic
Diluted

Dividends Declared and Paid
Total Assets
Convertible Preferred Stock
Long-term Debt

$0000.88
$0000.87

$0000.83
$0000.82

$0000.72
$0000.71

$0000.74
$0000.73

$0000.61
$0000.61

13,203
13,534
$000.693
$392,675
$002,856
$131,615

11,844
12,175
$000.683
$370,267
$002,856
$130,706

11,445
11,784
$000.673
$324,383
$002,856
$128,175

11,080
11,423
$000.663
$305,634
$002,961
$115,281

10,475
10,818
$000.649
$267,956
$002,961
$097,377

STATISTICAL SUMMARY

REVENUES (Thousands of Dollars):

2007

2006

2005

2004

2003

Residential
Commercial
Industrial
Fire Protection
Contract Sales
Contract Operations
Other

TOTAL REVENUES

CAPITALIZATION RATIOS:

Long-term Debt
Preferred Stock
Common Stock Equity

TOTAL

OTHER:

Book Value of Common Stock
Customers
Population Served (Retail)
Miles of Main
Fire Hydrants
Water Production (million gallons)

$ 38,792
8,358
8,513
8,882
10,749
8,832
1,988

$086,114

50%
1
49

100%

$00 9.87
132,000
434,600
1,343
7,216
21,731

$034,584
8,107
8,659
8,635
9,937
8,878
2,261

$031,289
7,297
8,183
7,742
10,024
8,082
1,996

$028,322
6,771
7,708
7,237
9,086
7,934
3,933

$025,272
6,299
7,131
6,830
8,458
8,065
2,056

$081,061

$074,613

$070,991

$064,111

50%
1
49

55%
2
43

54%
2
44

100%

$0008.86
125,200
421,400
1,306
6,821
20,594

$0008.36
119,800
407,500
1,250
6,595
21,196

$0007.99
115,000
400,000
1,215
6,306
20,344

$0007.56
109,700
373,000
1,150
5,953
20,015

Middlesex Water Company

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion of the Company’s historical results of operations and financial condition should be read in
conjunction with the Company’s consolidated financial statements and related notes.

Overview

Middlesex Water 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 domestic, 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. 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 and in Delaware. Only 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 59,400 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 303,000. In partnership with our
subsidiary, USA-PA, we operate the water supply system and wastewater system for the City of Perth Amboy,
New Jersey. Our other New Jersey subsidiaries, Pinelands Water and Pinelands Wastewater, provide water and
wastewater services to residents in Southampton Township, New Jersey.

Our Delaware subsidiaries, Tidewater and Southern Shores, provide water services to approximately 31,600 retail
customers in New Castle, Kent and Sussex Counties, Delaware. Our TESI subsidiary provides wastewater services to
approximately 1,400 residential retail customers. Our other Delaware subsidiary, White Marsh, services an additional
5,100 customers in Kent and Sussex Counties through 62 operations and maintenance contracts.

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.

We expect the growth of our regulated wastewater business in Delaware will eventually become a more significant
component of our operations.

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

Operating Results by Segment

The Company has two operating segments, Regulated and Non-Regulated. Our Regulated segment contributed
90%, 89% and 89% of total revenues, and 94%, 94% and 95% of net income for the years ended December 31, 2007,
2006 and 2005, respectively. The discussion of the Company’s results of operations is on a consolidated basis, and
includes significant factors by subsidiary. The segments in the tables included below are comprised of the following
companies: Regulated- Middlesex, Tidewater, Pinelands, Southern Shores, and TESI; Non-Regulated- USA, USA-PA,
and White Marsh.

Middlesex Water Company

RESULTS OF OPERATIONS IN 2007 COMPARED TO 2006

Revenues
Operations and maintenance
Depreciation
Other taxes

Operating income

Other income (expense)
Interest expense
Income taxes

Net income

Years Ended December 31,
(Millions of Dollars)

2007

Non-

2006
Non-

Regulated Regulated

Total

Regulated Regulated

$77.1
38.8
7.4
9.5

21.4

1.5
6.6
5.2

$9.0
7.4
0.1
0.2

1.3

—
—
0.6

$86.1
46.2
7.5
9.7

22.7

1.5
6.6
5.8

$71.9
35.7
7.0
9.1

20.1

0.9
7.0
4.6

$9.2
7.7
0.1
0.2

1.2

(0.1)
—
0.5

Total

$81.1
43.4
7.1
9.3

21.3

0.8
7.0
5.1

$11.1

$0.7

$11.8

$9.4

$0.6

$10.0

Operating revenues for the year rose $5.0 million, or 6.2% over the same period in 2006. Revenues improved by
$3.7 million in our Tidewater System, of which $2.4 million was a result of a base rate increase that was granted
to Tidewater. The rate increase was implemented in two parts; a 15% interim rate increase in June 2006 and an
additional 12% final increase on February 28, 2007. Customer growth and higher consumption contributed
$1.9 million of increased revenues. Our Tidewater System experienced record water production and consumption
billed due to extended favorable weather during the spring and summer. Fees charged to new customers for initial
connection to our Delaware water systems were lower by $0.6 million as new residential and commercial development
has slowed in our Delaware service territories. Revenues in our Middlesex system increased by $0.7 million as a result
of a 9.1% base rate increase implemented on October 26, 2007. Middlesex revenues also increased by $0.3 million
due to increased sales to our contract customers. TESI revenues increased by $0.3 million, as we connected new
customers to our existing and new wastewater systems in Delaware.

While we anticipate continued organic customer and consumption growth among our Delaware systems, such
growth and increased consumption cannot be guaranteed. Our water systems are highly dependent on the effects
of weather, which may adversely impact future consumption despite customer growth. 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. The Company expects its 2008 operating revenues to reflect the full effect of the October 2007
Middlesex $5.0 million rate increase.

Operation and maintenance expenses increased $2.8 million, or 6.5%. Labor costs were $1.3 million higher due to
wage increases and increased headcount to meet the needs of the growing Delaware customer base, risk management,
training and safety. As expected, electric generation costs for our Middlesex system increased due to the renewal in
late 2006 of our contract with the power purveyor. That factor accounted for most of the $0.6 million in additional
power costs. Pumping and water treatment costs increased a combined $0.2 million due to higher costs for chemicals
and disposal of residuals. Costs for water main breaks in our New Jersey system and transportation fuel were $0.2
million higher than the same period in 2006 due to the number and size of the breaks and higher gasoline prices.
The cost to operate our TESI regulated wastewater facilities in Delaware increased by $0.2 million as we acquired
the Milton, Delaware wastewater system during the year. All other operating costs increased by $0.3 million.

Electric generation costs for our Middlesex system are expected to increase in 2008 due to the renewal in late 2007 of
our power contract that reflects an 18% increase. Payroll and related employee benefit costs are expected to be higher
in 2007 due to headcount increase. However, the unit cost for our employee’s health benefits will not increase until
December 2008.

Middlesex Water Company

Depreciation expense for 2007 increased by $0.4 million, or 5.6%, due to a higher level of utility plant in service.
As our investments in utility plant and operating expenses increase, we continue to seek timely rate relief through
base rate filings as discussed above.

Other taxes increased by $0.4 million generally reflecting additional taxes on higher taxable gross revenues, payroll
and real estate.

Other income increased $0.7 million, primarily due to a gain of $0.2 million on the sale of non-utility real property
in New Jersey and a gain of $0.4 million on the sale of certain water service rights in Delaware.

Interest expense decreased by $0.4 million, or 5.7%, as a result of a lower level of average short-term debt outstanding
when compared to 2006.

Income tax expense based on our current year operating results was $0.9 million higher than 2006 and reflects the
increased revenues due to higher water rates in New Jersey and Delaware, the record customer usage in Delaware and
the sale of non-essential assets. This was partially offset by $0.2 million of solar tax credits recorded during 2007.

Net income increased to $11.8 million from $10.0 million in the prior year, and basic earnings per share increased
from $0.83 to $0.88. Diluted earnings per share increased from $0.82 to $0.87.

RESULTS OF OPERATIONS IN 2006 COMPARED TO 2005

Years Ended December 31,
(Millions of Dollars)

2006
Non-
Regulated

Total

2005
Non-

Regulated Regulated

Total

$9.2
7.7
0.1
0.2

1.2

(0.1)
—
0.5

$0.6

$81.1
43.4
7.1
9.3

21.3

0.8
7.0
5.1

$66.3
35.0
6.3
8.6

16.4

0.7
6.2
2.9

$8.3
7.2
0.1
0.2

0.8

—
—
0.3

$74.6
42.2
6.4
8.8

17.2

0.7
6.2
3.2

$10.0

$08.0

$0.5

$08.5

Regulated

$71.9
35.7
7.0
9.1

20.1

0.9
7.0
4.6

$09.4

Revenues
Operations and maintenance
Depreciation
Other taxes

Operating income

Other income (expense)
Interest expense
Income taxes

Net income

Operating revenues for the year rose $6.5 million, or 8.7% over the same period in 2005. Water sales improved by
$2.8 million in our Middlesex System, of which $4.1 million was a result of base rate increase that was granted to
Middlesex on December 8, 2005. This increase was somewhat offset by lower consumption revenues of $1.3 million
due to unfavorable weather from mid-July through the late fall of 2006 as compared to the prior year. Customer
growth of 7.07% in Delaware provided additional water consumption sales, facility charges and connection fees of
$0.9 million, higher base rates provided $1.0 million and increased consumption for existing customers provided an
additional $0.6 million. New unregulated wastewater contracts in Delaware provided $0.4 million in additional
revenues. Revenues from our operations and maintenance contract with the City of Perth Amboy increased by
$0.4 million due to scheduled fixed fee adjustments under the agreement. USA had increased revenues for its
LineCareSM maintenance program of $0.1 million. TESI revenues increased by $0.1 million, as we connected new
customers to our wastewater systems in Delaware. All other operations contributed $0.2 million of additional revenues.

