Powered by Professionals 2009 Annual Report 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, Delaware and Pennsylvania. 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. NJ PA Our Services • Water Production, Treatment and Distribution • Wastewater Collection and Treatment • Ownership and Operation of Utilities • Plant Operations and Maintenance • Public/Private Partnerships 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 • Water and Sewer Line Maintenance • Utility Billing and Collections • Community Irrigation • Water and Wastewater Contract Operations DE 2009 $91.2 52.3 8.5 15.4 6.7 10.0 9.8 0.73 0.72 0.71 453.6 7.1% 2008 $91.0 48.9 7.9 16.2 7.1 12.2 12.0 0.90 0.89 0.70 430.1 8.6% 2007 $86.1 46.2 7.5 15.4 6.6 11.8 11.6 0.88 0.87 0.69 398.6 8.9% Operating Revenues (Millions of Dollars) 86.1 81.1 74.6 91.0 91.2 12.0 Net Income (Millions of Dollars) 12.2 11.8 10.0 10.0 9.0 8.5 6.0 3.0 90 70 50 30 .90 .80 .70 .60 .50 Earnings and Dividends ($ Per Share) ■ Earnings ■ Dividends .89 .87 .82 .71 .67 .68 .72 .71 .70 .69 05 06 07 08 09 05 06 07 08 09 05 06 07 08 09 Cover: Nearly a half million people rely on the dedication and technical expertise of our employees who deliver a full range of critical utility services. 1 Shareholder’s Letter 10 Financial Data inside back cover Shareholder Information Dear Shareholders, W We look to 2010 with anticipation and enthusiasm as the evolution of the water and wastewater industry continues to require an acute focus on balancing the needs of our shareholders for appropriate returns with the needs of our customers for reliable water and wastewater services at reasonable rates. These factors continue to present challenges, coupled with opportunities, for your company. There is an ever-increasing awareness of investment opportunities in our industry, both domestically and internationally. Water…A Sound Investment We see interest in our business model, and Dennis W. Doll President and Chief Executive Officer J. Richard Tompkins Chairman of the Board opportunities for further growth and profitability more than 16,000 community wastewater systems, with several entities with whom we have become is largely government-owned and operated. acquainted during 2009. The growing national need for upgrade and replacement of aging water and Although there was evidence of positive wastewater infrastructure among many public and momentum in our national economy in 2009, private entities, coupled with the operational and the impact of the prolonged national economic financial expertise possessed by companies such as downturn on Middlesex Water Company has been Middlesex, continues to foster an environment more pronounced than had been experienced that is poised for further consolidation of the in recent history in other unfavorable economic fragmented water and wastewater industry in the cycles. We experienced overall reductions in water United States. This industry, which is comprised of consumption in 2009 across our various water utilities more than 50,000 community water systems and as compared to 2008. The continued economic “ Delivering innovative water and wastewater solutions to municipalities, developers and other customers requires a team of skilled and talented professionals. We have highlighted several of our employees throughout this report and the important roles they play in delivering high quality utility services. M i d d l e s e x W a t e r C o m p a n y 1 ” Balancing Rick Nolan supervises one of the utility distribution crews which helps maintain over 1,300 miles of water main, 100,000 service lines and 7,700 hydrants. 2 To be a trusted provider of safe, reliable and cost-effective services. Short and Long Term Infrastructure Needs challenges of a number of our industrial in September 2009. We were and commercial customers, combined pleased with this outcome for our with abnormally cool, wet weather shareholders, despite our concerns in the Northeast throughout the regarding a request for an increase spring and summer months, resulted in base rates during a difficult in water consumption patterns economic environment for a number below normal levels. The impact of of our customers. We viewed this weather on our business, particularly award as recognition by our as it affects outdoor water use Delaware regulators that an Gary Doughty responds to one of the 4,800 meter service requests received from customers annually. during the spring and summer appropriate balancing of the utility’s months, is not new to our company need to recover prudent investments Employees receive training in diversified skills enabling them to protect and maintain more than $453 million in utility infrastructure. (Pictured, left to right:) Tom Amato, Vitaly Chepel, Ray Bisogno, Paul Carlock, Gary Livitt, and Dave Weidele, kneeling. or to our industry. The convergence in utility infrastructure, together with of abnormal weather patterns in increases in various operation and the Northeast in 2009 and the maintenance expenses, is essential unprecedented challenges within to the long-term fiscal health of the our national and local economies companies under their jurisdiction. resulted in operating revenues in These regulatory principles are 2009 substantially below expectations. essential to a utility’s ability to sustain the level of service necessary Maintaining Service Reliability to meet customers’ needs for a safe, Our ability to mitigate the reliable supply of water. A similar unfavorable effects of economic request for an increase in base rates cycles is evidenced by the mature was also presented to the New regulatory framework within which Jersey Board of Public Utilities in the Middlesex regulated utility August of 2009 for our Middlesex companies operate. Our Delaware system. As in Delaware, our New water utility, Tidewater Utilities, Inc. Jersey regulators appropriately was awarded a 14.95% base rate balanced the needs of our customers increase on September 9, 2009. A and our shareholders, and significant portion of this increase, consequently, awarded Middlesex or 12.79%, had been awarded at the Water Company a $7.8 million or end of March 2009 on an interim 14.8% increase in annual operating basis, and became permanent revenues, effective March 17, 2010. M i d d l e s e x W a t e r C o m p a n y 3 Enhancing Sr. Meter Reader, Jaime Crespo, works with automated data which facilitates seamless and accurate billing for our customers. 4 Our Processes to Better Serve Our Customers To invest in products and services that complement our business practices. Patti Malazdra is part of a Customer Service team which handles numerous inquiries from our customers in New Jersey, Delaware and Pennsylvania. PC Support Technician Warren Newton helps maintain the Company’s technology platform which helps sustain all critical business processes. This regulatory framework has generated liquid sodium hypochlorite, matured over a period of many years used as the primary disinfectant and has sustained the shareholders in the water treatment process. and customers of Middlesex Water This treatment modification was through numerous economic selected as a safer alternative to cycles throughout the Company’s 113-year history. existing processes. ■ We are moving expeditiously to replace approximately 5,300 feet Continued Prudent Investments of water main that is no longer a in Infrastructure reliable artery to a significant The investor-owned utilities portion of our customer base in the industry has developed over time by South River Basin in New Jersey. balancing near-term operational and This mile-long pipeline is replacing financial needs with the need to plan a deteriorated 80-year old cast iron and build for the future. The quality pipeline under the Raritan River, of service enjoyed today by our using state-of-the-art directional- customers, and the stable investment returns received over time by our drilling technology. ■ A new addition to the administration shareholders, are directly attributable building was completed for to the foresight, planning and Tidewater Utilities in Delaware to execution of those who constructed accommodate the growth that has and managed the company’s assets over many decades. Investments been achieved in recent years. ■ A major upgrade to our Southern made in 2009 have been consistent Shores Water Company treatment with this philosophy. In addition to the continued renewal and plant is underway in Delaware. ■ Our strategy to develop regional replacement of aging water mains, solutions to meet expanding water there are a number of key projects and wastewater needs for future in various stages of completion: ■ At our Carl J. Olsen Treatment Plant Delaware customers continues to mature. The largest of our five in New Jersey, our largest water planned regional treatment facilities treatment facility, we are nearing projects has achieved an important completion of our transition from milestone with the grant by County the use of chlorine gas to on-site M i d d l e s e x W a t e r C o m p a n y 5 Developing Isidro Buen, Engineering Technician, uses Geographic Information Systems (GIS) to support the construction and management of water and wastewater assets in addition to planning to meet future customer needs. 6 Strategic Water and Wastewater Solutions To provide a suite of services that result in profitable growth. Project Engineer Eugene Catipay manages plans to enhance and expand area-wide service to ensure adequate infrastructure to support development needs in Delaware. authorities of a conditional use that developers with the greatest permit for this planned regional financial stability continued to system in Sussex County, Delaware. ■ We continue to upgrade and obtain necessary permits for their projects and re-evaluated the timing replace our computerized business and extent of their construction systems necessary to support our plans in anticipation of eventual numerous complex end-to-end improvement in the economy. business processes. We have We acquired the assets of completed conversion of our financial Twin Lakes Water Services, LLC in and human resources support November 2009, located in northeast systems and are nearing completion Pennsylvania. In the short time we of our customer care and billing, have owned these assets, we have procurement, inventory and fixed improved service quality for these asset systems. A project to further approximately 300 residents and implement a Geographic Information we are evaluating opportunities to System (GIS) has achieved several achieve additional economies of key milestones and is in use by a scale in this region. continually-increasing number of Several of the more than ninety our field personnel. The Growth Profile communities we serve in Delaware have been designed to accommodate additional phases of development. Customer growth from traditional As further development in these Tidewater’s 86 water plants and more than 163 wells are maintained by mechanics like David Winberry who monitor daily plant operations. developer projects occurred in 2009, communities occurs in the future, although at a slower pace than new customers can be served with experienced in recent years. Various only minimal additional capital projects in all of the states where we investment required. have a presence had been delayed by developers, and in some instances The Strength of Our Team cancelled, due to continued depressed As part of our ongoing focus on market demand for new housing, succession at both the Board and along with the prolonged tightening management levels, several changes of credit to developers by banks. occurred in 2009. We were pleased to We observed throughout 2009 be joined on the Board of Directors M i d d l e s e x W a t e r C o m p a n y 7 Delivering Chemist Nancy Rochford, working in the Company’s state-certified lab, is part of a team of water quality professionals committed to maintaining the highest standards of drinking water excellence. 