MSEX

Business Context and Reporting Period

Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 1998
Business Overview: Middlesex is a regulated utility providing water and wastewater services in New Jersey and Delaware. The company operates through wholly-owned subsidiaries including Tidewater Utilities, Inc., Pinelands Water Company, and Utility Service Affiliates, Inc. The company is currently undergoing significant capital expansion, specifically the upgrade of the Carl J. Olsen (CJO) Water Treatment Plant.

Key Financial Metrics (Nine Months Ended Sept 30, 1998)

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by $2.2 million (7.3%) year-over-year. Drivers included a 4.4% rate increase approved in January 1998 ($1.2M impact), customer growth ($0.4M), and the inclusion of Public Water Supply Company, Inc. (acquired July 1997) in consolidated results ($0.6M).
• Expense Increases: Total operating expenses rose $1.7 million (7.2%). Increases were attributed to higher purchased water and electric power costs, recognition of post-retirement benefits under new accounting standards, and higher depreciation due to $9.5 million of new utility plant placed in service.
• Profitability: Net income increased by $0.7 million (15.6%). Diluted earnings per share rose from $1.02 to $1.13.
• Capital Structure: Long-term debt increased significantly by approximately $23 million due to the issuance of Series W First Mortgage Bonds in March 1998 to fund the CJO Plant expansion. Interest charges rose by $0.5 million.
• Cash Flow: While operating cash flow remained relatively stable, net cash used in investing activities surged to $20.6 million (compared to $5.7 million in 1997) due to heavy capital expenditures. Financing activities provided $13.4 million, primarily from the bond issuance.

Guidance, Outlook, and Risks

• Regulatory Matters: On September 17, 1998, the company filed a petition with the New Jersey Board of Public Utilities (BPU) for a base rate increase of $7.9 million (21.9%). Approximately 75% of this request is to recover investments in the CJO Plant upgrade. A decision is expected in summer 1999.
• Capital Expenditures: Estimated capital expenditures are $24.3 million for 1998, $25.9 million for 1999, and $6.5 million for 2000. The company plans to finance these via bond proceeds, a pending common stock offering (up to 525,000 shares), and state revolving funds.
• New Business Opportunity: The company is negotiating a 20-year agreement to operate and maintain the water and wastewater systems for the City of Perth Amboy, NJ. This involves a fixed fee starting at $6.4 million and potential bond guarantees up to $27.5 million.
• Year 2000 Compliance: The company is evaluating Year 2000 risks for its computer systems and third-party vendors. While internal systems are largely certified, there is a risk of material adverse effect if third-party providers (power, telecommunications, fuel) fail.
• Liquidity: The company maintains $28.0 million in lines of credit, with $4.5 million outstanding as of September 30, 1998.

Investor Verification Checklist

• Rate Case Outcome: Monitor the BPU decision on the $7.9 million rate increase petition expected in summer 1999.
• Capital Project Costs: Verify if the CJO Plant upgrade and RENEW Program remain within the estimated $24.3 million (1998) and $25.9 million (1999) budgets.
• Equity Offering: Confirm the status and pricing of the proposed public offering of up to 525,000 shares of common stock.
• Perth Amboy Agreement: Track the finalization of the 20-year operating agreement and the associated $69.5 million bond issuance.
• Year 2000 Mitigation: Assess the company's contingency plans for third-party infrastructure failures (power, water supply) related to the Year 2000 transition.