Middlesex Water Company

Operation and maintenance expenses increased $1.2 million or 2.8% as compared to the same period in 2005.
Continued growth of our Delaware water and wastewater operations led to higher costs of $1.1 million. Despite lower
water production volume of 3.2% for our Middlesex System, costs increased by $0.3 million due to increased unit
costs for electricity, chemicals and residuals removal. Costs for providing services under our contract with the City of
Perth Amboy increased by $0.1 million and costs for providing services under our contracts in Delaware increased by
$0.2 million. Audit fees declined by $0.3 million as the Company changed independent accounting firms beginning
with the 2006 audit period. Labor and benefits expenses fell by $0.3 million due to vacant positions and improved
performance on investments. All other operating costs increased by $0.1 million.

Depreciation expense for 2006 increased by $0.7 million, or 10.9%, due to a higher level of utility plant in service.

Other taxes increased by $0.5 million generally reflecting additional taxes on higher taxable gross revenues, payroll
and real estate.

Other income decreased $0.1 million, primarily due to higher Allowance for Funds Used During Construction
(AFUDC) as capital spending increased compared to the prior year.

Interest expense increased by $0.8 million, or 12.9%, as a result of a higher level of long-term debt, and higher average
interest rates and increased weighted average short-term borrowings as compared to the prior year period.

Income tax expense based on the 2006 operating results was $1.9 million higher than 2005 and reflects the increased
revenues due to higher water rates in New Jersey and Delaware and increased water consumption in Delaware.

Net income increased to $10.0 million from $8.5 million in the prior year, and basic earnings per share increased from
$0.72 to $0.83. Diluted earnings per share increased from $0.71 to $0.82.

Outlook

In addition to factors previously discussed under “Results of Operations in 2007 Compared to 2006,” our revenues are
expected to increase in 2008 from anticipated customer growth in Delaware for our regulated water operations and, to
a lesser degree, from growth in our regulated wastewater operations in Delaware. We also expect revenues to increase as
a result of the settlement of our 2007 Middlesex rate case effective October 26, 2007. The approved increase of 9.1%
is expected to generate $5.0 million of revenues on an annual basis assuming actual market conditions are consistent
with our projections.

Revenues and earnings will also be influenced by weather. Changes in these factors, as well as increases in capital
expenditures and operating costs are the primary factors that determine the need for rate increase filings.

We continue to explore viable plans to streamline operations and reduce costs in all aspects of our business.

We expect our interest expense to increase during 2008 as a result of higher expected average borrowings against
the short-term credit facilities in order to finance a portion of our capital expenditures during the coming year (see
Liquidity and Capital Resources).

Our strategy includes continued revenue growth through acquisitions, internal expansion, contract operations and
when necessary, rate relief. We will continue to pursue opportunities in both the regulated and non-regulated sectors
that are financially sound, complement existing operations and increase shareholder value.

Middlesex Water Company

Liquidity and Capital Resources

Cash flows from operations are largely based on three factors: weather, adequate and timely rate increases, and
customer growth. The effect of those factors on net income is discussed in results of operations. For 2007, cash flows
from operating activities increased $2.7 million to $18.8 million, as compared to the prior year. This increase was
primarily attributable to higher net income and depreciation. The $18.8 million of net cash flow from operations
enabled us to fund approximately 86% of our utility plant expenditures for the period internally, with the remainder
funded with proceeds from equity issued under our Dividend Reinvestment Plan, long-term borrowings and short-
term borrowings.

For 2006, cash flows from operating activities increased $2.6 million to $16.1 million, as compared to the prior year.
This increase was primarily attributable to higher net income, depreciation and the timing of collection of customer
billings. The $16.1 million of net cash flow from operations allowed us to fund approximately 52% of our utility
plant expenditures for the period internally, with the remainder funded with proceeds from equity issued under
a formal offering in November 2006 and our Dividend Reinvestment Plan and both short-term and long-term
borrowings.

Increases in certain operating costs will impact our liquidity and capital resources. As described in our results of
operations discussion, during 2007 we received rate relief for Tidewater and Middlesex. We continually monitor the
need for timely rate filing to minimize any regulatory lag between increasing operating and capital costs and appropriate
rate relief. There is no certainty, however, that the BPU or PSC will approve any or all future requested increases.

Sources of Liquidity

Short-term Debt. The Company has established lines of credit aggregating $40.0 million. At December 31, 2007,
the outstanding borrowings under these credit lines were $6.3 million at a weighted average interest rate of 5.79%.

The weighted average daily amounts of borrowings outstanding under the Company’s credit lines and the weighted
average interest rates on those amounts were $2.6 million and $9.5 million at 6.36% and 6.13% for the years ended
December 31, 2007 and 2006, respectively.

Long-term Debt. Subject to regulatory approval, the Company periodically finances capital projects under State
Revolving Fund (SRF) loan programs in New Jersey and Delaware. These government programs provide financing
at interest rates that are typically below rates available in the financial markets. A portion of the borrowings under
the New Jersey SRF is interest free. We participated in the Delaware and New Jersey SRF loan programs during
2007 and expect to participate in the 2008 New Jersey SRF program for up to $3.5 million.

During 2007, Middlesex closed on $3.5 million of first mortgage bonds through the New Jersey Environmental
Infrastructure Trust (NJEIT) under the New Jersey SRF loan program in order to finance our 2008 RENEW program.
The proceeds of these bonds and any interest earned are held by a trustee, and are classified as Restricted Cash on the
Consolidated Balance Sheet.

During 2007, Tidewater closed on a $1.1 million loan with the Delaware SRF. The proceeds will be used to fund two
specific projects of the 2007 capital program in Delaware.

Substantially all of the Utility Plant of the Company is subject to the lien of its mortgage, which also includes debt
service and capital ratio covenants, certain restrictions as to cash dividend payments and other distributions on
common stock. The Company is in compliance with all of its mortgage covenants and restrictions.

Common Stock. The Company periodically issues shares of common stock in connection with its Dividend
Reinvestment and Common Stock Purchase Plan (the Plan). The Company raised $1.1 million through the issuance
of shares under the Plan during 2007. Periodically, the Company may issue additional equity to reduce short-term
indebtedness and for other general corporate purposes. The last public offering of its common stock closed in

Middlesex Water Company

November 2006. The majority of the net proceeds of approximately $26.2 million from that common stock offering
of 1,495,000 shares were used to repay all of the Company’s short-term borrowings outstanding at that time.

Capital Expenditures and Commitments
Under our capital program for 2008, we plan to expend $14.3 million for additions and improvements for our
Delaware water systems, which include the construction of several storage tanks and the creation of new wells and
interconnections. We expect to spend approximately $3.8 million for construction of wastewater systems in Delaware.
We expect to spend $2.9 million as we begin to implement a Company-wide information system upgrade. We expect
to spend $3.5 million for our RENEW program, which is our program to clean and cement line unlined mains in
the Middlesex System. There remains a total of approximately 112 miles of unlined mains in the 730-mile Middlesex
System. In 2007, eight miles of unlined mains were cleaned and cement lined. The capital program also includes
$12.4 million for scheduled upgrades to our existing systems in New Jersey. The scheduled upgrades consist of
$4.3 million for improvements to existing plant, $5.2 million for mains, $0.6 million for service lines, $0.4 million
for meters, $0.3 million for hydrants, and $1.6 million for other infrastructure needs.

To pay for our capital program in 2008, we will utilize internally generated funds and funds available and held in
trust under existing NJEIT loans (currently, $3.7 million) and Delaware SRF loans (currently, $3.1 million). The SRF
programs provide low cost financing for projects that meet certain water quality and system improvement benchmarks.
If necessary, we will also utilize short-term borrowings through $40.0 million of available lines of credit with several
financial institutions. As of December 31, 2007, we had $6.3 million outstanding against the lines of credit.

Going forward into 2009 through 2010, we currently project that we may be required to expend between $88.4 million
and $121.8 million for capital projects. The exact amount is dependent on customer growth, residential housing sales
and project scheduling. In particular, Middlesex has filed a prudency review application with the BPU for a proposed
major transmission pipeline designed to strengthen its existing transmission network and provide system redundancy.
Initial estimates to construct the pipeline are $26.2 million. The duration and outcome of the BPU review process
may affect the construction schedule as well as the project viability.

To the extent possible and because of favorable interest rates available to regulated water utilities, we expect to finance
our capital expenditures under the SRF loan programs. We also expect to use internally generated funds and proceeds
from the sale of common stock through the Dividend Reinvestment and Common Stock Purchase Plan. It may also
be necessary to sell shares of our Common Stock through a public offering.

Contractual Obligations
In the course of normal business activities, the Company enters into a variety of contractual obligations and commercial
commitments. Some of these items result in direct obligations on the Company’s balance sheet while others are
commitments, some firm and some based on uncertainties, which are disclosed in the Company’s other underlying
consolidated financial statements.

The table below presents our known contractual obligations for the periods specified as of December 31, 2007.

Long-term Debt
Notes Payable
Interest on Long-term Debt
Purchased Water Contracts
Wastewater Operations
Employee Retirement Plans(1)

Total

(1) Amount not determinable after one year.

Total

$134.3
6.3
98.1
44.2
51.7
3.6

$338.2

Payments Due by Period
(Millions of Dollars)
1-3
Years

4-5
Years

Less than
1 Year

$02.7
6.3
6.5
4.2
4.1
3.6

$27.4

$21.3
—
11.0
8.4
8.5
—

$49.2

$06.5
—
10.3
5.1
9.0
—

$30.9

More than
5 Years

$103.8
—
70.3
26.5
30.1
—

$230.7

Middlesex Water Company

Guarantees

USA-PA operates the City of Perth Amboy’s (Perth Amboy) water and wastewater systems under a service contract
agreement 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 a variable fee based on increased system billing. Scheduled fixed fee payments were
$7.8 million in 2007 and will increase over the term of the contract to $10.2 million by the end of the contract.

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 December 31, 2007, approximately $22.6 million of the Series C Serial Bonds remained outstanding.

We are 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 guarantor, there is a provision
in the agreement that requires Perth Amboy to reimburse us. There are other provisions in the agreement that we
believe make it unlikely that we will be required to perform under the guarantee, such as scheduled annual rate
increases for the water and wastewater services as well as rate increases due to unforeseen circumstances. 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.

Critical Accounting Policies and Estimates

The application of accounting policies and standards often requires the use of estimates, assumptions and judgments.
Changes in these variables may lead to significantly different financial statement results. Our critical accounting policies
are set forth below.