8 High Quality Utility Services To be the company of choice for those seeking effective water and wastewater solutions. Dave Weed, a professional dual- licensed water and wastewater operator, ensures systems remain in compliance and operating properly. Our accounting and finance team includes Joann Field, Accounts Payable Supervisor, who administers the business process to account for the multitude of goods and services procured by the Company. by Steven M. Klein, a former partner Award for our outreach and education in a national accounting and auditing efforts. We also were named to the firm and presently Executive Vice FSB 100 List of America’s 100 Fastest President and Chief Financial Officer Growing Publicly Traded Small of a publicly-traded bank. Companies by Fortune Small After nearly fifteen years with Business Magazine. These honors Middlesex Water Company, Ronald F. reflect the dedication by our employees Williams, Vice President – Operations to protect the environment and & Chief Operating Officer, retired improve the lives of the communities from the company at the end of in which we operate while working 2009. Ronn guided the company to deliver quality service and build through numerous operational shareholder value. challenges over the course of his Delivering innovative water tenure and we wish him all the best and wastewater solutions to in retirement. Our well-developed municipalities, developers and pool of diverse operational talent other customers requires a team of enabled us to fill the void left by skilled and talented professionals. Ronn’s retirement with a highly- We have highlighted several of our qualified internal candidate. Richard employees throughout this report M. Risoldi assumed Ronn’s role as and the important roles they play Vice President – Operations & Chief in delivering high quality utility Operating Officer effective January 1, services. We appreciate the many 2010. We congratulate Rick and look personal sacrifices our employees forward to his contributions toward are often required to make to meet our further success. all of these needs and along with our entire workforce, we look forward to Corporate Commitment serving the needs of our customers In June 2009, we were honored and shareholders in 2010 and by a leading New Jersey business beyond. We thank you for your publication with a Green Leadership continued confidence and support. J. Richard Tompkins Chairman of the Board Dennis W. Doll President and Chief Executive Officer M i d d l e s e x W a t e r C o m p a n y 9 Middlesex Water Company CONSOLIDATED SELECTED FINANCIAL DATA (Thousands Except per Share Data ) 2008 2007 2006 2005 2009 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 $091,243 $091,038 $086,114 $081,061 $074,613 52,348 8,559 10,175 71,082 20,161 1,726 6,750 5,160 9,977 208 48,929 7,922 10,168 67,019 24,019 1,302 7,057 6,056 12,208 218 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 Earnings Applicable to Common Stock $009,769 $011,990 $011,595 $009,791 $008,225 Earnings per Share: Basic Diluted Average Shares Outstanding: Basic Diluted Dividends Declared and Paid Total Assets Convertible Preferred Stock Long-term Debt $0000.73 $0000.72 $0000.90 $0000.89 $0000.88 $0000.87 $0000.83 $0000.82 $0000.72 $0000.71 13,454 13,716 $000.713 $458,086 $002,273 $124,910 13,317 13,615 $000.703 $440,000 $002,273 $118,217 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 STATISTICAL SUMMARY REVENUES (Thousands of Dollars): 2009 2008 2007 2006 2005 Residential Commercial Industrial Fire Protection Contract Sales Contract Operations Other TOTAL REVENUES CAPITALIZATION RATIOS: Long-term Debt Preferred Stock Common Stock Equity TOTAL OTHER: $(40,958 8,552 8,523 9,578 11,940 9,927 2,035 $(91,243 $(41,049 8,786 8,511 9,461 11,892 9,539 1,800 $038,792 8,358 8,513 8,882 10,749 8,832 1,988 $034,584 8,107 8,659 8,635 9,937 8,878 2,261 $(31,289 7,297 8,183 7,742 10,024 8,082 1,996 $(91,038 $086,114 $081,061 $(74,613 47% 1 52 49% 1 50 50% 1 49 50% 1 49 55% 2 43 100% 100% 100% 100% 100% Book Value of Common Stock Customers Population Served (Retail) Miles of Main Fire Hydrants Water Production (million gallons) $(010.23 138,400 455,000 1,388 7,768 20,289 $(010.13 137,300 451,500 1,376 7,642 20,949 $0009.87 132,000 434,600 1,343 7,216 21,731 $0008.86 125,200 421,400 1,306 6,821 20,594 $(008.36 119,800 407,500 1,250 6,595 21,196 10 Middlesex Water Company MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion of the Company’s historical results of operations and financial condition should be read in conjunction with the Company’s consolidated financial statements and related notes. Management’s Overview Operations Middlesex Water Company has operated as a water utility in New Jersey since 1897, in Delaware through our wholly-owned subsidiary, Tidewater, since 1992 and in Pennsylvania through our wholly-owned subsidiary, Twin Lakes, since November 2009. We are in the business of collecting, treating and distributing 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, Delaware and Pennsylvania. 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 59,800 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 Bayview subsidiary provides water services in Downe Township, New Jersey. Our other New Jersey subsidiaries, Pinelands Water and Pinelands Wastewater, provide water and wastewater services to residents in Southampton Township, New Jersey. USA provides residential customers in New Jersey and Delaware a water service line and sewer lateral maintenance programs called LineCareSM and LineCare+SM, respectively. Our Delaware subsidiaries, Tidewater and Southern Shores, provide water services to approximately 33,200 retail customers in New Castle, Kent and Sussex Counties, Delaware. Our TESI subsidiary provides wastewater services to approximately 1,900 residential retail customers. Tidewater’s subsidiary, White Marsh, services an additional 7,200 customers in Kent and Sussex Counties through 68 operations and maintenance contracts. We expect the growth of our regulated wastewater operations in Delaware will eventually become a more significant component of our operations. Our Pennsylvania subsidiary, Twin Lakes, provides water services to approximately 120 retail customers in the Township of Shohola, Pike County, Pennsylvania. The majority of our revenue is generated from retail and contract water services to customers in our service areas. We record water service revenue as such service is rendered and include estimates for amounts unbilled at the end of the period for services provided after the last billing cycle. Fixed service charges are billed in advance by our subsidiary, Tidewater, and are recognized in revenue as the service is provided. Rates Middlesex - On August 17, 2009, Middlesex filed an application with the NJBPU seeking permission to increase its base rates by 26.03%, or $15.1 million. The request was made necessary by increased costs of operations, chemicals and fuel, electricity, taxes, labor and benefits, decreases in industrial and commercial customer demand patterns as well as capital investment of approximately $39.0 million since Middlesex’s last rate filing in April of 2007. Discovery by the intervening parties has begun. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the request. A decision by the NJBPU is expected by the second quarter of 2010. On July 1, 2009, Middlesex implemented a NJBPU approved PWAC in order to recover increased costs of $1.0 million to purchase untreated water from the New Jersey Water Supply Authority and treated water from a non-affiliated regulated water utility. 11 Middlesex Water Company Tidewater - On January 26, 2009, Tidewater filed an application with the DEPSC seeking permission to increase its base rates by 32.54%, which was necessitated by increased costs of operations, maintenance and taxes, as well as capital investment since Tidewater’s last rate filing in April of 2006. On September 9, 2009, the DEPSC approved a base rate settlement that had been reached amongst the parties that reflects an overall increase of 14.95%. This rate increase approval is expected to generate additional annual revenues of $3.0 million based on a 10.0% return on common equity. Effective January 1, 2009, Tidewater received approval from the DEPSC to increase their DSIC from 2.94% to 5.25%. DSIC is a DEPSC approved rate that allows water utilities to recover their investment in non-revenue producing capital improvements to the water system in between base rate increase requests. As of March 27, 2009, this rate was set to zero in conjunction with interim rates approved in the base rate case described above. On December 22, 2009, Tidewater received approval from the DEPSC to increase their DSIC from 0% to 1.11% effective January 1, 2010. Southern Shores - In accordance with the tariff and underlying contract established for Southern Shores, an annual rate increase of 3% was implemented on January 1, 2009. Under the terms of the contract the increase cannot exceed the lesser of the regional Consumer Price Index or 3%. Operating Results by Segment 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. The Company has two operating segments, Regulated and Non-Regulated. Our Regulated segment contributed 88%, 89% and 90% of total revenues, and 87%, 90% and 94% of net income for the years ended December 31, 2009, 2008 and 2007, 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, TESI and Twin Lakes; Non-Regulated- USA, USA-PA, and White Marsh. RESULTS OF OPERATIONS IN 2009 COMPARED TO 2008 Years Ended December 31, (Millions of Dollars) 2009 Non- 2008 Non- Regulated Regulated Total Regulated Regulated Total $80.6 44.2 8.4 9.9 $18.1 1.4 6.5 4.3 $10.6 8.1 0.1 0.3 $ 2.1 0.3 0.2 0.9 $91.2 52.3 8.5 10.2 $20.2 1.7 6.7 5.2 $81.1 41.2 7.8 10.0 $22.1 0.9 7.0 5.0 $9.9 7.7 0.1 0.2 $1.9 0.4 0.1 1.0 $91.0 48.9 7.9 10.2 $24.0 1.3 7.1 6.0 $08.7 $01.3 $10.0 $11.0 $1.2 $12.2 Revenues Operations and maintenance Depreciation Other taxes Operating income Other income, net Interest expense Income taxes Net income Operating Revenues Operating revenues for the year ended December 31, 2009 increased $0.2 million from the same period in 2008. This increase was primarily related to the following factors: • Revenues in our Middlesex System decreased $1.6 million, primarily as a result of lower water consumption across our residential, commercial and industrial customer classes. We experienced a $1.9 million decline in water use by 12 Middlesex Water Company our general retail metered customers compared to the same period in 2008. This lower water consumption was attributable to unfavorable weather as compared to prior years as well as decreased demand by our large commercial and industrial customers. We are unable to determine when these customers’ water demands may return to previous levels, or if the decline in demand will continue indefinitely. Increased revenues of $0.4 million from the PWAC implemented on July 1, 2009, offset some of the consumption revenue decline. All other factors affecting Middlesex system revenues accounted for a $0.1 million decrease in revenues. • Revenues in our Tidewater system increased $1.4 million. Revenue of $1.6 million from increased rates helped to mitigate consumption revenue decreases of $0.8 million, largely attributable to those same weather and usage patterns described above. New customer growth and other fees added $0.4 million of revenue. All other factors affecting Tidewater system revenues accounted for a $0.2 million increase in revenues. • USA-PA’s fees for managing the Perth Amboy water and wastewater systems were $0.5 million higher than the same period in 2008, due mostly to higher pass-through charges and scheduled management fee increases. • All other operations accounted for a decrease of $0.1 million in revenues. Operation and Maintenance Expense Operation and maintenance expenses for the year ended December 31, 2009 increased $3.4 million from the same period in 2008. This increase was primarily related to the following factors: • Labor costs at our regulated entities increased $0.9 million in 2009 as compared to 2008, primarily due to increases in wages and resources necessary to meet the growing needs of our Delaware service territory and increased overtime incurred in connection with a higher incidence of water main breaks and system maintenance in our Middlesex system. • Chemical and residuals disposal expenses increased by $0.8 million in 2009 as compared to 2008. Although unfavorable weather patterns and economic conditions resulted in a decline in water production in our New Jersey and Delaware systems, costs for chemicals and residuals disposal increased due to a combination of unit cost disposal rate increases and lower quality of untreated water, as influenced by abnormally high rainfall during 2009. • Purchased water costs in our Middlesex system increased $0.5 million in 2009 as compared to 2008, primarily due to the full year’s effect of our suppliers’ rate increases that went into effect in the fourth quarter of 2008. • Employee retirement benefit plan expenses increased $0.4 million, primarily resulting from increased qualified employee retirement benefit plan expenses of $1.2 million, largely attributable to the investment performance of the benefit plans’ assets, offset by a decrease of $0.8 million in life insurance program expenses due to market fluctuations in the cash surrender value of life insurance policies. • Uncollectible accounts expense increased $0.4 million in 2009 as compared to 2008, resulting from current economic conditions. • Operating costs for USA-PA increased $0.3 million, which are recovered under the pass-through mechanism in the contract. • All other operating and maintenance expense categories increased $0.1 million in 2009 as compared to 2008. Depreciation Depreciation expense for the year ended December 31, 2009 increased $0.6 million from the same period in 2008 due to a higher level of utility plant in service. Other Taxes Other taxes remained consistent with 2008, generally reflecting decreased taxes on lower taxable gross revenues offset by increased payroll and real estate taxes. Other Income, net Other Income, net for the year ended December 31, 2009 increased $0.4 million from the same period in 2008, primarily due to increased Allowance for Funds Used During Construction from higher capitalized interest resulting from our ongoing capital program. Interest Expense Interest expense for the year ended December 31, 2009 decreased $0.4 million from the same period in 2008. 