Business Context and Reporting Period
Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and Six Months Ended June 30, 1999
Business Overview: Middlesex operates regulated water and wastewater utilities in New Jersey and Delaware, alongside a non-regulated segment providing contract services for municipal systems. The company recently expanded its non-regulated operations through a subsidiary, USA-PA, which began operating the City of Perth Amboy's systems on January 1, 1999.
Key Financial Metrics
| Metric | Three Months Ended June 30, 1999 |
Six Months Ended June 30, 1999 |
Twelve Months Ended June 30, 1999 |
|---|---|---|---|
| Operating Revenues | $13.81 million | $25.49 million | $48.19 million |
| Net Income | $2.57 million | $4.07 million | $7.75 million |
| Earnings Per Share (Basic) | $0.51 | $0.80 | $1.60 |
| Operating Cash Flow | N/A | $2.40 million | $9.31 million |
| Capital Expenditures | N/A | $10.38 million | $26.36 million |
| Total Debt (Long-term + Current) | $78.08 million | $78.08 million | $78.08 million |
| Cash and Equivalents | $8.65 million | $8.65 million | $8.65 million |
Note: Operating margins are not explicitly stated as a percentage in the text, but operating income for the six months ended June 30, 1999, was $4.93 million against $25.49 million in revenue.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 30.4% ($3.2 million) for the quarter and 25.2% ($5.1 million) for the six months compared to the prior year periods.
- Drivers: Significant contribution from the new USA-PA contract services ($1.7 million for the quarter; $3.4 million for six months). Additional growth came from an 11.5% rate increase approved in May 1999, Pinelands rate increases, and higher consumption due to dry, hot weather.
- Expense Increases: Operating expenses rose 30.2% for the quarter and 27.4% for the six months.
- Drivers: Inclusion of USA-PA operations and maintenance costs was the primary factor. Other increases included higher purchased power/water costs due to construction at the Carl J. Olsen (CJO) Plant and wage increases.
- Profitability: Net income surged 63.4% for the quarter and 43% for the six months, driven by revenue growth outpacing expense increases and favorable financing activity.
- Capitalization: Total capitalization increased to $151.24 million from $149.76 million at year-end 1998, primarily due to retained earnings growth.
Outlook, Risks, and Management Commentary
- Capital Program: The 1999 capital program is estimated at $26.6 million. Major projects include the completion of the CJO Plant upgrade ($15.0 million), the RENEW Program for main line rehabilitation ($2.0 million), and Delaware system improvements ($5.8 million).
- Liquidity and Financing: The company is utilizing proceeds from $23.0 million in Series W bonds and a $12.7 million common stock offering to fund capital projects. It maintains $28.0 million in available lines of credit, with $3.0 million outstanding as of June 30, 1999. The company filed for approval to issue up to $4.5 million in low-interest bonds via the New Jersey State Revolving Fund (approved July 26, 1999).
- Regulatory Matters: The New Jersey Board of Public Utilities (BPU) approved an 11.5% base rate increase effective May 13, 1999, to recover capital investments in the CJO Plant.
- Year 2000 (Y2K) Readiness: The company is actively managing Y2K risks. Vendor response rates are high (88% overall, 100% for critical vendors). Contingency plans are being submitted to regulators. Estimated implementation costs are less than $0.1 million.
- Legal Proceedings: A lawsuit regarding a 1997 legionella death at a motel in the service area has been partially settled by the insurer. Remaining claims are covered by substantial insurance, and management does not expect a significant financial impact.
- Accounting Standards: The company is evaluating FASB Statement No. 133 regarding derivative instruments, required for adoption in 2001.
Investor Verification Checklist
- USA-PA Integration: Verify the sustainability of the revenue and margin contribution from the new Perth Amboy contract operations.
- Rate Case Impact: Confirm the full financial realization of the 11.5% rate increase approved in May 1999.
- Capital Expenditure Execution: Monitor the $26.6 million capital program, specifically the $15.0 million CJO Plant upgrade, for cost overruns or delays.
- Debt Servicing: Review the impact of the new Series W bonds and the proposed $4.5 million SRF financing on future interest expenses.
- Y2K Contingency: Assess the adequacy of the contingency plans submitted to the BPU and Delaware Public Service Commission.