Regulatory Accounting
We maintain our books and records in accordance with accounting principles generally accepted in the United States
of America. Middlesex and certain of its subsidiaries, which account for 90% of Operating Revenues and 98% of
Total Assets, are subject to regulation in the states in which they operate. Those companies are required to maintain
their accounts in accordance with regulatory authorities’ rules and guidelines, which may differ from other authoritative
accounting pronouncements. In those instances, the Company follows the guidance provided in the Financial
Accounting Standards Board (FASB), Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting
For the Effects of Certain Types of Regulation” (SFAS 71).

In accordance with SFAS No. 71, costs and obligations are deferred if it is probable that these items will be recognized
for rate-making purposes in future rates. Accordingly, we have recorded costs and obligations, which will be amortized
over various future periods. Any change in the assessment of the probability of rate-making treatment will require us to
change the accounting treatment of the deferred item. We have no reason to believe any of the deferred items that are
recorded would be treated differently by the regulators in the future.

Revenues
Revenues from metered customers include amounts billed on a cycle basis and unbilled amounts estimated from
the last meter reading date to the end of the accounting period. The estimated unbilled amounts are determined
by utilizing factors which include historical consumption usage and current climate conditions. Differences between
estimated revenues and actual billings are recorded in a subsequent period.

Revenues from unmetered customers are billed at a fixed tariff rate in advance at the beginning of each service period
and are recognized in revenue ratably over the service period.

Middlesex Water Company

Revenues from the Perth Amboy management contract are comprised of fixed and variable fees. Fixed fees, which
have been set for the life of the contract, are billed monthly and recorded as earned. Variable fees, which are based
on billings and other factors and are not significant, are recorded upon approval of the amount by Perth Amboy.

Pension Plan
We maintain a noncontributory defined benefit pension plan which covers substantially all employees with more than
1,000 hours of service and who were hired prior to March 31, 2007.

The discount rate utilized for determining future pension obligations has increased from 5.52% at December 31, 2005
to 5.89% at December 31, 2006 and increased to 6.59% at December 31, 2007. Lowering the discount rate by 0.5%
would have increased the net periodic pension cost by $1.3 million in 2007. Lowering the expected long-term rate of
return on the pension plans by 0.5% (from 8.0% to 7.5%) would have increased the net periodic pension cost in 2007
by approximately $1.1 million.

The discount rate for determining future pension obligations is determined based on market rates for long-term,
high-quality corporate bonds at our December 31 measurement date. The expected long-term rate of return for
pension assets is determined based on historical returns and our asset allocation.

Future pension expense will depend on future investment performance, changes in future discount rates and various
other demographic factors related to the population participating in the pension plan.

Recent Accounting Standards

See Note 1(m) of the Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Qualitative and Quantitative Disclosures About Market Risk.

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 2009 to 2038. Over the next
twelve months, approximately $2.7 million of the current portion of 18 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.

Middlesex Water Company

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Middlesex Water Company (Middlesex or the Company) is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13A-15(f ) and
15d-15(f ). Middlesex’s internal control system was designed to provide reasonable assurance to the Company’s
management and Board of Directors of adequate preparation and fair presentation of the published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to the adequacy of financial statement
preparation and presentation. Middlesex’s management assessed the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on our assessment, we believe that as of December 31, 2007, the Company’s internal control over
financial reporting is operating as designed and is effective based on those criteria.

Middlesex’s independent registered public accounting firm has audited the effectiveness of our internal control over
financial reporting as of December 31, 2007 as stated in their report which is included herein.

Dennis W. Doll
President and
Chief Executive Officer

Iselin, New Jersey
March 10, 2008

A. Bruce O’Connor
Vice President and
Chief Financial Officer

Middlesex Water Company

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Middlesex Water Company:

We have audited Middlesex Water Company’s (the
Company) internal control over financial reporting as
of December 31, 2007, based on criteria established in
Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s
management is responsible for maintaining effective
internal control over financial reporting and for its
assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight
Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material
respects. Our audit of internal control over financial
reporting included obtaining an understanding of
internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit
also included performing such other procedures as we
considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting
is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes
in accordance with generally accepted accounting
principles. A company’s internal control over financial
reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted
accounting principles, and that receipts and expenditures
of the company are being made only in accordance
with authorizations of management and directors of
the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may
become inadequate because of changes in conditions,
or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).

We have also audited, in accordance with the standards
of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets and
consolidated statements of capital stock and long-term
debt of the Company as of December 31, 2007 and
2006 and the related consolidated statements of income,
stockholders’ equity and comprehensive income, and
cash flows for the years then ended. Our report dated
March 10, 2008 expressed an unqualified opinion on
these consolidated financial statements.

Beard Miller Company LLP
Reading, Pennsylvania
March 10, 2008

Middlesex Water Company

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Middlesex Water Company:

We have audited the accompanying consolidated
balance sheets and consolidated statements of capital
stock and long-term debt of Middlesex Water Company
and subsidiaries (the Company) as of December 31,
2007 and 2006, and the related consolidated statements
of income, stockholders’ equity and comprehensive
income, and cash flows for the years then ended.
The Company’s management is responsible for these
consolidated financial statements. Our responsibility
is to express an opinion on these financial statements
based on our audits. The consolidated financial
statements of the Company for the year ended
December 31, 2005 were audited by other auditors
whose report dated March 16, 2006, expressed
an unqualified opinion on those statements.

We conducted our audits in accordance with the
standards of the Public Company Accounting
Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated
financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. An audit also includes assessing
the accounting principles used and significant estimates
made by management, as well as evaluating the overall
financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material
respects, the financial position of the Company as
of December 31, 2007 and 2006, and the results of its
operations and its cash flows for the years then ended
in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 7 to the consolidated financial
statements, the Company changed its method of
accounting for defined benefit pension and other
postretirement plans in 2006.

We also have audited, in accordance with the standards
of the Public Company Accounting Oversight Board
(United States), Middlesex Water Company’s internal
control over financial reporting as of December 31,
2007, based on criteria established in Internal Control –
Integral Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 10, 2008
expressed an unqualified opinion.

Beard Miller Company LLP
Reading, Pennsylvania
March 10, 2008

Middlesex Water Company

CONSOLIDATED BALANCE SHEETS
(In thousands)

ASSETS

UTILITY PLANT:

CURRENT ASSETS:

DEFERRED CHARGES
AND OTHER ASSETS:

Water Production
Transmission and Distribution
General
Construction Work in Progress

TOTAL
Less Accumulated Depreciation

UTILITY PLANT - NET

Cash and Cash Equivalents
Accounts Receivable, net
Unbilled Revenues
Materials and Supplies (at average cost)
Prepayments

TOTAL CURRENT ASSETS

Unamortized Debt Expense
Preliminary Survey and Investigation Charges
Regulatory Assets
Operations Contracts Fees Receivable
Restricted Cash
Non-utility Assets - Net
Other

TOTAL DEFERRED CHARGES AND OTHER ASSETS

December 31,

2007

$098,942
264,939
24,874
9,833

398,588
64,736

333,852

2,029
8,227
4,609
1,205
1,363

17,433

2,884
5,283
16,090
4,184
6,418
6,183
348

41,390

2006

$095,324
243,959
25,153
6,131

370,567
59,694

310,873

5,826
8,538
4,013
1,306
1,229

20,912

3,014
3,436
18,342
607
6,850
5,648
585

38,482

TOTAL ASSETS

$392,675

$370,267

CAPITALIZATION AND LIABILITIES

CAPITALIZATION:

Common Stock, No Par Value
Retained Earnings
Accumulated Other Comprehensive Income, net of tax

CURRENT
LIABILITIES:

TOTAL COMMON EQUITY

Preferred Stock
Long-term Debt

TOTAL CAPITALIZATION

Current Portion of Long-term Debt
Notes Payable
Accounts Payable
Accrued Taxes
Accrued Interest
Unearned Revenues and Advanced Service Fees
Other

$105,668
27,441
69

133,178

3,958
131,615

268,751

2,723
6,250
6,477
7,611
1,916
758
1,274

$104,248
25,001
94

129,343

3,958
130,706

264,007

2,501

—

5,491
6,684
1,880
601
984

COMMITMENTS AND CONTINGENT LIABILITIES (Note 4)

TOTAL CURRENT LIABILITIES

27,009

18,141

DEFERRED CREDITS
AND OTHER LIABILITIES:

Customer Advances for Construction
Accumulated Deferred Investment Tax Credits
Accumulated Deferred Income Taxes
Employee Benefit Plans
Regulatory Liability - Cost of Utility Plant Removal
Other

21,758
1,461
17,940
13,333
5,726
459

TOTAL DEFERRED CREDITS AND OTHER LIABILITIES

60,677

CONTRIBUTIONS IN AID OF CONSTRUCTION

TOTAL CAPITALIZATION AND LIABILITIES

36,238

$392,675

See Notes to Consolidated Financial Statements.

19,246
1,813
15,779
16,388
6,200
527

59,953

28,166

$370,267

Middlesex Water Company

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except per Share Amounts)

OPERATING REVENUES

OPERATING EXPENSES:

Operations
Maintenance
Depreciation
Other Taxes

TOTAL OPERATING EXPENSES

OPERATING INCOME

OTHER INCOME (EXPENSE):

Allowance for Funds Used During Construction
Other Income
Other Expense

TOTAL OTHER INCOME, NET

INTEREST CHARGES

INCOME BEFORE INCOME TAXES
INCOME TAXES

NET INCOME
PREFERRED STOCK DIVIDEND REQUIREMENTS

EARNINGS APPLICABLE TO COMMON STOCK

Earnings per share of Common Stock:

Basic
Diluted

Average Number of Common Shares Outstanding:

Basic
Diluted

Cash Dividends Paid per Common Share

See Notes to Consolidated Financial Statements.