13 Middlesex Water Company This decrease was primarily related to the following factors: • Interest expense on long term debt decreased $0.5 million in 2009 as compared to 2008, primarily resulting from lower average long-term debt outstanding in 2009. • Other interest expense increased $0.1 million in 2009 as compared to 2008, primarily due to increased interest costs from higher average short-term debt outstanding in 2009 ($40.0 million) as compared to 2008 ($16.4 million) offset by decreased interest costs from lower average short term debt interest rates in 2009 (1.73%) as compared to 2008 (3.69%). Income Taxes Income taxes for the year ended December 31, 2009 decreased $0.8 million as compared to 2008, primarily resulting from decreased operating income in 2009 as compared to 2008. Net Income and Earnings Per Share Net income for the year ended December 31, 2009 decreased $2.2 million from the same period in 2008. Basic earnings per share decreased to $0.73 in 2009 as compared to $0.90 in 2008. Diluted earnings per share decreased to $0.72 in 2009 as compared to $0.89 in 2008. RESULTS OF OPERATIONS IN 2008 COMPARED TO 2007 Years Ended December 31, (Millions of Dollars) 2008 Non- Regulated Total 2007 Non- Regulated Regulated Total $9.9 7.7 0.1 0.2 $1.9 0.4 0.1 1.0 $91.0 48.9 7.9 10.2 $24.0 1.3 7.1 6.0 $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 Regulated $81.1 41.2 7.8 10.0 $22.1 0.9 7.0 5.0 $11.0 $1.2 $12.2 $11.1 $0.7 $11.8 Revenues Operations and maintenance Depreciation Other taxes Operating income Other income (expense) Interest expense Income taxes Net income Operating Revenues Operating revenues for the year rose $4.9 million over the same period in 2007. This increase was primarily related to the following factors: • Revenues in our Middlesex system increased $4.2 million as a result of a 9.1% base rate increase implemented October 26, 2007. Middlesex revenues decreased $1.1 million due to lower consumption by our customers during 2008. • Water sales improved $0.8 million in our Delaware water systems. We recorded additional revenue of $1.2 million as a result of an additional 12% base rate increase that was granted to Tidewater effective February 28, 2007, and DSIC rate increases of 1.62% and 2.94% that went into effect January 1, 2008 and July 1, 2008, respectively. Fees charged for initial connection to our Delaware Water system were $0.4 million lower in 2008 as new residential and commercial development has slowed in our Delaware service territories. • USA-PA’s fees for managing the Perth Amboy water and wastewater systems were $0.5 million higher than the same period in 2007, due mostly to scheduled increases in the fixed fee component of the contract. • Revenues from our regulated wastewater operations in Delaware increased $0.2 million due to customer growth. • All other operations accounted for $0.3 million of additional revenues. 14 Middlesex Water Company Operation and Maintenance Expense Operation and maintenance expenses increased $2.7 million. This increase was primarily related to the following factors: • Even though 2008 water production was lower than 2007 in our Middlesex and Tidewater systems, our expenses increased $0.3 million due to higher costs for water, electric power and chemicals. • Labor and benefits costs increased $1.3 million, which includes $0.7 million recognized for employee benefits due to market fluctuations in the cash surrender value of life insurance policies. • The costs to operate our regulated wastewater facilities in Delaware increased $0.3 million due to acquisition of the Milton, Delaware municipal wastewater system during 2007 and an increased number of wastewater treatment facilities in operation in Delaware. • Costs for service claims under our LineCareSM program were $0.1 million higher due in part to a 9.4% increase in the number of subscribers in the program during 2008. • Operating costs for USA-PA increased $0.3 million due to higher pass-through charges. • All other expense categories increased $0.4 million. Depreciation Depreciation expense for 2008 increased by $0.4 million due to a higher level of utility plant in service. Other Taxes Other taxes increased by $0.5 million generally reflecting additional taxes on higher taxable gross revenues, payroll and real estate. Other Income, Net Other income was $0.2 million lower than 2007, primarily due to one-time gains recorded in 2007 on two transactions related to assets no longer used in our operations. Interest Expense Interest expense increased by $0.4 million as a result of a higher level of average short-term debt outstanding when compared to 2007. Income Taxes Income tax expense based on our current year operating results was $0.2 million higher than 2007 and reflects increased revenues due to higher water rates in New Jersey and Delaware. Net Income and Earnings Per Share Net income increased to $12.2 million from $11.8 million in the prior year, and basic earnings per share increased from $0.88 to $0.90. Diluted earnings per share increased from $0.87 to $0.89. Outlook Our revenues are expected to increase in 2010 from the full year’s effect of rate increases granted to Tidewater in September 2009, the January 1, 2010 Tidewater DSIC rate implementation and an anticipated rate increase for Middlesex. There can be no assurances however, that the NJBPU will grant Middlesex’s filed rate increase request in whole or in part. 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 in determining the need for rate increase requests. We continue to implement plans to streamline operations and reduce operating costs. Ongoing economic conditions continue to negatively impact our customers’ water consumption, particularly the level of water usage by our commercial and industrial customers in our Middlesex system. We are unable to determine when these customers’ water demands may return to previous levels, or if a reduced level of demand will continue indefinitely. The decrease in demand by our commercial and industrial customers in our Middlesex system was one of 15 Middlesex Water Company the factors that required our rate increase petition with the NJBPU. If water demand by our commercial and industrial customers in our Middlesex system does not return to previous levels and/or our proposed rate increase is not approved in whole or in part, our financial condition and results of operations could be negatively impacted. As a result of ongoing challenging economic conditions impacting the pace of new residential home construction, there may be an increase in the amount of Preliminary Survey & Investigation costs that will not be currently recoverable in rates. In addition, the impact of the depressed national and local economies on the residential housing market has resulted in the suspension of construction activities on the North Carolina water and wastewater facility we agreed to own and operate. We are not obligated to assume ownership of the facilities until completion of construction by the present owner and until homes are occupied and customers are connected. We entered into this agreement in 2008 and have invested approximately $0.6 million. Construction is expected to resume as demand for new residential housing improves and we continue to preserve our rights for recovery of our investment if the project does not move forward in a timeframe acceptable to us. On February 3, 2010, the Company filed a petition with the NJBPU seeking approval to issue up to 2.0 million shares of common stock in the form of a follow-on offering during the second quarter of 2010. The proceeds from the common stock offering will be used to retire short term debt. We expect our level of short-term debt borrowing to decrease in 2010 as compared to 2009. The return on assets held in our retirement benefit plans during 2009 resulted in an increase in the amount available to fund current and future obligations. We expect this will help stabilize retirement plan benefit expenses and retirement plan cash contributions in 2010. 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 we believe complement existing capabilities and will ultimately increase shareholder value. Liquidity and Capital Resources Cash flows from operations are largely based on four factors: weather, adequate and timely rate increases, effective cost management and customer growth. The effect of those factors on net income is discussed in results of operations. For 2009, cash flows from operating activities decreased $0.9 million to $18.5 million. As described more fully in the Results of Operations section above, lower earnings was the primary reason for the decrease in cash flow. The $18.5 million of net cash flow from operations enabled us to fund approximately 92% of our utility plant expenditures internally for the period, with the remainder funded by bank lines of credit and other loan commitments. For 2008, cash flows from operating activities increased $0.3 million to $19.4 million, as compared to the prior year. This increase was primarily attributable to higher net income and depreciation. The $19.4 million of net cash flow from operations enabled us to fund approximately 64% 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. Increases in certain operating costs will impact our liquidity and capital resources. During 2009, we received rate relief for Middlesex, Tidewater and Southern Shores and we have filed for a base rate increase for Middlesex. We continually monitor the need for timely rate filing to minimize the lag between the time we experience increased operating and capital costs and the time we receive appropriate rate relief. There is no certainty, however, that the NJBPU, DEPSC or PAPUC will approve any or all future requested increases. Capital Expenditures and Commitments To fund our capital program, we use internally generated funds, short term and long term debt borrowings, and when market conditions are favorable, proceeds from sales of common stock under our DRP and offerings to the public. 