Business Context and Reporting Period
Company: Middlesex Water Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1999
Business Overview: Middlesex Water Company operates water utility systems in central and southern New Jersey and Delaware, along with a wastewater utility in southern New Jersey. The company serves approximately 57,000 retail customers in New Jersey and 12,700 in Delaware. Operations are divided into regulated utility services (water production, treatment, distribution) and non-regulated contract services (operations and maintenance of municipal systems).
Key Financial Metrics
| Metric | 1999 | 1998 | 1997 |
|---|---|---|---|
| Operating Revenues | $53,497,000 | $43,058,000 | $40,294,000 |
| Operating Income | $10,665,000 | $9,149,000 | $8,768,000 |
| Net Income | $7,881,000 | $6,521,000 | $5,861,000 |
| Earnings Per Share (Basic) | $1.54 | $1.42 | $1.33 |
| Dividends Paid Per Share | $1.19 | $1.15 | $1.125 |
| Total Assets | $215,036,000 | $203,501,000 | $159,761,000 |
| Long-Term Debt | $82,330,000 | $78,032,000 | $52,918,000 |
| Cash and Cash Equivalents | $5,170,000 | $9,389,000 | $2,513,000 |
Capital Expenditures: Actual capital expenditures for 1999 were $24.5 million. Projected requirements are $18.1 million for 2000, $16.1 million for 2001, and $16.1 million for 2002.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased by $10.4 million (24.1%) compared to 1998. This was primarily driven by the commencement of the 20-year management contract with the City of Perth Amboy (USA-PA), which contributed $7.0 million, and rate increases across regulated companies totaling $3.8 million.
- Expense Increases: Total operating expenses rose $8.9 million (26.3%). Significant factors included $5.7 million in operations and maintenance costs related to the Perth Amboy contract and a $0.6 million increase in depreciation due to the activation of improvements at the Carl J. Olsen (CJO) Water Treatment Plant.
- Profitability: Net income reached a record high, increasing $1.4 million (21.5%) to $7.88 million. Basic earnings per share rose 8.5% to $1.54.
- Debt Structure: Long-term debt increased by approximately $4.3 million. The company issued $4.5 million in First Mortgage Bonds through the New Jersey State Revolving Fund to finance the RENEW Program (main cleaning and lining).
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management expects revenues to continue growing in 2000, driven by the annualized effect of rate increases in Delaware and New Jersey and anticipated customer growth in Delaware. The company's strategy focuses on growth through acquisitions, internal expansion, public/private partnerships, and rate relief. Opportunities in Delaware are being pursued to significantly increase the customer base.
Regulatory Matters
- New Jersey: In May 1999, the Board of Public Utilities (BPU) approved an 11.5% ($4.3 million) base rate increase for Middlesex to recover capital investments in the CJO Plant upgrade.
- Delaware: In September 1999, Tidewater Utilities filed for a 38.3% ($1.7 million) base rate increase. An interim increase of 14.8% was granted in November 1999. A final decision is expected in the second quarter of 2000.
Risks and Contingencies
- Legal Proceedings:
- Legionella Claims: Claims arising from a 1997 outbreak at a motel in the service area. The company believes insurance will cover all claims except potential punitive damages.
- Warehouse Fire: Multiple claims regarding insufficient water pressure following a 1995 fire. The company believes it has substantial defenses but lacks insurance coverage for these specific claims.
- Water Line Break: A potential claim of $5.6 million involving a broken water line and power cable. The company is insured for damages except for approximately $0.2 million in pollution discharge damages.
- Guarantees: The company guaranteed $26.3 million in bonds issued by the City of Perth Amboy in connection with the USA-PA management contract.
- Year 2000: The company reported no service interruptions occurred due to the calendar year change to 2000.
Investor Verification Checklist
- Perth Amboy Contract Performance: Verify the financial performance and operational stability of the USA-PA subsidiary, which contributed significantly to 1999 revenue growth.
- Delaware Rate Case Outcome: Monitor the final decision by the Delaware Public Service Commission regarding the 38.3% rate increase request, as this impacts future earnings.
- Capital Expenditure Funding: Confirm the company's ability to fund the projected $18.1 million capital program in 2000, particularly the RENEW Program and Delaware system upgrades.
- Legal Exposure: Review the status of the warehouse fire litigation and the water line break claim to assess potential uninsured liabilities.
- Debt Covenants: Review the terms of the $26.3 million bond guarantee for Perth Amboy and the impact on the company's credit profile.