2007

$86,114

42,117
4,123
7,539
9,664

63,443

22,671

537
1,153
(163)

1,527

6,619

17,579
5,736

11,843
248

$11,595

$ 000.88
$ 000.87

13,203
13,534
$00.693

Years Ended December 31,

2006

$81,061

2005

$74,613

39,799
3,546
7,060
9,338

59,743

21,318

632
160
(18)

774

7,012

15,080
5,041

10,039
248

38,636
3,520
6,460
8,779

57,395

17,218

548
220
(28)

740

6,245

11,713
3,237

8,476
251

$09,791

$08,225

$000.83
$000.82

11,844
12,175
$00.683

$000.72
$000.71

11,445
11,784
$00.673

2007

Years Ended December 31,
2006

2005

$11,843

$10,039

$8,476

Middlesex Water Company

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adjustments to Reconcile Net Income to

Net Cash Provided by Operating Activities:

Depreciation and Amortization
Provision for Deferred Income Taxes and ITC
Allowance for Funds Used During Construction
Equity Portion of AFUDC
Cash Surrender Value of Life Insurance
Gain on Sale of Real Estate
Changes in Assets and Liabilities:

Accounts Receivable
Unbilled Revenues
Materials and Supplies
Prepayments
Other Assets
Accounts Payable
Accrued Taxes
Accrued Interest
Employee Benefit Plans
Unearned Revenue and Advanced Service Fees
Other Liabilities

NET CASH PROVIDED BY OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES:

Utility Plant Expenditures, Including AFUDC of $ 282 in 2007,

$373 in 2006, and $0 in 2005

Cash Surrender Value & Other Investments
Restricted Cash
Proceeds from Real Estate Dispositions
Preliminary Survey and Investigation Charges

NET CASH USED IN INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVITIES:

Redemption of Long-term Debt
Proceeds from Issuance of Long-term Debt
Net Short-term Bank Borrowings
Deferred Debt Issuance Expenses
Common Stock Issuance Expense
Restricted Cash
Proceeds from Issuance of Common Stock
Payment of Common Dividends
Payment of Preferred Dividends
Construction Advances and Contributions-Net

NET CASH PROVIDED BY FINANCING ACTIVITIES

NET CHANGES IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

8,176
399
—
(255)
(271)
(267)

(2,752)
(596)
101
(134)
(9)
986
941
36
239
157
224

18,818

(21,930)
—
444
273
(1,847)

(23,060)

(2,501)
3,632
6,250
(50)
(15)
(12)
1,420
(9,141)
(248)
1,110

445

(3,797)

5,826

7,761
897
—
(259)
(155)
—

(463)
(276)
(46)
(301)
(485)
(538)
197
11
(84)
127
(299)

16,126

(30,734)
—
(1,036)
—
(1,661)

(33,431)

(1,915)
5,016
(4,000)
(28)
(238)
(32)
28,088
(8,190)
(248)
1,694

20,147

2,842

2,984

7,160
165
(548)
—
—
—

(1,758)
(165)
(56)
(103)
(151)
(18)
(323)
166
710
86
(144)

13,497

(25,288)
(294)
7,637

—
(743)

(18,688)

(1,215)
14,948
(7,000)
(166)
—
(163)
4,076
(7,690)
(251)
1,601

4,140

(1,051)

4,035

$2,984

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$02,029

$05,826

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:

Utility Plant received as Construction Advances and Contributions

$08,960

$03,543

$5,150

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

Cash Paid During the Year for:

Interest
Interest Capitalized
Income Taxes

See Notes to Consolidated Financial Statements.

$06,542
$00(282)
$04,534

$06,937
$00(373)
$04,352

$5,990
$0(548)
$3,792

Middlesex Water Company

CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND LONG-TERM DEBT

(In thousands)

Common Stock, No Par Value

Shares Authorized - 40,000
Shares Outstanding - 2007 - 13,246
2006 - 13,168

Retained Earnings
Accumulated Other Comprehensive Income, net of tax

TOTAL COMMON EQUITY

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
Shares Outstanding, $8.00 Series - 12

Nonredeemable:

Shares Outstanding, $7.00 Series - 01
Shares Outstanding, $4.75 Series - 10
TOTAL PREFERRED STOCK

Long-term Debt:

8.05%, Amortizing Secured Note, due December 20, 2021
6.25%, Amortizing Secured Note, due May 22, 2028
6.44%, Amortizing Secured Note, due August 25, 2030
6.46%, Amortizing Secured Note, due September 19, 2031
4.22%, State Revolving Trust Note, due December 31, 2022
3.30% to 3.60%, State Revolving Trust Note, due May 1, 2025
3.49%, State Revolving Trust Note, due January 25, 2027
4.03%, State Revolving Trust Note, due December 1, 2026
4.00% to 5.00%, State Revolving Trust Bond, due September 1, 2021
0.00%, State Revolving Fund Bond, due September 1, 2021

First Mortgage Bonds:

5.20%, Series S, due October 1, 2022
5.25%, Series T, due October 1, 2023
6.40%, Series U, due February 1, 2009
5.25%, Series V, due February 1, 2029
5.35%, Series W, due February 1, 2038
0.00%, Series X, due September 1, 2018
4.25% to 4.63%, Series Y, due September 1, 2018
0.00%, Series Z, due September 1, 2019
5.25% to 5.75%, Series AA, due September 1, 2019
0.00%, Series BB, due September 1, 2021
4.00% to 5.00%, Series CC, due September 1, 2021
5.10%, Series DD, due January 1, 2032
0.00%, Series EE, due September 1, 2024
3.00% to 5.50%, Series FF, due September 1, 2024
0.00%, Series GG, due August 1, 2026
4.00% to 5.00%, Series HH, due August 1, 2026
0.00%, Series II, due August 1, 2027
3.40% to 5.00%, Series JJ, due August 1, 2027
SUBTOTAL LONG-TERM DEBT

Less: Current Portion of Long-term Debt

TOTAL LONG-TERM DEBT

See Notes to Consolidated Financial Statements.

December 31,

2007

2006

$105,668

$104,248

27,441
69

133,178

25,001
94

129,343

1,457
1,399

102
1,000

003,958

002,800
8,575
6,347
6,627
691
3,168
603
974
695
538

12,000
6,500
15,000
10,000
23,000
591
765
1,342
1,785
1,685
1,995
6,000
7,112
8,385
1,710
1,950
1,750
1,750

1,457
1,399

102
1,000

003,958

002,896
8,995
6,627
6,907
739
3,100
598
914
730
577

12,000
6,500
15,000
10,000
23,000
647
820
1,455
1,890
1,805
2,090
6,000
7,482
8,735
1,750
1,950
-
-

134,338

(2,723)

$131,615

133,207

(2,501)

$130,706

Middlesex Water Company

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME

(in thousands)

Balance at January 1, 2005
Net Income
Minimum Pension Liability,
Net of $135 Income Tax
Change in Value of Equity

Investments, Net of $5 Income Tax

Comprehensive Income

Dividend Reinvestment &

Common Stock Purchase Plan

Restricted Stock Award - Net
Preferred Stock Conversion
Cash Dividends on Common Stock
Cash Dividends on Preferred Stock

Balance at December 31, 2005
Net Income
Minimum Pension Liability,
Net of $135 Income Tax

Change in Value of Equity Investments,

Net of $20 Income Tax

Comprehensive Income

Dividend Reinvestment &

Common Stock Purchase Plan

Restricted Stock Award - Net
Issuance of Common Stock
Cash Dividends on Common Stock
Cash Dividends on Preferred Stock
Common Stock Expenses

Balance at December 31, 2006
Net Income
Change in Value of Equity Investments,

Net of $13 Income Tax

Comprehensive Income

Dividend Reinvestment &

Common Stock Purchase Plan

Restricted Stock Award - Net
Cash Dividends on Common Stock
Cash Dividends on Preferred Stock
Common Stock Expenses
Other

Common
Stock
Shares

11,358

Common
Stock
Amount

$ 071,980

Accumulated
Other
Comprehensive
Income (Loss)

$0(45

Retained
Earnings

$ 23,103
8,476

Total

$ 095,128
8,476

195
19
12

3,640
436
105

11,584

76,161

70
19
1,495

1,321
275
26,491

13,168

104,248

61
17

1,147
273

(7,690)
(251)

23,638
10,039

(8,190)
(248)
(238)

25,001
11,843

(9,141)
(248)
(15)
1

(262)

(207)

262

0(94

(25)

(262)

8,224

3,640
436
105
(7,690)
(251)

099,592
10,039

262

10,340

1,321
275
26,491
(8,190)
(248)
(238)

129,343
11,843

(25)

11,818

1,147
273
(9,141)
(248)
(15)
1

Balance at December 31, 2007

13,246

$105,668

$27,441

$0(69

$133,178

See Notes to Consolidated Financial Statements.

Middlesex Water Company

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of
Significant Accounting Policies

(a) Organization – Middlesex Water Company
(Middlesex) is the parent company and sole shareholder
of Tidewater Utilities, Inc. (Tidewater), Tidewater
Environmental Services, Inc. (TESI), Pinelands Water
Company (Pinelands Water) and Pinelands Wastewater
Company (Pinelands Wastewater) (collectively,
Pinelands), Utility Service Affiliates, Inc. (USA) 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.

Middlesex Water 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 domestic, 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. We are regulated as to rates
charged to customers for water and wastewater services
in New Jersey and Delaware, as to the quality of
services we provide and as to certain other matters.
Only our USA, USA-PA and White Marsh subsidiaries
are not regulated utilities.

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

(b) System of Accounts – Middlesex, Pinelands Water
and Pinelands Wastewater maintain their accounts in
accordance with the Uniform System of Accounts
prescribed by the Board of Public Utilities of the State
of New Jersey (BPU). Tidewater, TESI and Southern
Shores maintain their accounts in accordance with
the Public Service Commission of Delaware (PSC)
requirements.

(c) Utility Plant is stated at original cost as defined
for regulatory purposes. Property accounts are charged
with the cost of betterments and major replacements
of property. Cost includes direct material, labor and
indirect charges for pension benefits and payroll taxes.
The cost of labor, materials, supervision and other

expenses incurred in making repairs and minor
replacements and in maintaining the properties is
charged to the appropriate expense accounts. At
December 31, 2007, there was no event or change
in circumstance that would indicate that the carrying
amount of any long-lived asset was not recoverable.