16 Middlesex Water Company The table below summarizes our estimated capital expenditures for the years 2010-2012. (Millions) 2010 2011 2012 2010-2012 Mains Service Lines RENEW Program* Information Technology Systems Meters Hydrants Plant Improvements Other General Infrastructure Needs $11,105 1,172 3,500 4,638 2,502 641 8,606 2,169 $03,913 1,112 4,000 424 2,440 524 10,333 1,194 $03,831 1,112 4,000 272 2,440 591 17,578 998 Total Estimated Capital Expenditures $34,333 $23,940 $30,822 $18,849 3,396 11,500 5,334 7,382 1,756 36,517 4,361 $89,095 * Program to clean and cement unlined mains in the Middlesex System The actual amount and timing of capital expenditures is dependent on customer growth, residential new home construction and sales and project scheduling. To pay for our capital program in 2010, we plan on utilizing: • Internally generated funds • Proceeds from an anticipated common stock offering in the second quarter of 2010 • Proceeds from the sale of common stock through the DRP • Funds available and held in trust under existing New Jersey State Revolving Fund (SRF) loans (currently, $4.1 million) and Delaware SRF loans (currently, $1.9 million) and, if available, proceeds from 2010 Delaware and New Jersey SRF programs. The SRF programs provide low cost financing for projects that meet certain water quality and system improvement benchmarks. • Funds available under a Tidewater DEPSC approved loan (up to $10.0 million available through June 30, 2010) • Short-term borrowings, if necessary, through $58.0 million of available lines of credit with several financial institutions. As of December 31, 2009, we had $42.9 million outstanding against the lines of credit. Sources of Liquidity Short-term Debt. The Company had established lines of credit aggregating $53.0 million as of December 31, 2009. At December 31, 2009, the outstanding borrowings under these credit lines were $42.9 million at a weighted average interest rate of 1.53%. In January 2010, the Company increased its available lines of credit to $58.0 million. The weighted average daily amounts of borrowings outstanding under the Company’s credit lines and the weighted average interest rates on those amounts were $40.0 million and $16.4 million at 1.73% and 3.69% for the years ended December 31, 2009 and 2008, respectively. Long-term Debt. Subject to regulatory approval, the Company periodically finances capital projects under SRF loan programs in New Jersey and Delaware. These government programs provide financing at interest rates that are typically below rates available in the broader financial markets. A portion of the borrowings under the New Jersey SRF is interest- free. We participated in the Delaware SRF loan program during 2009 and expect to participate in the 2010 Delaware SRF program for up $1.1 million. We will also participate in the New Jersey SRF program in 2010 for up to $4.0 million. In March 2009, Tidewater closed on a $22.0 million DEPSC approved loan and immediately used $7.0 million of the available funds to retire short-term debt. Terms for the new long-term debt include an interest rate of 6.59%, final maturity in April 2029 and equal principal payments over the life of the loan. In June 2009, Tidewater borrowed $5.0 million at a rate of 7.05% with a final maturity in January 2030 and equal principal payments over the life of the loan. Tidewater can borrow the remaining $10.0 million in whole or in increments at its discretion until June 30, 2010, at an interest rate based on market conditions and with a maximum final maturity date of January 2030. Substantially all of the Utility Plant of the Company is subject to the lien of its mortgage, which includes debt service and capital ratio covenants. The Company is in compliance with all of its mortgage covenants and restrictions. 17 Middlesex Water Company Common Stock. The Company periodically issues shares of common stock in connection with its DRP. The Company raised $1.3 million through the issuance of shares under the DRP during 2009. On December 23, 2009, the Company announced a 5% purchase discount for optional cash purchases and reinvested dividends under the DRP. The discount applies to purchases made by the DRP between February 1, 2010 and June 1, 2010. As noted above, we anticipate issuing up to 2.0 million shares of common stock in the second quarter of 2010. 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, 2009. Payments Due by Period (Millions of Dollars) Long-term Debt Notes Payable Interest on Long-term Debt Purchased Water Contracts Wastewater Operations Employee Retirement Plans (1) Total Total $128.6 42.9 95.0 37.1 43.4 5.0 $352.0 Less than 1 Year $03.7 42.9 6.2 5.0 4.3 5.0 $67.1 1-3 Years $08.1 — 12.0 5.3 9.0 — $34.4 3-5 Years More than 5 Years $08.3 — 11.3 4.9 9.5 — $34.0 $108.5 — 65.5 21.9 20.6 — $216.5 (1) Amounts are not determinable after one year due to the volatility of factors we used to determine estimated future contributions to our employee retirement benefit plan including market performance, discount rates, long term rates of return, healthcare trend rates, wage increases, participant eligibility and participant turnover. 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). Under the Agreement, USA-PA receives a fixed fee and a variable fee based on increased system billing. In connection with the Agreement, Perth Amboy, through the Middlesex County Improvement Authority, issued approximately $68.0 million in three series of bonds. In 1998, as part of the Agreement negotiations with Perth Amboy, Middlesex agreed to guarantee debt service payments on 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, 2009, approximately $19.7 million of the Series C Serial Bonds remained outstanding. To date, Middlesex has not had to fund any debt service obligations as guarantor. 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. Our obligation in that case would be to pay scheduled debt service payments as they come due. 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 reim- bursement 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. The Company regularly evaluates these estimates, assumptions and judgments, including those related to the calculation of pension and postemployment benefits, unbilled revenues, and the recoverability of certain assets, 18 Middlesex Water Company including regulatory assets. The Company bases its estimates, assumptions and judgments on historical experience and current operating environment. Changes in any of the variables that are used for the Company’s estimates, assumptions and judgments may lead to significantly different financial statement results. 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 88% 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 in the Financial Accounting Standards Board Accounting Standards Codification Topic 980 Regulated Operations (Regulatory Accounting). In accordance with Regulatory Accounting, costs and obligations are deferred if it is probable that these items will be recognized for rate-making purposes in future rates. Accordingly, we have recorded costs and obligations, which will be amortized over various future periods. Any change in the assessment of the probability of rate-making treatment will require us to change the accounting treatment of the deferred item. We have no reason to believe any of the deferred items that are recorded will be treated differently by the regulators in the future. Revenues Revenues from metered customers include amounts billed on a cycle basis and unbilled amounts estimated from the last meter reading date to the end of the accounting period. The estimated unbilled amounts are determined by utilizing factors which include historical consumption usage and current climate and economic conditions. Differences between estimated revenues and actual billings are recorded in a subsequent period. Revenues from unmetered customers are billed at a fixed tariff rate in advance at the beginning of each service period and are recognized in revenue ratably over the service period. Revenues from the Perth Amboy management contract are comprised of fixed and variable fees. Fixed fees, which have been set for the life of the contract, are billed monthly and recorded as earned. Variable fees, which are based on billings and other factors and are not material, are recorded upon approval of the amount by Perth Amboy. Postemployment Retirement Benefit Plans The costs for providing postemployment retirement benefits are dependent upon numerous factors, including actual plan experience and assumptions of future experience. Future postemployment retirement benefit plan obligations and expense will depend on future investment performance, changes in future discount rates and various other demographic factors related to the population participating in the Company’s postemployment retirement benefit plans, all of which can change significantly in future years. We maintain a noncontributory defined benefit pension plan (Pension Benefits) which covers substantially all employees with more than 1,000 hours of service and who were hired prior to March 31, 2007. The Company has a postretirement benefit plan other than pensions (Other Benefits) for substantially all of its retired employees. Employees hired after March 31, 2007 are not eligible to participate in this plan. Coverage includes healthcare and life insurance. The allocation by asset category of postemployment employee benefit plan assets at December 31, 2009 and 2008 is as follows: Asset Category Equity Securities Debt Securities Cash Commodities Total Pension Plan 2009 59.2% 36.4% 4.1% 0.3% 2008 49.5% 47.0% 3.5% —% Other Benefits Plan 2009 2008 40.4% 25.7% 49.5% 59.6% 9.0% 14.7% 1.1% —% 100.0% 100.0% 100.0% 100.0% Target 60% 38% 2% 2% Range 30-65% 25-70% 0-10% 0% 19 Middlesex Water Company The discount rate, compensation increase rate and long-term rate of return utilized for determining our postemployment employee benefit plans’ future obligations as of December 31, 2009 are as follows: Discount Rate Compensation Increase Long-term Rate of Return Pension Plan Other Benefits Plan 5.95% 3.50% 8.00% 5.95% 3.50% 7.50% For 2009, costs and obligations for our Other Benefits Plan assumed a 9.0% annual rate of increase in the per capita cost of covered healthcare benefits and assumed a decline of 1.0% per year through 2012 and 0.5% per year through 2014, resulting in an annual rate of increase in the per capita cost of covered healthcare benefits of 5% by year 2014. The following is a sensitivity analysis for certain actuarial assumptions used in determining projected benefit obligations (PBO) and expenses for our postemployment employee benefit plans: Pension Plan Actuarial Assumptions Discount Rate 1% Increase Discount Rate 1% Decrease Other Benefits Plan Discount Rate 1% increase Discount Rate 1% Decrease Healthcare Cost Trend Rate 1% Increase Healthcare Cost Trend Rate 1% Decrease Estimated Increase/(Decrease) on PBO (000s) Estimated Increase/(Decrease) on Expense (000s) (4,833) 6,025 (3,292) 4,192 3,540 (2,833) (482) 608 (422) 577 419 (323) The discount rates used at our December 31 measurement date for determining future postemployment employee benefit plans’ obligations and costs are determined based on market rates for long-term, high-quality corporate bonds specific to our Pension Plan and Other Benefits Plan’s asset allocation. The expected long-term rate of return for Pension Plan and Other Benefits Plan assets is determined based on historical returns and our asset allocation. Recent Accounting Standards See Note 1(n) 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 2018 to 2038. Over the next twelve months, approximately $3.7 million of the current portion of 26 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. 20 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, 2009. 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, 2009, 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, 2009 as stated in their report which is included herein. Dennis W. Doll President and Chief Executive Officer Iselin, New Jersey March 8, 2010 A. Bruce O’Connor Vice President and Chief Financial Officer 21 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, 2009, 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, 2009, 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 and the related statements of income, common stockholders’ equity and comprehensive income, and cash flows of Middlesex Water Company, and our report dated March 8, 2010 expressed an unqualified opinion. Reading, Pennsylvania March 8, 2010 22 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, 2009 and 2008, and the related consolidated statements of income, common stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Middlesex Water Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 8, 2010 expressed an unqualified opinion. Reading, Pennsylvania March 8, 2010 23 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, 2009 $113,124 293,269 29,631 17,547 453,571 77,027 376,544 4,278 10,616 4,424 1,618 1,109 22,045 2,856 6,999 33,081 3,715 5,266 7,134 446 59,497 2008 $107,517 283,759 27,142 11,653 430,071 70,544 359,527 3,288 9,510 4,822 1,475 1,481 20,576 2,903 7,187 31,910 3,708 7,049 6,762 378 59,897 CAPITALIZATION AND LIABILITIES TOTAL ASSETS $458,086 $440,000 CAPITALIZATION: CURRENT LIABILITIES: Common Stock, No Par Value Retained Earnings 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 TOTAL CURRENT LIABILITIES COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) 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 $109,366 30,265 139,631 3,373 124,910 267,914 3,710 42,850 4,348 5,686 1,861 861 1,352 60,668 20,806 1,303 27,788 25,723 6,738 275 CONTRIBUTIONS IN AID OF CONSTRUCTION TOTAL CAPITALIZATION AND LIABILITIES 46,871 $458,086 TOTAL DEFERRED CREDITS AND OTHER LIABILITIES 82,633 See Notes to Consolidated Financial Statements. 24 $107,726 30,077 137,803 3,375 118,217 259,395 17,985 25,877 5,689 7,781 2,053 842 1,243 61,470 22,089 1,382 21,733 25,540 6,197 963 77,904 41,231 $440,000 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. Years Ended December 31, 2009 $91,243 47,770 4,578 8,559 10,175 71,082 20,161 1,001 1,011 (286) 1,726 6,750 15,137 5,160 9,977 208 $09,769 $ 000.73 $ 000.72 13,454 13,716 $00.713 2008 $91,038 44,782 4,147 7,922 10,168 67,019 24,019 667 906 (271) 1,302 7,057 18,264 6,056 12,208 218 $11,990 $ 000.90 $ 000.89 13,317 13,615 $00.703 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 25 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 Equity Portion of AFUDC Cash Surrender Value of Life Insurance Gain on Disposal of Equity Investments Gain on Sale of Real Estate Stock Compensation Expense Changes in Assets and Liabilities: Accounts Receivable Unbilled Revenues Materials & Supplies Prepayments Other Assets Accounts Payable Accrued Taxes Accrued Interest Employee Benefit Plans Unearned Revenue & Advanced Service Fees Other Liabilities NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES: Utility Plant Expenditures, Including AFUDC of $421 in 2009, $319 in 2008, and $282 in 2007 Restricted Cash Proceeds from Real Estate Dispositions 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 CASH AND CASH EQUIVALENTS AT END OF PERIOD SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: Utility Plant received as Construction Advances and Contributions Transfer of Equity Investment to Employee Retirement Benefit Plans Long term Debt Deobligation SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash Paid During the Year for: Interest Interest Capitalized Income Taxes See Notes to Consolidated Financial Statements. 26 2009 $9,977 9,217 5,522 (580) (387) — — 386 (1,112) 398 (143) 372 (564) (1,341) (2,096) (192) (354) 19 (616) 18,506 (20,128) 456 — (19,672) (18,244) 12,014 16,973 (116) — (25) 1,251 (9,582) (208) 93 2,156 990 3,288 $4,278 $4,264 — $1,352 $6,887 (421) $1,856 Years Ended December 31, 2008 2007 $12,208 $11,843 8,530 1,032 (348) 576 (86) — 288 (807) (213) (270) (118) (351) 147 206 137 (1,146) 84 (465) 19,404 (30,336) (591) — (30,927) (2,787) 4,652 19,627 (158) — (40) 1,187 (9,353) (218) (128) 12,782 1,259 2,029 $03,288 $05,452 $00,132 $000,— $06,864 $00(319) $05,205 8,176 399 (255) (271) — (267) 273 (2,752) (596) 101 (134) (9) 986 941 36 239 157 224 19,091 (23,777) 444 273 (23,060) (2,501) 3,632 6,250 (50) (15) (12) 1,147 (9,141) (248) 1,110 172 (3,797) 5,826 $02,029 $08,960 $000,— $000,— $06,542 $00(282) $04,534 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 - 2009 - 13,519 2008 - 13,404 Retained Earnings TOTAL COMMON EQUITY Cumulative Preference Stock, No Par Value: Shares Authorized - 134 Shares Outstanding - 32 Convertible: Shares Outstanding, $7.00 Series - 14 Shares Outstanding, $8.00 Series - 7 Nonredeemable: Shares Outstanding, $7.00 Series - 1 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 3.64% State Revolving Trust Note, due July 1, 2028 3.64% State Revolving Trust Note, due January 1, 2028 6.59%, Amortizing Secured Note, due April 20, 2029 7.05%, Amortizing Secured Note, due January 20, 2030 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 August 1, 2023 3.00% to 5.50%, Series FF, due August 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 0.00%, Series KK, due August 1, 2028 5.00% to 5.50%, Series LL, due August 1, 2028 SUBTOTAL LONG-TERM DEBT Less: Current Portion of Long-term Debt TOTAL LONG-TERM DEBT See Notes to Consolidated Financial Statements. December 31, 2009 2008 $109,366 30,265 $139,631 $107,726 30,077 137,803 1,457 816 100 1,000 3,373 2,581 7,735 5,787 6,067 622 3,687 678 903 625 436 395 132 6,743 5,000 12,000 6,500 — 10,000 23,000 483 650 1,118 1,560 1,447 1,790 6,000 5,642 6,935 1,530 1,810 1,619 1,690 1,705 1,750 1,457 816 102 1,000 3,375 2,695 8,155 6,067 6,347 657 3,689 675 939 660 500 389 140 — — 12,000 6,500 15,000 10,000 23,000 538 710 1,230 1,675 1,566 1,895 6,000 6,693 8,025 1,619 1,880 1,708 1,750 1,750 1,750 128,620 (3,710) $124,910 136,202 (17,985) $118,217 27 Middlesex Water Company CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME Common Stock Shares 13,168 Common Stock Amount $104,248 61 17 1,147 273 13,246 105,668 67 69 22 1,187 583 288 (In thousands) Balance at January 1, 2007 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 - Employees Cash Dividends on Common Stock Cash Dividends on Preferred Stock Common Stock Expenses Other Balance at December 31, 2007 Net Income Change in Value of Equity Investments, Net of $36 Income Tax Comprehensive Income Dividend Reinvestment & Common Stock Purchase Plan Conversion of $8 Convertible Preferred Stock Restricted Stock Award, Net - Employees Cash Dividends on Common Stock Cash Dividends on Preferred Stock Other Balance at December 31, 2008 13,404 107,726 Net Income Dividend Reinvestment & Common Stock Purchase Plan Restricted Stock Award, Net - Employees Restricted Stock Award - Board Of Directors Cash Dividends on Common Stock Cash Dividends on Preferred Stock Other 84 29 2 1,254 365 21 Retained Earnings $ 25,001 11,843 Accumulated Other Comprehensive Income (Loss) 0$ 94 (25) 0(69 (69) 0 — (9,141) (248) (15) 1 27,441 12,208 (9,353) (218) (1) 30,077 9,977 (9,582) (208) 1 Total $ 129,343 11,843 (25) 11,818 1,147 273 (9,141) (248) (15) 1 133,178 12,208 (69) 12,139 1,187 583 288 (9,353) (218) (1) 137,803 9,977 1,254 365 21 (9,582) (208) 1 Balance at December 31, 2009 13,519 $109,366 $30,265 $ — $139,631 See Notes to Consolidated Financial Statements. 28 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), Utility Service Affiliates (Perth Amboy) Inc. (USA-PA) and Twin Lakes Utilities, Inc. (Twin Lakes). Southern Shores Water Company, LLC (Southern Shores) and White Marsh Environmental Systems, Inc. (White Marsh) are wholly-owned subsidiaries of Tidewater. The financial statements for Middlesex and its wholly- owned subsidiaries (the Company) are reported on a consolidated basis. All significant intercompany accounts and transactions have been eliminated. Middlesex Water Company has operated as a water utility in New Jersey since 1897, in Delaware, through our wholly-owned subsidiary, Tidewater, since 1992 and in Pennsylvania, through our wholly-owned subsidiary, Twin Lakes, since November 2009. We are in the business of collecting, treating, distributing and selling water for domestic, commercial, municipal, industrial and fire protection purposes. We also operate a New Jersey municipal water and wastewater system under contract and provide wastewater services in New Jersey and Delaware through our subsidiaries. Our rates charged to customers for water and wastewater services, the quality of services we provide and certain other matters are regulated in New Jersey, Delaware and Pennsylvania by the New Jersey Board of Public Utilities (NJBPU), Delaware Public Service Commission (DEPSC) and Pennsylvania Public Utilities Commission (PAPUC), respectively. 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 NJBPU. Tidewater, TESI and Southern Shores maintain their accounts in accordance with DEPSC requirements. Twin Lakes maintains its accounts in accordance with PAPUC requirements. (c) Utility Plant – Utility Plant is stated at original cost as defined for regulatory purposes. Property accounts are charged with the cost of betterments and major replacements of property. Cost includes direct material, labor and indirect charges for pension benefits and payroll taxes. The cost of labor, materials, supervi- sion 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, 2009, 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 – 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, 2009, 2008 and 2007. These rates have been approved by the NJBPU, DEPSC or PAPUC: Source of Supply Pumping Water Treatment General Plant Transmission and Distribution (T&D): T&D – Mains T&D – Services T&D – Other 1.15% - 3.44% 2.87% - 5.04% 2.71% - 7.64% 2.08% - 17.84% 1.10% - 3.13% 2.12% - 2.81% 1.61% - 4.63% Non-regulated fixed assets consist primarily of office buildings, furniture and fixtures, and transportation equipment. These assets are recorded at original cost and depreciation is calculated based on the estimated useful lives, ranging from 3 to 40 years. (e) Preliminary Survey and Investigation (PS&I) Costs – In the design of water and wastewater systems that the Company ultimately intends to construct, own and operate certain expenditures are incurred to advance those project activities. These PS&I costs are recorded as deferred charges on the balance sheet because these costs are expected to be recovered through future rates charged to customers as the underlying projects are placed into service as utility plant. If it is subsequently determined that costs for a project recorded as PS&I are not recoverable through rates charged to our customers, the applicable PS&I 29 Middlesex Water Company costs are recorded as a charge to the income statement at that time. (f ) Customers’ Advances for Construction (CAC) – 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 CAC. 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 (CIAC) – CIAC include direct non-refundable contributions of water utility plant and/or cash and the portion of CAC that becomes non-refundable. CAC and CIAC are not depreciated in accordance with regulatory requirements. In addition, these amounts reduce the investment base for purposes of setting rates. (g) 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, 2009, 2008 and 2007 approximately $1.0 million, $0.7 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 AFUDC rate for the years ended December 31, 2009, 2008 and 2007 for Middlesex and Tidewater is as follows: For The Years Ended December 31, 2007 2009 2008 Middlesex Tidewater 7.65% 8.24%* 7.65% 8.33% 7.65% 7.94% *8.33% through August 2009 30 (h) Accounts Receivable – We record bad debt expense based on historical write-offs combined with an evaluation of current conditions. The allowance for doubtful accounts was $0.4 million and $0.2 million at December 31, 2009 and December 31, 2008, respectively. Bad debt expense for the years ended December 31, 2009, 2008 and 2007 was $0.6 million, $0.2 million and $0.1 million, respectively. (i) 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 fixed service charges, include amounts billed in arrears on a cycle basis and unbilled amounts estimated from the last meter reading date to the end of the accounting period. The estimated unbilled amounts are determined by utilizing factors which include historical consumption usage and current climate and economic conditions. Actual billings may differ from our estimates. Tidewater customers are billed in advance for their fixed service charge and these revenues are recognized as the service is provided to the customer. Southern Shores is an unmetered system. Customers are billed a fixed service charge in advance at the beginning of each month and revenues are recognized as earned. 