(d) Depreciation is computed by each regulated
member of the Company utilizing a rate approved by
the applicable regulatory authority. The Accumulated
Provision for Depreciation is charged with the cost
of property retired, less salvage. The following table
sets forth the range of depreciation rates for the major
utility plant categories used to calculate depreciation
for the years ended December 31, 2007, 2006 and
2005. These rates have been approved by either the
BPU or PSC:

Source of Supply
Pumping
Water Treatment
General Plant
Transmission and Distribution (T&D):
T&D – Mains
T&D – Services
Other

1.15% -03.44%
2.87% -05.04%
2.71% -07.64%
2.08% -17.84%

1.10% -03.13%
2.12% -02.81%
1.61% -04.63%

Non-regulated fixed assets consist primarily of an
office building, furniture and fixtures, and transportation
equipment. These assets are recorded at original cost
and depreciation is calculated based on the estimated
useful lives, ranging from 3 to 40 years.

(e) Customers’ Advances for Construction – Water
utility plant and/or cash advances are contributed to
the Company by customers, real estate developers and
builders in order to extend water service to their
properties. These contributions are recorded as
Customers’ Advances for Construction. Refunds on
these advances are made by the Company in accordance
with agreements with the contributing party and are
based on either additional operating revenues related
to the utility plant or as new customers are connected
to and take service from the utility plant. After all
refunds are made, any remaining balance is transferred
to Contributions in Aid of Construction.

Contributions in Aid of Construction – Contributions
in Aid of Construction include direct non-refundable
contributions of water utility plant and/or cash and
the portion of Customers’ Advances for Construction
that become non-refundable.

Middlesex Water Company

Advances and Contributions are not depreciated in
accordance with BPU and PSC requirements. In
addition, these amounts reduce the investment base
for purposes of setting rates.

(f ) Allowance for Funds Used During Construction
(AFUDC) – Middlesex and its regulated subsidiaries
capitalize AFUDC, which represents the cost of
financing projects during construction. AFUDC is
added to the construction costs of individual projects
exceeding specific cost and construction period
thresholds established for each company and then
depreciated along with the rest of the utility plant’s
costs over its estimated useful life. For the years ended
December 31, 2007, 2006 and 2005 approximately
$0.5 million, $0.6 million and $0.5 million,
respectively of AFUDC was added to the cost of
construction projects. AFUDC is calculated using
each company’s weighted cost of debt and equity as
approved in their most recent respective regulatory
rate order. The average AFUDC rate for the years
ended December 31, 2007, 2006 and 2005 for
Middlesex and Tidewater were 7.45% and 7.94%,
respectively.

(g) Accounts Receivable – We record bad debt expense
based on historical write-offs. The allowance for
doubtful accounts was $0.3 million at December 31,
2007, $0.3 million at December 31, 2006, and $0.2
million at December 31, 2005. The corresponding
expense for the year ended December 31, 2007, 2006
and 2005 was $0.1 million, $0.3 million and $0.2
million, respectively.

(h) Revenues – General metered customer’s bills for
regulated water service are typically comprised of two
components; a fixed service charge and a volumetric or
consumption charge. Revenues from general metered
service water customers, except Tidewater, include
amounts billed in arrears on a cycle basis and unbilled
amounts estimated from the last meter reading date
to the end of the accounting period. The estimated
unbilled amounts are determined by utilizing factors
which include historical consumption usage and
current climate conditions. Actual billings may differ
from our estimates. Revenues are adjusted in the
period that the difference is identified. Tidewater
customers are billed in advance for their fixed service
charge and these revenues are recognized as the service
is provided to the customer.

Southern Shores is an unmetered system. Customers
are billed a fixed service charge in advance at the
beginning of each month and revenues are recognized
as earned. Revenues from the City of Perth Amboy

management contract are comprised of fixed and
variable fees. Fixed fees, which have been set for the
life of the contract, are billed monthly and recorded
as earned. Variable fees, which are not significant, are
recorded upon approval of the amount by the City of
Perth Amboy.

USA bills customers on a quarterly or annual basis
for its LineCareSM service line maintenance program.
Quarterly amounts billed are recognized as earned.
Amounts that are billed on an annual basis are deferred
and recognized as revenue ratably over the year.

(i) Deferred Charges and Other Assets – Unamortized
Debt Expense is amortized over the lives of the related
issues. Restricted Cash represents proceeds from loans
entered into through state financing programs and is
held in trusts. The proceeds are restricted for specific
capital expenditures and debt service requirements.

(j) Income Taxes – Middlesex files a consolidated
federal income tax return for the Company and
income taxes are allocated based on the separate return
method. Investment tax credits have been deferred
and are amortized over the estimated useful life of
the related property.

(k) Statements of Cash Flows – For purposes of reporting
cash flows, the Company considers all highly liquid
investments with original maturity dates of three
months or less to be cash equivalents. Cash and cash
equivalents represent bank balances and money market
funds with investments maturing in less than 90 days.

(l) Use of Estimates – Conformity with accounting
principles generally accepted in the United States of
America requires management to make estimates and
assumptions that affect the reported amounts in the
financial statements. Actual results could differ from
those estimates.

(m) Recent Accounting Pronouncements – In
September 2006, the Financial Accounting Standards
Board (FASB) issued SFAS 157, Fair Value
Measurements, which establishes a framework for
measuring fair value and expands disclosures about fair
value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007 and interim
periods within those fiscal years. In February 2008,
the FASB issued FASB Staff Position (FSP) 157-2,
Effective Date of FASB Statement No. 157, which
deferred the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008 for nonfinancial
assets and nonfinancial liabilities. The Company does
not expect that the adoption of SFAS 157 will have
a material impact on its financial statements.

Middlesex Water Company

In February 2007, the FASB issued FSP FAS 158-1,
“Conforming Amendments to the Illustrations in
FASB Statements No. 87, No. 88, and No 106 and
to the Related Staff Implementation Guides.” This
FSP makes conforming amendments to other FASB
statements and staff implementation guides and
provides technical corrections to SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans.” The conforming
amendments in this FSP did not have a material
impact on the Company’s consolidated financial
statements or disclosures.

FASB statement No. 141 (R) “Business Combinations”
was issued in December of 2007. This Statement
establishes principles and requirements for how the
acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interest
in the acquiree. The Statement also provides guidance
for recognizing and measuring the goodwill acquired
in the business combination and determines what
information to disclose to enable users of the financial
statements to evaluate the nature and financial effects
of the business combination. The guidance will
become effective as of the beginning of a company’s
fiscal year beginning after December 15, 2008.
This new pronouncement will impact the Company’s
accounting for business combinations completed
beginning January 1, 2009.

In May 2007, the FASB issued FSP FIN 48-1 “Definition
of Settlement in FASB Interpretation No. 48” (FSP
FIN 48-1). FSP FIN 48-1 provides guidance on how
to determine whether a tax position is effectively
settled for the purpose of recognizing previously
unrecognized tax benefits. FSP FIN 48-1 is effective
retroactively to January 1, 2007. The implementation
of this standard did not have a material impact on our
consolidated financial position or results of operations.

In July 2006, the 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 is effective for fiscal years beginning
after December 15, 2006. The adoption of this
interpretation did not materially impact the Company’s
results of operations and financial condition.

(n) Other Comprehensive Income – Total comprehensive
income includes changes in equity that are excluded
from the consolidated statements of income and are
recorded into a separate section of capitalization on

the consolidated balance sheets. The Company’s
accumulated other comprehensive income shown on
the consolidated balance sheets consists of unrealized
gains on investment holdings.

(o) Regulatory Accounting – We maintain our books
and records in accordance with accounting principles
generally accepted in the United States of America.
Middlesex and certain of its subsidiaries, which
account for 90% of Operating Revenues and 98%
of Total Assets, are subject to regulation in the state
in which they operate. Those companies are required
to maintain their accounts in accordance with regulatory
authorities’ rules and guidelines, which may differ
from other authoritative accounting pronouncements.
In those instances, the Company follows the guidance
provided in SFAS No. 71, “Accounting for the Effects
of Certain Types of Regulation.”

(p) Pension Plan – We maintain a noncontributory
defined benefit pension plan which covers substantially
all employees with more than 1,000 hours of service,
and who were hired as of March 31, 2007. The
discount rate utilized for determining pension costs
decreased from 5.88% for the year ended December
31, 2005 to 5.52% for the year ended December 31,
2006 and increased to 5.89% for the year ended
December 31, 2007. Future actual pension expense
will depend on future investment performance,
changes in future discount rates and various other
factors related to the population participating in
the pension plans.

Note 2 - Rate and Regulatory Matters

Effective October 26, 2007, Middlesex received
approval from the New Jersey Board of Public Utilities
(BPU) for a 9.1%, or $5.0 million increase in its base
water rates. The increase was predicated on a rate base
of $164.4 million and an authorized return on equity
of 10.0%. Middlesex had originally filed for an $8.9
million or 16.5% base rate increase with the BPU on
April 18, 2007. The rate 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 June 2005.

On April 28, 2006, Tidewater filed for a $5.5 million,
or 38.6%, base rate increase with the Delaware Public
Service Commission (PSC). The request is intended to
recover increased costs of operations, maintenance and
taxes, as well as capital investment of approximately
$23.8 million since rates were last established in
March 2005. Since June 27, 2006, Tidewater has been
billing and recognizing additional revenues through a

Middlesex Water Company

15% interim rate increase subject to refund as allowed
under PSC regulations. A settlement was reached
amongst the parties which concluded that a 26.9%
overall increase in base rates would be implemented.
The PSC approved the settlement and the remaining
11.9% increase was put into effect on February 28, 2007.

Effective April 13, 2006, Pinelands Water and
Pinelands Wastewater received approval from the
New Jersey Board of Public Utilities (BPU) for base
rate increases of 7.02% and 0.98%, respectively.
These increases represent a total base rate increase of
approximately $0.1 million for Pinelands to offset
increased costs associated with capital improvements,
and the operation and maintenance of their systems.

In accordance with the tariff established for Southern
Shores, an annual rate increase of 3% was implemented
on January 1, 2008. Under the terms of a contract
with Southern Shores Homeowners Association, the
increase cannot exceed the lesser of the regional
Consumer Price Index or 3%.

We have recorded certain costs as regulatory assets
because we expect full recovery of, or are currently
recovering, these costs in the rates we charge customers.
These deferred costs have been excluded from rate
base and, therefore, we are not earning a return on
the unamortized balances. These items are detailed
as follows:

December 31,
(Thousands of Dollars)

Remaining
Recovery
Periods

Various
Various
3-8 years

Regulatory Assets

2007

2006

Postretirement

Benefits
Income Taxes
Tank Painting
Rate Cases
and Other

$07,279 $11,130
6,813
275

8,222
225

364

124 Up to 2 years

Total

$16,090 $18,342

Postretirement benefits include pension and other
postretirement benefits that have been recorded on the
Consolidated Balance Sheet upon adoption of SFAS
158. These amounts represent obligations in excess of
current funding, which the Company believes will be
fully recovered in rates set by the regulatory authorities.