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. (j) Deferred Charges and Other Assets - Unamortized Debt Expense is amortized over the lives of the related issues. Restricted Cash represents pro- ceeds 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. (k) 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 Middlesex Water Company and are amortized over the estimated useful life of the related property. For more information on income taxes, see Note 3 – Income Taxes. (l) Statements of Cash Flows - For purposes of report- ing cash flows, the Company considers all highly liq- uid 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. (m) 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. (n) Recent Accounting Pronouncements – In June 2009, the Financial Accounting Standards Board (FASB) issued guidance on “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”, which establishes the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. Under the ASC, new standards will be issued in the form of Accounting Standards Updates (ASU). This guidance is effective for interim and annual periods ending after September 15, 2009. The adoption of this standard did not have an impact on our financial position or results of operations. Topic 320, Investments – Debt and Equity Securities In April 2009, the FASB issued guidance on “Recognition and Presentation of Other-Than- Temporary Impairments”. This guidance improves presentation and disclosures in financial statements for other-than-temporary impairments of debt and equity securities and expands on the factors companies should consider when evaluating debt securities for other- than-temporary impairments. The change is effective for interim and annual reporting periods ending after June 15, 2009. This was adopted as of June 30, 2009, and had no effect on results of operations, cash flows or financial position. Topic 715, Compensation – Retirement Benefits In December 2008, the FASB issued guidance on “Employers’ Disclosures about Postretirement Benefit Plan Assets” which addresses employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan, including information related to a company’s: • plan assets • plan investment policies and strategies • significant concentrations of risk within plan assets, and • inputs and valuation techniques used to measure the fair value of plan assets and the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period. The disclosures about plan assets are required for fiscal years ending after December 15, 2009. This was adopted as of December 31, 2009, and had no effect on results of operations, cash flows or financial position. Adoption of the guidance did require additional disclosures in Note 7 – Employee Benefit Plans. Topic 820, Fair Value Measurements and Disclosures (ASC 820) In September 2006, the FASB issued guidance on “Fair Value Measurements” (ASC 820), which establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance was adopted January 1, 2008 for financial assets and financial liabilities and did not have a material impact on the Company’s financial statements. In February 2008, the FASB issued further guidance which deferred the effective date of ASC 820 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities. This guidance was adopted as of January 1, 2009 and had no effect on results of operations, cash flows or financial position. In April 2009, the FASB issued guidance on “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” Fair value has been defined by FASB as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional information for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have significantly decreased. In addition, it includes guidance on identifying circumstances that indicate a transaction is not orderly. This guidance was adopted as of June 30, 2009, and had no effect on results of operations, cash flows or financial position. 31 Middlesex Water Company In April 2009, the FASB issued guidance on “Interim Disclosures about Fair Value of Financial Instruments.” This guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance was adopted as of June 30, 2009, and resulted in additional interim disclosures of the fair values of financial instruments in our Quarterly Reports on Form 10-Q, which previously had only been required annually. Adoption of this guidance resulted in no change to accounting policies and had no effect on results of operations, cash flows or financial position. In August 2009, the FASB issued ASU 2009-05. The update provides additional guidance for measuring the fair value of liabilities and clarifies that the quoted price for the identical liability, when traded as an asset in an active market, is a Level 1 measurement, providing there are no adjustments to the quoted price. Alternatively, when no quoted price is available, the ASU affirms the use of other valuation techniques outlined in ASC 820. ASU 2009-05 is effective for the first interim or annual reporting period beginning after the ASU’s issuance. This guidance was adopted as of October 1, 2009, and had no effect on results of operations, cash flows or financial position. Topic 855, Subsequent Events In May 2009, the FASB issued SFAS No. 165, Subsequent Events (ASC 855), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted the provisions effective June 30, 2009, which had no effect on results of operations, cash flows or financial position. (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 88% 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 FASB ASC Topic 980 Regulated Operations (Regulatory Accounting). In accordance with Regulatory Accounting, costs and obligations are deferred if it is probable that these 32 items will be recognized for rate-making purposes in future rates. Accordingly, we have recorded costs and obligations, which will be amortized over various future periods. Any change in the assessment of the probability of rate-making treatment will require us to change the accounting treatment of the deferred item. We have no reason to believe any of the deferred items that are recorded will be treated differently by the regulators in the future. For additional information, see Note 2 – Rate and Regulatory Matters. (p) Postemployment Employee Benefit Plans - 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 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. The Company’s costs for providing postemployment employee benefits are dependent upon numerous factors, including actual plan experience and assumptions of future experience. Postemployment employee benefit plan obligations and expense are determined based on investment performance, discount rates and various other demographic factors related to the population participating in the Company’s postemployment employee benefit plans, all of which can change significantly in future years. For more information on the Company’s Postemployment Employee Benefit Plans, see Note 7 – Employee Benefit Plans. Note 2 - Rate and Regulatory Matters Rate Matters On January 26, 2009, Tidewater filed an application with the DEPSC seeking permission to increase its base rates by 32.54%, which was necessitated by increased costs of operations, maintenance and taxes, as well as capital investment since Tidewater’s last rate filing in April of 2006. On September 9, 2009, the DEPSC approved a base rate settlement that had been reached amongst the parties that reflects an overall increase of 14.95%. This rate increase approval is expected to generate additional annual revenues of $3.0 million based on a 10.0% return on equity. On August 17, 2009, Middlesex filed an application with the NJBPU seeking permission to increase its base rates by 26.03%, or $15.1 million. The request was made necessary by increased costs of operations, chemicals and fuel, electricity, taxes, labor and benefits, Middlesex Water Company decreases in industrial and commercial customer demand patterns as well as capital investment of approximately $39.0 million since Middlesex’ last rate filing in April of 2007. Discovery by the intervening parties has begun. We cannot predict whether the NJBPU will ultimately approve, deny, or reduce the amount of the request. A decision by the NJBPU is not expected until the second quarter of 2010. On July 1, 2009, Middlesex implemented a NJBPU approved Purchased Water Adjustment Clause (PWAC) in order to recover increased costs of $1.0 million to purchase untreated water from the New Jersey Water Supply Authority and treated water from a non-affiliated regulated water utility. Effective January 1, 2009, Tidewater received approval from the DEPSC to increase their Distribution System Improvement Charge (DSIC) from 2.94% to 5.25%. This rate was set to zero in conjunction with the interim rates approved in the base rate case described above. On December 22, 2009, Tidewater received approval from the DEPSC to increase their DSIC from 0% to 1.11% effective January 1, 2010. In accordance with the tariff established for Southern Shores, an annual rate increase of 3% was implemented on January 1, 2009. 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%. Effective December 18, 2008, Pinelands Water and Pinelands Wastewater implemented NJBPU approved base rate increases of 5.53% and 18.30%, respectively. These increases represent a total base rate increase of approximately $0.2 million for Pinelands to offset increased costs associated with the operation and maintenance of their systems. Effective October 26, 2007, Middlesex received approval from the NJBPU 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%. Regulatory Matters We have recorded certain costs as regulatory assets because we expect full recovery of, or are currently recovering, these costs in the rates we charge customers. These deferred costs have been excluded from rate base and, therefore, we are not earning a return on the unamortized balances. These items are detailed as follows: December 31, (Thousands of Dollars) Regulatory Assets 2009 2008 Postretirement Benefits Income Taxes Tank Painting Rate Cases and Other $21,167 $20,679 10,905 189 11,356 168 Remaining Recovery Periods Various Various 3-7 years 390 137 Up to 2 years Total $33,081 $31,910 Postretirement benefits include pension and other postretirement benefits that have been recorded on the Consolidated Balance Sheet in accordance with the guidance provided in Topic 715, Compensation – Retirement Benefits. These amounts represent obligations in excess of current funding, which the Company believes will be fully recovered in rates set by the regulatory authorities. The recovery period for income taxes is dependent upon when the temporary differences between the tax and book treatment of various items reverse. The Company uses composite depreciation rates for its regulated utility assets, which is currently an acceptable method under generally accepted accounting principles and is widely used in the utility industry. Historically, under the composite depreciation method, the anticipated costs of removing assets upon retirement are provided for over the life of those assets as a component of depreciation expense. The Company recovers certain asset retirement costs through rates charged to customers as an approved component of depreciation expense. As of December 31, 2009 and 2008, the Company has approximately $6.7 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 $0.7 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. The Company expects to recover training costs of approximately $0.6 million associated with implementation of a new information technology system in future rates. These deferred costs have been recorded in construction work in process as of December 31, 2009. 33 Middlesex Water Company 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) 2009 2008 2007 Income Tax at Statutory Rate $5,147 $6,253 $6,021 Tax Effect of: Utility Plant Related State Income Taxes – Net Employee Benefits Other Total Income Tax Expense (247) (725) (595) 339 (86) 7 309 202 17 350 (49) 9 $5,160 $6,056 $5,736 Income tax expense is comprised of the following: Years Ended December 31, (Thousands of Dollars) 2009 2008 2007 Current: Federal State Deferred: Federal State Investment Tax Credits Total Income Tax Expense $0(208) $4,651 $4,894 413 392 35 4,933 479 1,018 74 634 117 (79) (79) (322) $5,160 $6,056 $5,736 The statutory review period for income tax returns for the years prior to 2007 has been closed. An examination by the Internal Revenue Service of the Federal income tax return for 2007 is currently under- way. An examination by the Internal Revenue Service of the Federal income tax returns for 2005 and 2006 was completed during 2008. The examination resulted in a net refund, including interest of approximately $0.1 million. The tax refund was recorded to the appropriate current and deferred tax accounts and the interest was reported as other income. In the event that there are interest and penalties associated with income tax adjustments in future examinations, these amounts will be reported under interest expense and 34 other expense, respectively. There are no unrecognized tax benefits resulting from prior period tax positions. The Company is not aware of any uncertain tax positions that could result in a future tax liability. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax purposes. The components of the net deferred tax liability are as follows: December 31, (Thousands of Dollars) 2009 2008 $31,942 (3,914) 217 (457) $26,224 (4,036) (65) (390) $27,788 $21,733 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 (the Agreement) through June 30, 2018. Under the Agreement, USA-PA receives a fixed fee and a variable fee based on increased system billing. Scheduled fixed fee payments for 2009, 2008 and 2007 were $8.2 million, $8.0 million and $7.8 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. In 1998, as part of Agreement negotiations, Middlesex agreed to guarantee debt service payments on 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, 2009, approximately $19.7 million of the Series C Serial Bonds remained outstanding. To date, Middlesex has not had to fund any debt service obligations as guarantor. 