The recovery period for income taxes is dependent
upon when the temporary differences between the
tax and book treatment of various items reverse.
The Company uses composite depreciation rates for its
regulated utility assets, which is currently an acceptable
method under generally accepted accounting principles
and is widely used in the utility industry. Historically,
under the composite depreciation method, the anticipated
costs of removing assets upon retirement are provided
for over the life of those assets as a component of
depreciation expense. The Company recovers certain
asset retirement costs through rates charged to customers
as an approved component of depreciation expense.
As of December 31, 2007 and 2006, the Company
has approximately $5.7 million and $6.2 million,
respectively, of expected costs of removal recovered
currently in rates in excess of actual costs incurred.
These amounts are recorded as regulatory liabilities.

The Company is recovering in current rates acquisition
premiums totaling $0.8 million over the remaining
lives of the underlying Utility Plant. These deferred
costs have been included in rate base as utility plant
and a return is being earned on the unamortized
balances during the recovery periods.

Note 3 - Income Taxes

Income tax expense differs from the amount computed
by applying the statutory rate on book income subject
to tax for the following reasons:

Years Ended December 31,
(Thousands of Dollars)
2007
2006

2005

Income Tax at

Statutory Rate

$6,021 $5,155 $3,982

Tax Effect of:

Utility Plant Related
State Income Taxes –

Net

Employee Benefits
Other

Total Income
Tax Expense

(595)

(338)

(899)

350
(49)
9

257
(48)
15

176
(25)
3

$5,736 $5,041 $3,237

Middlesex Water Company

Income tax expense is comprised of the following:

Years Ended December 31,
(Thousands of Dollars)
2007
2006

2005

Current:
Federal
State
Deferred:
Federal
State
Investment Tax

Credits

Total Income
Tax Expense

$4,894 $3,846 $2,889
183

413

298

634
117

884
92

160
84

(322)

(79)

$5,736 $5,041 $3,237

The statutory review period for income tax returns
for the years prior to 2004 has been closed. Federal
income tax returns for 2005 and 2006 are currently
under review by the Internal Revenue Service. Although
the review is still in process, no material adjustments
have been proposed by the examiner. In the event that
there are interest and penalties associated with income
tax adjustments, these amounts would be reported under
interest expense and other expense, respectively.

Deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts
of assets and liabilities for financial purposes and
the amounts used for income tax purposes. The
components of the net deferred tax liability are
as follows:

December 31,
(Thousands of Dollars)

2007

2006

$24,892
(4,117)
(2,544)
(291)

$23,656
(4,189)
(3,515)
(173)

$17,940

$15,779

Utility Plant Related
Customer Advances
Employee Benefits
Other

Total Deferred
Tax Liability

Note 4 - Commitments and
Contingent Liabilities

Guarantees - USA-PA operates the City of Perth
Amboy’s (Perth Amboy) water and wastewater systems

under a service contract agreement 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 a variable fee based on increased system billing.
Scheduled fixed fee payments for 2007, 2006 and
2005 were $7.8 million, $7.6 million and $7.4 million,
respectively. The fixed fees will increase over the term
of the contract to $10.2 million.

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 December 31, 2007, approximately $22.6 million
of the Series C Serial Bonds remained outstanding.

We are 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
guarantor, there is a provision in the agreement that
requires Perth Amboy to reimburse us. There are other
provisions in the agreement that we believe make it
unlikely that we will be required to perform under the
guarantee, such as scheduled annual rate increases for
water and wastewater services as well as rate increases
due to unforeseen circumstances. 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 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,
2011, provides for the minimum purchase of 3 mgd of
treated water with provisions for additional purchases.

Middlesex Water Company

Purchased water costs are shown below:

Purchased Water

Untreated
Treated

Total Costs

Years Ended December 31,
(Millions of Dollars)
2006

2007

2005

$2.4
2.1

$4.5

$2.3
1.9

$4.2

$2.3
1.9

$4.2

Construction – The Company may spend up to $36.9
million in 2008, $76.9 million in 2009 and $44.9
million in 2010 on its construction program. The
development of these estimates is based in part upon
projected housing development and sales in Delaware.

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 October 2007,
Tidewater agreed to dismiss its appeal of the SFPC’s
decision with the Sussex County Superior Court in
Delaware of the notice of violation and request for
corrective action issued by the Fire Marshal. In return
for the dismissal both parties have agreed that 15 of
the original 67 community water systems previously
identified will require certain modifications over a
ten-year period in order to provide full fire protection.
The expected capital investment to comply with the
settlement is $12.0 to $14.0 million and will be
expended ratably over the ten-year period. We will
apply to the PSC to increase base rates to recover the
costs of any such modifications. Although these types
of modifications have routinely been included in previous
rate matters, the PSC may not approve a portion or all
of the costs associated with the fire protection upgrades.

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

Note 5 – Short-term Borrowings

Information regarding the Company’s short-term
borrowings for the years ended December 31, 2007
and 2006 is summarized as follows:

Established Lines at
Year-End
Maximum Amount

Outstanding

Average Outstanding
Notes Payable at Year-End
Weighted Average
Interest Rate

Weighted Average Interest

(Millions of Dollars)
2006

2007

$40.0

$37.0

6.6
2.6
6.3

18.2
9.5
None

6.36% 6.13%

Rate at Year-End

5.79%

None

The maturity date for the $6.3 million borrowing,
with an interest rate of 5.79%, outstanding as of
December 31, 2007 was January 7, 2008.

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

Note 6 - Capitalization

All the transactions discussed below related to the
issuance of securities were approved by either the BPU
or PSC, except where otherwise noted.

Common Stock
In June 2007, the number of shares authorized under
the Dividend Reinvestment and Common Stock
Purchase Plan (DRP) increased from 1,700,000 shares
to 2,300,000 shares. The cumulative number of shares
issued under the DRP at December 31, 2007, is
1,642,877. The Company also has shares authorized
and outstanding under a restricted stock plan, which
is described in Note 7 – Employee Benefit Plans.
In November 2006, the Company sold and issued
1,495,000 shares of its common stock in a public
offering that was priced at $18.46. The majority of the
net proceeds of approximately $26.2 million were used
to repay all of the Company’s short-term borrowings
outstanding at that time. Remaining proceeds from
the public offering were used to fund a portion of
the 2007 capital program.

In the event dividends on the preferred stock are in
arrears, no dividends may be declared or paid on the
common stock of the Company. At December 31,
2007, no preferred stock dividends were in arrears.

Preferred Stock
If four or more quarterly dividends are in arrears, the
preferred shareholders, as a class, are entitled to elect

Middlesex Water Company

two members to the Board of Directors in addition
to Directors elected by holders of the common stock.
At December 31, 2007 and 2006, 36,898 shares of
preferred stock presently authorized were outstanding
and there were no dividends in arrears.

The conversion feature of the no par $7.00 Series
Cumulative and Convertible Preferred Stock allows the
security holders to exchange one convertible preferred
share for twelve shares of the Company’s common
stock. In addition, the Company may redeem up to
10% of the outstanding convertible stock in any
calendar year at a price equal to the fair market value
of twelve shares of the Company’s common stock for
each share of convertible stock redeemed. During
September 2005, 1,000 shares of the no par $7.00
Series Cumulative and Convertible Preferred Stock
was converted into 12,000 of common stock.

The conversion feature of the no par $8.00 Series
Cumulative and Convertible Preferred Stock allows
the security holders to exchange one convertible
preferred share for 13.714 shares of the Company’s
common stock. The preferred shares are convertible
into common stock at the election of the security
holder or Middlesex.

Long-term Debt
In December 2007, Tidewater closed on a $1.1 million
loan with the Delaware State Revolving Fund (SRF).
This loan allows, but does not obligate, Tidewater to
draw down against a General Obligation Note for
two specific projects no later than July 31, 2008. The
interest rate on any draw-down will be set at 3.64%
with a final maturity of July 1, 2028 on the amount
actually borrowed.

In November 2007, Middlesex issued $3.5 million
of first mortgage bonds through the New Jersey
Environmental Infrastructure Trust under the New
Jersey SRF program. The Company closed on the
first mortgage bonds designated as Series II and JJ
on November 8, 2007.

In November 2006, Middlesex issued $3.7 million
of first mortgage bonds through the New Jersey
Environmental Infrastructure Trust under the New
Jersey SRF program. The Company closed on the
first mortgage bonds designated as Series GG and
HH on November 4, 2006.

In May 2006, Tidewater closed on a $1.0 million
loan with the Delaware State Revolving Fund (SRF).
The proceeds were used to fund capital improvements

for one specific community water system in Delaware.
The interest rate on the loan is 4.03% and will have a
final maturity on December 1, 2026.

First Mortgage Bonds Series S through W and
Series DD are term bonds with single maturity dates.
With the exception of $15.0 million for repayment
for the First Mortgage Bond Series U due in 2009,
principal repayments for the First Mortgage Bonds
extend beyond 2012. The aggregate annual principal
repayment obligations for all other long-term debt
are shown below:

Year

2008
2009
2010
2011
2012

(Millions of Dollars)
Annual Maturities

$2.7
$3.1
$3.2
$3.2
$3.3

The weighted average interest rate on all long-term
debt at December 31, 2007 and 2006 was 5.20% and
5.28%, respectively. Except for the Amortizing Secured
Notes and Series U First Mortgage Bonds, all of the
Company’s outstanding debt has been issued through
the New Jersey Economic Development Authority
($57.5 million), the New Jersey Environmental
Infrastructure Trust program ($32.1 million) and
the SRF program ($5.4 million).

Restricted cash includes proceeds from the Series Y,
AA, BB, CC, EE, FF, GG, HH, II and JJ First
Mortgage Bonds and State Revolving Trust Bonds
issuances. These funds are held in trusts and restricted
for specific capital expenditures and debt service
requirements. Series GG and HH proceeds can only
be used for the 2007 main cleaning and cement lining
program. Series II and JJ proceeds can only be used for
the 2008 main cleaning and cement lining program.
All other bond issuance balances in restricted cash are
for debt service requirements.