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. Middlesex Water Company Our obligation in that case would be to pay scheduled debt service payments as they come due. 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. Purchased water costs are shown below: Purchased Water Untreated Treated Total Costs Years Ended December 31, (Millions of Dollars) 2008 2009 2007 $2.4 2.6 $5.0 $2.4 2.1 $4.5 $2.4 2.1 $4.5 Construction – The Company may spend up to $34.3 million in 2010, $23.9 million in 2011 and $30.8 million in 2012 on its construction program. The actual amount and timing of capital expenditures is dependent on customer growth, residential new home construction and sales and project scheduling. There is no assurance that projected customer growth and residential new home construction and sales will occur. Litigation – The Company is a defendant in lawsuits in the normal course of business. We believe the resolution of pending claims and legal proceedings will not have a material adverse effect on the Company’s consolidated financial statements. Change in Control Agreements – The Company has Change in Control Agreements with certain of its officers that provide compensation and benefits in the event of termination of employment in connection with a change in control of the Company. Note 5 – Short-term Borrowings Information regarding the Company’s short-term borrowings for the years ended December 31, 2009 and 2008 is summarized below: 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) 2008 2009 $53.0 $36.0 44.2 40.0 42.9 25.9 16.4 25.9 1.73% 3.69% Rate at Year-End 1.53% 2.30% The maturity dates for the $42.9 million borrowings outstanding as of December 31, 2009 are: $7.0 million in January 2010, $7.0 million in February 2010 and $20.5 million in March 2010 and $8.4 million in April 2010. In January 2010, the Company increased its available lines of credit to $58.0 million. Interest rates for short-term borrowings are below the prime rate with no requirement for compensating balances. Note 6 - Capitalization All the transactions discussed below related to the issuance of securities were approved by either the NJBPU or DEPSC, except where otherwise noted. Common Stock On February 3, 2010, the Company filed a petition with the NJBPU seeking approval to issue up to 2.0 million shares of its common stock in the form of a follow-on offering during the second quarter of 2010. The proceeds from the common stock offering will be used to retire short term debt. 35 Middlesex Water Company 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, 2009, is 1,794,801. On December 23, 2009, the Company announced a 5% purchase discount for optional cash purchases and reinvested dividends under the DRP. The discount applies to purchases made by the DRP between February 1, 2010 and June 1, 2010. The Company also has shares authorized and outstanding under a restricted stock plan, which is described in Note 7 – Employee Benefit Plans. The Company maintains a stock plan for its outside directors (the Outside Director Stock Compensation Plan). The maximum number of shares authorized for grant under the Outside Director Stock Compensation Plan is 100,000. In 2009, 1,554 shares of common stock were granted and issued to the Company’s outside directors under the Outside Director Stock Compensation Plan. As of December 31, 2009, there are 98,446 shares available for future awards under Outside Director Stock Compensation Plan. 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, 2009, 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 two members to the Board of Directors in addition to Directors elected by holders of the common stock. At December 31, 2009 and 2008, 31,873 and 31,898 shares of preferred stock presently authorized were outstanding and there were no dividends in arrears. The Company may not pay any dividends on its common stock unless full cumulative dividends to the preceding dividend date for all outstanding shares of preferred stock have been paid or set aside for payment. All such preferred dividends have been paid. In addition, if Middlesex were to liquidate, holders of preferred stock would be paid back the stated value of their preferred shares before any distributions could be made to common stockholders. The conversion feature of the no par $7.00 Series Cumulative and Convertible Preferred Stock allows the security holders to exchange one convertible preferred share for twelve shares of the Company’s common 36 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 2009, the Company repurchased 25 shares of the $7.00 Series Cumulative and Convertible Preferred 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. During 2008, 5,000 shares of the no par $8.00 Series Cumulative and Convertible Preferred Stock were converted into 68,570 of common stock. Long-term Debt In March 2009, Tidewater closed on a $22.0 million DEPSC approved loan and immediately borrowed $7.0 million at a rate of 6.59% with a final maturity in April 2029. In June 2009, Tidewater borrowed $5.0 million at a rate of 7.05% with a final maturity in January 2030. Tidewater can borrow the remaining $10.0 million in whole or in increments at its discretion until June 30, 2010, at an interest rate based on market conditions and with a maximum final maturity date of January 2030. In November 2008, Middlesex issued $3.5 million of first mortgage bonds through the New Jersey Environmental Infrastructure Trust under the New Jersey State Revolving Fund (SRF) program. The Company closed on the first mortgage bonds designated as Series KK and LL on November 8, 2008. First Mortgage Bonds Series S through W and Series DD are term bonds with single maturity dates. Principal repayments for all series of the Company’s long-term debt extend beyond 2014. The aggregate annual principal repayment obligations for all long- term debt over the next five years are shown below: Year 2010 2011 2012 2013 2014 (Millions of Dollars) Annual Maturities $3.7 $4.0 $4.1 $4.1 $4.2 Middlesex Water Company The weighted average interest rate on all long-term debt at December 31, 2009 and 2008 was 5.16% and 5.15%, respectively. Except for the Amortizing Secured Notes and Series U First Mortgage Bonds, which was repaid in 2009, all of the Company’s outstanding long-term debt has been issued through the New Jersey Economic Development Authority ($57.5 million), the New Jersey Environmental Infrastructure Trust (NJEIT) program ($30.8 million) and the Delaware SRF program ($6.4 million). Restricted cash includes proceeds from the Series Y, AA, BB, CC, EE, FF, GG, HH, II, JJ, KK and LL 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 KK and LL proceeds can only be used for the 2010 main cleaning and cement lining program. All other bond issuance balances in restricted cash are for debt service requirements. Due to expenditures being less than anticipated on our Series EE and FF NJEIT SRF loan programs, in 2009, the NJEIT deobligated $1.4 million of principal payments on those Series. As a result of this transaction, long- term debt and restricted cash decreased $1.4 million. Substantially all of the Utility Plant of the Company is subject to the lien of its mortgage, which includes debt service and capital ratio covenants. The Company is in compliance with all of its mortgage covenants and restrictions. Earnings Per Share The following table presents the calculation of basic and diluted earnings per share (EPS) for the three years ended December 31, 2009. 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 Amounts) 2008 2007 2009 Income Shares Income Shares Income Shares $9,977 (208) $9,769 $00.73 $9,769 97 56 $9,922 $00.72 13,454 13,454 13,454 166 96 13,716 $12,208 (218) 13,317 $11,843 (248) $11,990 $000.90 13,317 $11,595 $000.88 13,203 13,203 $11,990 97 66 $12,153 $000.89 13,317 $11,595 97 96 167 131 13,615 $11,788 $000.87 13,203 167 164 13,534 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, trade receivables, accounts payable and notes payable approximate their respective fair values due to the short-term maturities of these instruments. The fair value of the Company’s long-term debt relating to First Mortgage and SRF bonds 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) 2009 Carrying Amount $87,230 $01,061 Fair Value $84,429 $01,091 2008 Carrying Amount Fair Value $105,290 $001,160 $95,171 $01,170 37 The regulatory asset related to this transition obligation at December 31, 2009 and 2008 was $0.3 million and $0.4 million, respectively. Regulatory Treatment of Over/Underfunded Pension and Postretirement Obligations Because the Company is subject to regulation in the states in which it operates, it is required to maintain its accounts in accordance with the regulatory authority’s rules and guidelines, which may differ from other authoritative accounting pronouncements. In those instances, the Company follows the guidance of FASB ASC Topic 980 Regulated Operations. Based on prior regulatory practice, and in accordance with the guidance in Topic 980, the Company records underfunded Pension Plan and Other Benefits Plan obligations, which otherwise would be recognized as Other Comprehensive Income under Topic 715, Compensation – Retirement Benefits, as a Regulatory Asset, and expects to recover those costs in rates charged to customers. Middlesex Water Company 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 was $40.3 million and $29.8 million at December 31, 2009 and 2008, respectively. Customer advances for construction have a carrying amount of $20.8 million and $22.1 million at December 31, 2009 and 2008, respectively. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases. Note 7 - Employee Benefit Plans Pension Benefits The Company’s Pension Plan covers 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 contribution, the eligible employee must be employed by the Company on December 31st of the year to which the award relates. In addition, the Company maintains an unfunded supplemental plan for its executive officers. The Accumulated Benefit Obligation for the Company’s Pension Plan at December 31, 2009 and 2008 was $30.8 million and $27.5 million, respectively. Other Benefits The Company’s Other Benefits Plan covers substantially all of its retired employees. Employees hired after March 31, 2007 are not eligible to participate in this plan. Coverage includes healthcare and life insurance. 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 statement of Financial Accounting Standard 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, Middlesex is also recovering the transition obligation over 15 years. 38 Middlesex Water Company 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 2009 and 2008. Change in Projected Benefit Obligation: Beginning Balance Service Cost Interest Cost Actuarial Loss Benefits Paid Ending Balance Change in Fair Value of Plan Assets: Beginning Balance Actual Return on Plan Assets Employer Contributions Benefits Paid Ending Balance Funded Status Amounts Recognized in the Consolidated Balance Sheets consist of: Current Liability Noncurrent Liability Net Liability Recognized December 31, (Thousands of Dollars) Pension Benefits 2009 2008 Other Benefits 2009 2008 $(34,352 1,372 2,101 2,217 (1,731) $(30,167 1,248 1,950 2,637 (1,650) $(18,771 891 1,086 2,508 (520) $(15,067 775 1,010 2,420 (501) $(38,311 $(34,352 $(22,736 $(18,771 $(20,036 4,110 2,883 (1,731) $(24,568 (5,390) 2,508 (1,650) $(07,239 1,066 1,895 (520) $0(7,025 (1,085) 1,800 (501) $(25,298 $(20,036 $(09,680 $0(7,239 $(13,013) $(14,316) $(13,056 $(11,532) (346) (12,667) (308) (14,008) — (13,056) — (11,532) $(13,013) $(14,316) $(13,056) $(11,532) Components of Net Periodic Benefit Cost Service Cost Interest Cost Expected Return on Plan Assets Amortization of Net Transition Obligation Amortization of Net Actuarial Loss Amortization of Prior Service Cost Years Ended December 31, (Thousands of Dollars) Pension Benefits 2008 2009 2007 Other Benefits 2008 2009 2007 $1,372 2,101 (1,602) — 615 10 $1,248 1,950 (1,938) — — 10 $1,296 1,807 (1,819) — 75 10 $0,891 $0,775 1,086 1,010 (595) (581) 135 135 493 287 — — $0,821 895 (481) 135 337 — Net Periodic Benefit Cost $2,496 $1,270 $1,369 $2,010 $1,626 $1,707 Amounts that are expected to be amortized from Regulatory Assets into Net Periodic Benefit Cost in 2010 are as follows: Actuarial Loss Prior Service Cost Transition Obligation (Thousands of Dollars) Pension Benefits Other Benefits $ 506 10 — $531 — 135 39 Middlesex Water Company The discount rate and compensation