Substantially all of the Utility Plant of the Company
is subject to the lien of its mortgage, which also
includes debt service and capital ratio covenants,
certain restrictions as to cash dividend payments and
other distributions on common stock. The Company
is in compliance with all of its mortgage covenants
and restrictions.

Middlesex Water Company

Earnings Per Share
The following table presents the calculation of
basic and diluted earnings per share (EPS) for the
three years ended December 31, 2007. Basic EPS

is computed on the basis of the weighted average
number of shares outstanding. Diluted EPS assumes
the conversion of both the Convertible Preferred
Stock $7.00 Series and $8.00 Series.

Basic:

Net Income
Preferred Dividend

Earnings Applicable to Common Stock
Basic EPS

Diluted:

Earnings Applicable to Common Stock
$7.00 Series Dividend
$8.00 Series Dividend

Adjusted Earnings Applicable to Common Stock
Diluted EPS

(In Thousands, Except per Share Data)
2006

2005

2007

Income

$11,843
(248)

13,203 $10,039

11,844

(248)

$11,595
$000.88

13,203 $09,791
$000.83

11,844

$8,476
(251)

$8,225
$00.72

11,445

$11,595
97
96

$11,788
$000.87

13,203 $09,791
97
96

167
164

13,534 $09,984
$000.82

11,844
167
164

12,175

$8,225
101
96

$8,422
$00.71

11,445
175
164

11,784

Fair Value of Financial Instruments
The following methods and assumptions were used
by the Company in estimating its fair value disclosure
for financial instruments for which it is practicable to
estimate that value. The carrying amounts reflected
in the consolidated balance sheets for cash and cash
equivalents, marketable securities, and trade receivables

and payables 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 bonds is based on quoted
market prices for similar issues. The carrying amount
and fair market value of the Company’s bonds were
as follows:

First Mortgage Bonds
State Revolving Bonds

At December 31,
(Thousands of Dollars)

Carrying
Amount

$103,322
$001,233

2007

2006

Fair
Value

Carrying
Amount

Fair
Value

$104,681
$001,272

$101,124
$001,307

$103,083
$1,340

For other long-term debt for which there was no
quoted market price, it was not practicable to
estimate their fair value. The carrying amount of
these instruments at December 31, 2007 and 2006
was $29.8 million and $30.8 million, respectively.
Customer advances for construction have a carrying
amount of $21.8 million and $19.2 million at
December 31, 2007 and 2006, respectively. Their
relative fair values cannot be accurately estimated
since future refund payments depend on several
variables, including new customer connections,
customer consumption levels and future rate increases.

Note 7 - Employee Benefit Plans

Pension
The Company has a noncontributory defined
benefit pension plan, which covers substantially
all employees with more than 1,000 hours of service.
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 an annual

Middlesex Water Company

contribution, the eligible employee must be employed
by the Company on December 31st of the year
the award pertains to. In addition, the Company
maintains an unfunded supplemental pension plan
for its executive officers. The Accumulated Benefit
Obligation for all pension plans at December 31,
2007 and 2006 was $21.6 million and $22.1 million,
respectively.

Postretirement Benefits Other Than Pensions
The Company has a postretirement benefit plan
other than pensions for substantially all of its retired
employees. Employees hired after March 31, 2007
are not eligible to participate in this plan. Coverage
includes healthcare and life insurance. Retiree
contributions are dependent on credited years
of service. Accrued retirement benefit costs are
recorded each year.

The Company has recognized a deferred regulatory
asset relating to the difference between the accrued
retirement benefit costs and actual cash paid for plan
premiums in years prior to 1998. Included in the
regulatory asset is a transition obligation from
adopting SFAS No.106, “Employers’ Accounting
for Postretirement Benefits Other than Pensions,”
on January 1, 1993. In addition to the recognition
of annual accrued retirement benefit costs in rates,

Reconciliation of Projected Benefit Obligation
Beginning Balance
Service Cost
Interest Cost
Actuarial (Gain)/Loss
Benefits Paid

Ending Balance

Reconciliation of Plan Assets at Fair Value
Beginning Balance
Actual Return on Plan Assets
Employer Contributions
Benefits Paid

Ending Balance

Funded Status

Middlesex is also recovering the transition obligation
over 15 years. The regulatory assets at December 31,
2007 and 2006 were $0.4 million and $0.5 million,
respectively.

The Company adopted SFAS 158 on December 31,
2006. Because the Company is subject to regulation
in the states in which it operates, it is required to
maintain its accounts in accordance with the
regulatory authority’s rules and guidelines, which
may differ from other authoritative accounting
pronouncements. In those instances, the Company
follows the guidance of SFAS No. 71, “Accounting
for the Effects of Certain Types of Regulation,”
(SFAS 71). Based on prior regulatory practice, and in
accordance with the guidance provided by SFAS 71,
the Company records underfunded pension and
postretirement obligations, which otherwise would
be recognized as Other Comprehensive Income
under SFAS 158, as a Regulatory Asset, and expects
to recover those costs in rates charged to customers.
The adoption of this standard had no impact on
results of operations or cash flows.

The Company uses a December 31 measurement date
for all of its employee benefit plans. The table below sets
forth information relating to the Company’s pension plans
and other postretirement benefits for 2007 and 2006.

December 31,
(Thousands of Dollars)

Pension Benefits

2007

2006

Other Benefits

2007

2006

$31,728
1,296
1,807
(3,081)
(1,583)

$30,167

$23,028
1,315
1,808
(1,583)

$24,568

$29,666
1,311
1,703
544
(1,496)

$31,728

$20,338
2,578
1,608
(1,496)

$23,028

$14,698
821
895
(852)
(495)

$15,247
756
804
(1,655)
(454)

$15,067

$14,698

$6,701
324
495
(495)

$4,666
1,045
1,444
(454)

$07,025

$06,701

$.(5,599)

$.(8,700)

$.(8,042)

$.(7,997)

Amounts Recognized in the Consolidated Balance Sheets consist of:
Current Liability
Noncurrent Liability

(308)
(5,291)

(308)
(8,392)

—
(8,042)

—
(7,997)

Net Liability Recognized

$.(5,599)

$.(8,700)

$.(8,042)

$.(7,997)

Middlesex Water Company

Components of Net Periodic Benefit Cost
Service Cost
Interest Cost
Expected Return on Plan Assets
Amortization of Net Transition Obligation
Amortization of Net Actuarial (Gain)/Loss
Amortization of Prior Service Cost

Years Ended December 31,
(Thousands of Dollars)

Pension Benefits
2006

2007

2005

Other Benefits
2006

2007

2005

$1,296
1,807
(1,819)
—
75
10

$1,311
1,703
(1,608)
—
258
11

$1,126
1,559
(1,547)
—
49
92

$0,821 $0,756
804
(330)
135
443
—

895
(481)
135
337
—

$0,622
771
(275)
135
482
—

Net Periodic Benefit Cost

$1,369

$1,675

$1,279

$1,707 $1,808

$1,735

Amounts that are expected to be amortized from Regulatory Assets into Net Periodic Benefit Cost in 2008 are
as follows:

Actuarial (Gain)/Loss
Prior Service Cost
Transition Obligation

Weighted Average Assumptions:

Expected Return on Plan Assets
Discount Rate for:

Benefit Obligation
Benefit Cost

Compensation Increase for:
Benefit Obligation
Benefit Cost

(Thousands of Dollars)

Pension Benefits
2008

Other Benefits
2008

$ —
10
—

$232
—
135

2007

2006

2005

2007

2006

2005

8.00% 8.00%

8.00%

7.50% 7.50% 7.50%

6.59% 5.89%
5.89% 5.52%

3.50% 3.50%
3.50% 3.50%

5.52%
5.88%

3.50%
3.50%

6.59% 5.89% 5.52%
5.89% 5.52% 5.88%

3.50% 3.50% 3.50%
3.50% 3.50% 3.50%

The compensation increase assumption for Other Benefits is attributable to life insurance provided to qualifying
employees upon their retirement. The insurance coverage will be determined based on the employee’s base
compensation as of their retirement date.

A 9.0% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2007 and assumed
to decline by 1.0% per year through 2010 and by 0.5% per year to 5% by year 2013. A one-percentage point change
in assumed healthcare cost trend rates would have the following effects:

Effect on Current Year’s Service and Benefit Cost
Effect on Benefit Obligation

(Thousands of Dollars)
1 Percentage Point
Increase Decrease

$399
2,767

$(301)
(2,159)

Middlesex Water Company

The following benefit payments, which reflect expected future service, are expected to be paid:

Year

2008
2009
2010
2011
2012
2013-2017

Totals

(Thousands of Dollars)

Pension
Benefits

$01,606
1,577
1,586
1,652
1,655
9,784

$17,860

Other
Benefits

$0,565
582
606
656
694
4,146

$7,249

Benefit Plans Assets
The allocation of plan assets at December 31, 2007 and 2006 by asset category is as follows:

Asset Category

Equity Securities
Debt Securities
Cash

Total

Pension Plan

Other Benefits

2007

59.7%
37.8
2.5

2006

2007

2006

Target

Range

60.0%
36.9
3.1

47.0%
50.6
2.4

48.5%
33.0
18.5

60% 30-65%
38% 25-70%
2% 0-10%

100.0%

100.0% 100.0% 100.0%

Two outside investment firms each manage a
portion of the pension plan asset portfolio. One
of those investment firms also manages the other
postretirement benefits assets. Quarterly meetings
are held between the Company’s Pension Committee
of the Board of Directors and the investment
managers to review their performance and asset
allocation. If the actual asset allocation is outside
the targeted range, the Pension Committee reviews
current market conditions and advice provided
by the investment managers to determine the
appropriateness of rebalancing the portfolio.

The objective of the Company is to maximize the
long-term return on benefit plan assets, relative
to a reasonable level of risk, maintain a diversified
investment portfolio and maintain compliance with
the Employee Retirement Income Security Act of
1974. The expected long-term rate of return is based
on the various asset categories in which plan assets
are invested and the current expectations and
historical performance for these categories.