increase rate for determining our postemployment employee benefit plans’ benefit obligations and costs as of December 31, 2009, 2008 and 2007, respectively, are as follows: Weighted Average Assumptions: Expected Return on Plan Assets Discount Rate for: Benefit Obligation Benefit Cost Compensation Increase for: Benefit Obligation Benefit Cost Pension Benefits 2008 2007 2009 Other Benefits 2008 2009 2007 8.00% 8.00% 8.00% 7.50% 7.50% 7.50% 5.95% 6.17% 3.50% 3.50% 6.17% 6.59% 3.50% 3.50% 6.59% 5.89% 3.50% 3.50% 5.95% 6.12% 6.59% 6.12% 6.59% 5.89% 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. For 2009, costs and obligations for our Other Benefits Plan assumed a 9.0% annual rate of increase in the per capita cost of covered healthcare benefits and assumed a decline of 1.0% per year through 2012 and 0.5% per year through 2014, resulting in an annual rate of increase in the per capita cost of covered healthcare benefits of 5% by year 2014. A one-percentage point change in assumed healthcare cost trend rates would have the following effects: Effect on Current Year’s Service and Interest Cost Effect on Projected Benefit Obligation (Thousands of Dollars) 1 Percentage Point Increase Decrease $0,419 $3,540 $0,(323) $(2,833) The following benefit payments, which reflect expected future service, are expected to be paid: Year 2010 2011 2012 2013 2014 2015-2019 Totals (Thousands of Dollars) Pension Benefits Other Benefits $01,748 1,761 1,769 1,872 1,878 10,265 $19,293 $9,605 665 737 816 905 5,807 $9,535 Benefit Plans Assets The allocation of plan assets at December 31, 2009 and 2008 by asset category is as follows: Pension Plan Other Benefits Asset Category Equity Securities Debt Securities Cash Commodities Total 40 2009 59.2% 36.4% 4.1% 0.3% 100.0% 2008 2009 2008 Target Range 49.5% 47.0% 3.5% —% 25.7% 59.6% 14.7% —% 100.0% 100.0% 100.0% 40.4% 49.5% 9.0% 1.1% 60% 30-65% 38% 25-70% 2% 0-10% 0% 0% Middlesex Water Company 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 (2.7% of total plan assets) and $0.7 million (3.4 % of total plan assets) at December 31, 2009 and 2008, respectively. Fair Value Measurements Accounting guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows: • Level 1 – Inputs to the valuation methodology are unadjusted quoted market prices for identical assets or liabilities in accessible active markets. • Level 2 – Inputs to the valuation methodology that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. If the asset or liability has a specified contractual term, the Level 2 input must be observable for substantially the full term of the asset or liability. • Level 3- Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Certain investments in cash and cash equivalents, equity securities, and commodities are valued based on quoted market prices in active markets and are classified as Level 1 investments. Certain investments in cash and cash equivalents, equity securities and fixed income securities are valued using prices received from pricing vendors that utilize observable inputs and are therefore classified as Level 2 investments. The following table presents Middlesex’s pension plan and other benefits plan assets measured and recorded at fair value within the fair value hierarchy as of December 31, 2009: Pension Plan Assets Equity Securities Fixed Income Securities Cash and Cash Equivalents Commodities Total Other Benefits Plan Assets Equity Securities Fixed Income Securities Cash and Cash Equivalents Commodities Total Level 1 Level 2 Level 3 Total (Thousands of Dollars) $10,515 — 435 85 $11,035 $03,913 — — 102 $04,015 $04,467 9,198 598 — $14,263 $0(00— 4,792 873 — $05,665 — — — — — — — — — — $14,982 9,198 1,033 85 $25,298 $03,913 4,792 873 102 $09,680 41 Middlesex Water Company Benefit Plans Contributions For the pension plan, Middlesex made total cash contributions of $2.9 million in 2009 and expects to make cash contributions of approximately $3.0 million in 2010. For the postretirement health benefit plan, Middlesex made total cash contributions of $1.9 million in 2009 and expects to make contributions of approximately $2.0 million in 2010. 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 $0.5 million for each of the years ended December 31, 2009 and 2008 and $0.4 million for the year ended December 31, 2007. For those employees hired after March 31, 2007 and still employed on December 31, 2009, the Company approved and funded discretionary contribution of $0.1 million that was based on 2.5% of eligible 2009 compensation. For the years ended December 31, 2008 and 2007, the Company made discretionary contributions of $0.1 million, respectively, for those employees hired after March 31, 2007. Stock-Based Compensation The Company has a stock compensation plan for its employees (the Employee Stock Compensation Plan). The Company maintains an escrow account for 93,415 shares of the Company's common stock for the Employee Stock Compensation Plan. Such stock is subject to an agreement requiring forfeiture by the employee in the event of termination of employment within five years of the award other than as a result of retirement, death, disability or change in control. The maximum number of shares authorized for grant under the 2008 Restricted Stock Plan is 300,000 shares, for which there remains 248,405 unissued shares. The Company recognizes compensation expense at fair value for the restricted stock awards in accordance with FASB ASC Topic 715, Compensation – Retirement Benefits. 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: Balance, January 1, 2007 Granted Vested Forfeited Amortization of Compensation Expense Balance, December 31, 2007 Granted Vested Forfeited Amortization of Compensation Expense Balance, December 31, 2008 Granted Vested Forfeited Amortization of Compensation Expense Balance, December 31, 2009 Shares (thousands) Unearned Compensation (thousands) 64 18 (10) (1) 71 22 (12) 81 30 (17) (1) 93 $796 344 (3) (276) $861 377 (5) (305) $928 448 (6) (380) $990 Weighted Average Grant Price $19.10 $17.30 $15.11 The fair value of vested restricted shares was $0.2 million for each of the years ended December 31, 2009, December 31, 2008 and December 31, 2007. 42 Middlesex Water Company Note 8 – Business Segment Data The Company has identified two reportable segments. One is the regulated business of collecting, treating and distributing water on a retail and wholesale basis to residential, commercial, industrial and fire protection customers in parts of New Jersey, Delaware and Pennsylvania. This segment also includes regulated wastewater systems in New Jersey and Delaware. The Company is subject to regulations as to its rates, services and other matters by the states of New Jersey, Delaware and Pennsylvania with respect to utility service within these states. The other segment is primarily comprised of non-regulated contract services for the operation and maintenance of municipal and private water and wastewater systems in New Jersey and Delaware. Inter-segment transactions relating to operational costs are treated as pass-through expenses. Finance charges on inter-segment loan activities are based on interest rates that are below what would normally be charged by a third party lender. 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) 2009 2008 2007 $80,910 10,857 (524) $91,243 $18,117 2,044 $20,161 $08,401 158 $08,559 $01,565 337 (176) $01,726 $06,733 193 (176) $06,750 $08,652 1,325 $09,977 $20,104 24 $20,128 $81,118 10,327 (407) $91,038 $22,132 1,887 $24,019 $07,798 124 $07,922 $01,077 387 (162) $01,302 $06,981 238 (162) $07,057 $10,976 1,232 $12,208 $29,095 1,241 $30,336 As of December 31, 2009 2008 $451,734 11,022 (4,670) $458,086 $433,109 11,537 (4,646) $440,000 $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 $23,433 344 $23,777 43 Middlesex Water Company Note 9 - Quarterly Operating Results - Unaudited Operating results for each quarter of 2009 and 2008 are as follows: 2009 Operating Revenues Operating Income Net Income Basic Earnings per Share Diluted Earnings per Share 2008 Operating Revenues Operating Income Net Income Basic Earnings per Share Diluted Earnings per Share 1st $20,583 3,002 1,361 $000.10 $000.10 $20,855 4,347 2,004 $000.15 $000.15 (Thousands of Dollars, Except per Share Data) 2nd 3rd 4th $23,083 5,547 2,846 $000.21 $000.21 $23,035 6,825 3,565 $000.26 $000.26 $25,498 7,324 4,027 $000.30 $000.29 $25,653 8,384 4,715 $000.35 $000.35 $22,079 4,288 1,743 $000.12 $000.12 $21,495 4,463 1,924 $000.14 $000.13 Total $91,243 20,161 9,977 $000.73 $000.72 $91,038 24,019 12,208 $000.90 $000.89 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. COMMON STOCK MARKET PRICE AND DIVIDEND PER SHARE First Quarter Second Quarter Third Quarter Fourth Quarter High $17.71 15.29 15.89 17.91 2009 Low $11.64 12.61 13.62 14.74 Dividend $0.1775 0.1775 0.1775 0.1800 High $19.83 19.23 18.52 17.93 2008 Low $17.25 16.59 15.68 12.05 Dividend $0.1750 0.1750 0.1750 0.1775 Middlesex Water Company has paid quarterly dividends on its common stock each year since 1912 and has increased dividends for 37 consecutive years. The following shows the anticipated Common Stock dividend record and payment dates for the year 2010: Schedule of Dividend Dates for the Year 2010* Declaration Dates January 26 April 27 July 27 October 26 December 16** March 24 June 22 September 28 Record Dates February 15 May 14 August 13 November 15 January 15 April 15 July 15 October 15 Payment Dates March 1 June 1 September 1 December 1 February 1 May 3 August 2 November 1 Ex. Dividend Dates February 11 May 12 August 11 November 11 January 13 April 13 July 13 October 13 Common Preferred * Subject to approval by Board of Directors **2009 44 Board of Directors J. Richard Tompkins2,6 Chairman of the Board Dennis W. Doll Vice Chairman of the Board, President and Chief Executive Officer Annette Catino1,2*,5*,6 President and Chief Executive Officer, QualCare Alliance Networks, Inc. John C. Cutting 1,2*,5*,6 Retired, formerly Senior Engineer, Science Applications International Corporation Steven M. Klein 1,3,5 Executive Vice President and Chief Financial Officer of Northfield Bancorp, Inc. John R. Middleton, MD 1,3,4 Engaged in Private Practice, Infectious Diseases Former Chair of the Department of Medicine and former Chief Medical Officer of Raritan Bay Medical Center John P. Mulkerin 1*+,4,5 Retired, formerly President and Chief Executive Officer, First Sentinel Bancorp, Inc. Walter G. Reinhard, Esq.2,4*,5 Partner, Law Firm of Norris, McLaughlin & Marcus, P.A. Jeffries Shein 3*,4,5,6 Managing Partner, JGT Management Co., LLC 1 Audit Committee 2 Capital Improvement Committee 3 Compensation Committee 4 Corporate Governance and Nominating Committee 5 Pension Committee 6 Ad Hoc Pricing Committee * Committee Chair + Audit Committee Financial Expert Executive Leadership Dennis W. Doll President and Chief Executive Officer Gerard L. Esposito President, Tidewater Utilities, Inc. James P. Garrett 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 Δ Vice President – Operations and Chief Operating Officer Δ Mr. Williams retired effective January 1, 2010 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 25, 2010, at 11:00 a.m. at the Office of the Company, 1500 Ronson Road, Iselin, NJ. The record date for the Annual Meeting was March 29, 2010. Shareholders As of December 31, 2009, there were 1,940 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: 732-638-7549 Fax: 732-638-7515 E-mail: bsohler@middlesexwater.com Auditors ParenteBeard LLC 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 and Common Stock Purchase Plan Middlesex Water Company offers a Dividend Reinvestment Plan and Common Stock Purchase Plan which provides new and existing shareholders of its common stock with a convenient way to build ownership in the company without payment of any brokerage commission or service charge. The Plan is now available to new investors who, upon enrollment, agree to become a shareholder by making an initial investment of $500, up to a maximum of $10,000, in Middlesex Water common stock. The offer and sale of shares under the Plan will be made only through a Prospectus, available on our website at www.middlesexwater.com or by contacting the Investor Relations Department. Direct Deposit of Dividends Shareholders of record can have immediate access to dividend funds by having their dividend payments deposited directly into their 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 www.middlesexwater.com A Provider of Water, Wastewater and Related Products and Services PO Box 1500 Iselin, New Jersey 08830-0452 732-634-1500 www.middlesexwater.com