Equity securities include Middlesex common stock
in the amounts of $0.7 million (3.0% of total plan
assets) and $0.7 million (3.2 % of total plan assets)
at December 31, 2007 and 2006, respectively.

For the pension plan, Middlesex made total cash
contributions of $1.8 million in 2007 and expects
to make cash contributions of approximately
$2.0 million in 2008.

For the postretirement health benefit plan, Middlesex
made total cash contributions of $0.5 million in 2007
and expects to make contributions of approximately
$2.4 million in 2008.

401(k) Plan
The Company has a 401(k) defined contribution plan,
which covers substantially all employees with more
than 1,000 hours of service. Under the terms of the
Plan, the Company matches 100% of a participant’s
contributions, which do not exceed 1% of a participant’s
compensation, plus 50% of a participant’s contributions
exceeding 1%, but not more than 6%. The Company’s
matching contributions were $0.4 million for each of
the years ended December 31, 2007, 2006 and 2005.

For those employees hired after March 31, 2007 and
still employed on December 31, 2007, the Company
approved a discretionary contribution that was based
on 5% of eligible compensation. The Company expects
to fund the contribution of less than $0.1 million in
March 2008.

Middlesex Water Company

Stock-Based Compensation
The Company maintains an escrow account for
71,253 shares of the Company’s common stock
which were awarded under the 1997 Restricted Stock
Plan, which has expired. Such stock is subject to an
agreement requiring forfeiture by the employee in the
event of termination of employment within five years
of the award other than as a result of retirement,
death, disability or change in control. The Company
filed a petition with the BPU requesting approval
of stock-based compensation plan called the 2008
Restricted Stock Plan. The Company intends to seek
shareholder approval for the new plan at its May 21,

2008 annual meeting of shareholders. The maximum
number of shares authorized for grant under the
proposed plan is 300,000 shares.

The Company recognizes compensation expense at
fair value for the restricted stock awards in accordance
with SFAS No.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.

The following table presents information on the
Restricted Stock Plan:

(In Thousands Except
Grant Price)

Balance, January 1, 2005
Granted
Vested
Amortization of
Compensation
Expense

Balance, December 31, 2005
Granted
Vested
Forfeited
Amortization of
Compensation
Expense

Balance, December 31, 2006
Granted
Vested
Forfeited
Amortization of
Compensation
Expense

Balance, December 31, 2007

Unearned
Compensation

$606
436

Weighted
Average
Grant Price

$22.95

$19.24

$19.10

(342)

700
405

(38)

(271)

796
344

(3)

(276)

$861

65
19
(28)

56
21
(11)
(2)

64
18
(10)
(1)

Note 8 – Business Segment Data

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

Middlesex Water Company

Operations by Segments:

Revenues:

Regulated
Non – Regulated

Inter-segment Elimination

Consolidated Revenues

Operating Income:

Regulated
Non – Regulated

Consolidated Operating Income

Depreciation:
Regulated
Non – Regulated

Consolidated Depreciation

Other Income, Net:

Regulated
Non – Regulated

Inter-segment Elimination

Consolidated Other Income, Net

Interest Expense:

Regulated
Non – Regulated

Inter-segment Elimination

Consolidated Interest Charges

Net Income:
Regulated
Non – Regulated

Consolidated Net Income

Capital Expenditures:

Regulated
Non – Regulated

Total Capital Expenditures

Assets:
Regulated
Non – Regulated
Inter-segment Elimination

Consolidated Assets

Years Ended December 31,

(Thousands of Dollars)

2007

2006

2005

$66,317
8,416
(120)

$74,613

$16,390
828

$17,218

$06,357
103

$06,460

$00,836
—
(96)

$00,740

$06,245
96
(96)

$06,245

$08,037
439

$08,476

$25,016
272

$25,288

$77,113
9,392
(391)

$86,114

$21,351
1,320

$22,671

$07,408
131

$07,539

$01,643
—
(116)

$01,527

$06,619
116
(116)

$06,619

$11,120
723

$11,843

$21,586
344

$21,930

$71,948
9,317
(204)

$81,061

$20,062
1,256

$21,318

$06,936
124

$07,060

$00,951
(78)
(99)

$00,774

$07,012
99
(99)

$07,012

$09,417
622

$10,039

$30,492
242

$30,734

As of December 31,

2007

2006

$387,931
8,157
(3,413)

$392,675

$366,149
6,808
(2,690)

$370,267

Middlesex Water Company

Note 9 - Quarterly Operating Results - Unaudited

Operating results for each quarter of 2007and 2006 are as follows:

2007

Operating Revenues
Operating Income
Net Income
Basic Earnings per Share
Diluted Earnings per Share

2006

Operating Revenues
Operating Income
Net Income
Basic Earnings per Share
Diluted Earnings per Share

1st

$18,988
3,722
1,769
$000.13
$000.13

$18,230
3,973
1,812
$000.15
$000.15

(Thousands of Dollars, Except per Share Data)
2nd

3rd

4th

$21,745
6,279
3,313
$000.25
$000.24

$21,037
6,149
2,968
$000.25
$000.25

$24,135
7,729
4,158
$000.31
$000.31

$22,632
6,858
3,377
$000.29
$000.28

$21,246
4,941
2,603
$000.19
$000.19

$19,162
4,338
1,882
$000.14
$000.14

Total

$86,114
22,671
11,843
$000.88
$000.87

$81,061
21,318
10,039
$000.83
$000.82

The information above, in the opinion of the Company, includes all adjustments consisting only of normal recurring
accruals necessary for a fair presentation of such amounts. The business of the Company is subject to seasonal
fluctuation with the peak period usually occurring during the summer months.

Middlesex Water Company

SHAREHOLDER INFORMATION

Stock Exchange Listing
The Common Stock of Middlesex
Water Company is listed on the
NASDAQ Global Select Market
under the symbol MSEX.

Annual Meeting
The Annual Meeting of Shareholders
will be held on May 21, 2008,
at 11:00 a.m. at the Office of the
Company, 1500 Ronson Road,
Iselin, NJ. Each stockholder of
record will receive formal notice
of the meeting together with the
proxy statement and proxy card.
The record date for the 2007
Annual Meeting was March 14, 2008.

Shareholders
As of December 31, 2007,
there were 1,975 registered
shareholders.

Shareholder Services
Registrar and Transfer Company is the
transfer agent for Middlesex Water
Company and can answer questions
concerning your account, dividend
payments, lost certificates, transfer
of stock, change of address and
other related matters.

Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Telephone: 800-368-5948
Fax: 908-497-2318
Website: www.rtco.com
E-mail: info@rtco.com

Investor Relations Contact
Bernadette M. Sohler
Vice President - Corporate Affairs
Telephone: 732-634-1500
Fax: 732-638-7515
E-mail: bsohler@middlesexwater.com

Auditors
Beard Miller Company LLP
2609 Keiser Blvd.
P.O. Box 311
Reading, PA 19603-0311
Telephone: 800-267-9405

Mortgage Trustee
U.S. Bank National Association
21 South Street, 3rd Floor
Morristown, NJ 07960

Form 10-K
You may request a copy of our Annual
Report on Form 10-K as filed with the
Securities and Exchange Commission
free of charge by contacting the

Investor Relations Department
at 1500 Ronson Road, Iselin, NJ
08830. Filings may also be found
on our website at:
www.middlesexwater.com.

Dividend Reinvestment
Middlesex Water Company
offers a Dividend Reinvestment Plan
(DRIP) which provides
registered shareholders with
a convenient way to purchase
additional shares of stock through
investment of dividends or
voluntary cash payments.
A prospectus describing the
Plan is available from the
transfer agent or the Company.

Direct Deposit of Dividends
Middlesex Water Company
offers direct deposit of dividends
whereby dividend payments may be
deposited into shareholders’ checking,
savings or money market accounts.

Company Headquarters
Middlesex Water Company
1500 Ronson Road
Iselin, NJ 08830
Telephone: 732-634-1500
Fax: 732-638-7515

COMMON STOCK MARKET PRICE AND DIVIDEND PER SHARE

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

$19.07
19.48
20.24
19.25

2007
Low

$17.75
18.12
18.05
18.10

Dividend

$0.1725
0.1725
0.1725
0.1750

High

$19.72
19.34
20.50
19.50

2006
Low

$17.03
16.50
17.58
17.96

Dividend

$0.1700
0.1700
0.1700
0.1725

Schedule of Dividend Dates for the Year 2008*

Declaration
Dates

January 22
April 29
July 22
October 23

December 18**
April 1
June 25
September 22

Record
Dates

February 15
May 15
August 15
November 14

January 15
April 15
July 15
October 15

Payment
Dates

March 3
June 2
September 2
December 1

February 1
May 1
August 1
November 3

Ex. Dividend
Dates

February 13
May 13
August 13
November 12

January 11
April 11
July 11
October 13

Common

Preferred

* Subject to approval by Board of Directors **2007

Board of Directors

Pictured left to right:

Walter G. Reinhard

Dennis W. Doll

Officers

Dennis W. Doll

President and Chief Executive Officer

John P. Mulkerin

James P. Garrett

Member, Law Firm of
Norris, McLaughlin & Marcus, P.A.

John R. Middleton, MD

Engaged in Private Practice,
Infectious Diseases;
formerly Chair of the
Department of Medicine and
former Chief Medical Officer of
Raritan Bay Medical Center

J. Richard Tompkins

Chairman of the Board

Annette Catino

Retired, formerly President and
Chief Executive Officer,
First Sentinel Bancorp, Inc.

Jeffries Shein

Managing Partner,
JGT Management Co., LLC

John C. Cutting

Retired, formerly Senior Engineer,
Science Applications International
Corporation

President and Chief Executive Officer,
QualCare Alliance Networks, Inc.

Not Pictured:

Stephen H. Mundy

Director Emeritus

Vice President – Human Resources

A. Bruce O’Connor

Vice President and Chief Financial Officer

Kenneth J. Quinn

Vice President, General Counsel,
Secretary and Treasurer

Richard M. Risoldi

Vice President – Subsidiary Operations

Bernadette M. Sohler

Vice President – Corporate Affairs

Ronald F. Williams

Vice President – Operations and
Chief Operating Officer

A Provider of Water, Wastewater and
Related Products and Services

PO Box 1500
Iselin, New Jersey 08830-0452
732-634-1500