Business Context and Reporting Period
Company: Middlesex Water Company (MSEX)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1998
Business Overview: A regulated water utility operating in central and southern New Jersey and Delaware. The company operates the Middlesex System (87.8% of 1998 revenue), Tidewater Systems in Delaware (8.8%), and smaller Pinelands water and wastewater systems. The company serves approximately 54,000 retail customers in New Jersey and 11,300 in Delaware, alongside various contract sales to municipalities.
Key Financial Metrics
| Metric | 1998 | 1997 |
|---|---|---|
| Operating Revenues | $43,058,000 | $40,294,000 |
| Operating Income | $9,149,000 | $8,768,000 |
| Net Income | $6,521,000 | $5,861,000 |
| Earnings Per Share (Basic) | $1.42 | $1.33 |
| Operating Cash Flow | $10,417,000 | $12,627,000 |
| Long-Term Debt | $78,032,000 | $52,918,000 |
| Total Assets | $203,501,000 | $159,761,000 |
| Dividends Paid (Common) | $1.15 per share | $1.125 per share |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 6.9% ($2.8 million) driven by a 4.4% rate increase approved in January 1998, full-year inclusion of the Public Water Supply Company acquisition, and 11.5% customer growth in Delaware.
- Expense Increases: Operating expenses rose 7.6% ($2.4 million) due to higher labor costs, postretirement benefit recognition, and the inclusion of Public's expenses for a full year.
- Capital Expenditures: Utility plant expenditures surged to $26.3 million in 1998 (up from $10.2 million in 1997), primarily funding the Carl J. Olsen (CJO) Plant upgrade.
- Debt Expansion: Long-term debt increased by approximately $25.1 million, reflecting the issuance of $23 million in Series W Mortgage Bonds and other financing to support capital projects.
- Profitability: Net income increased 11.3% to $6.5 million, with Basic EPS rising to $1.42.
Outlook, Risks, and Management Commentary
Guidance and Outlook
- Revenue Expectations: Management expects revenue improvement in 1999 due to the new Perth Amboy service agreement, continued Delaware growth, and the final phase of Pinelands rate increases.
- Capital Program: Projected capital expenditures are $26.6 million for 1999, $10.4 million for 2000, and $9.8 million for 2001. Funding is secured via bond proceeds and stock offerings.
- Rate Petitions: A 21.9% rate increase petition for the Middlesex System (seeking $8.0 million) is pending BPU approval, expected in summer 1999. A rate increase for Delaware operations is also anticipated in 1999.
Risks and Contingencies
- Regulatory Risk: No assurance that the requested 21.9% rate increase will be granted or that the return on equity will be maintained.
- Legal Proceedings:
- Legionella Claims: A motel in bankruptcy alleges waterborne legionella caused illness and financial loss. The company believes claims are unsupported and insurance covers most damages, though punitive damages are excluded.
- Warehouse Fire: Claims regarding insufficient water pressure during a 1995 fire remain unresolved; the company has no insurance coverage for these specific claims but believes defenses are substantial.
- Utility Line Break: A potential $1.5 million claim exists regarding a water line break damaging an electric cable; liability is not established.
- Year 2000 (Y2K): The company is evaluating risks related to vendor systems and critical control devices. Contingency plans are being developed for potential service interruptions.
- Perth Amboy Agreement: The company guaranteed $26.3 million of bonds issued by the City of Perth Amboy in connection with a 20-year operations and maintenance contract.
Investor Verification Checklist
- Rate Case Outcome: Verify the BPU's decision on the 21.9% rate increase petition for the Middlesex System, as this significantly impacts future earnings.
- Perth Amboy Contract Performance: Monitor the financial performance of the new USA-PA subsidiary and the City of Perth Amboy's ability to service the guaranteed debt.
- Capital Project Completion: Confirm the timely completion and cost containment of the $38 million CJO Plant upgrade scheduled for late 1999.
- Legal Resolution: Track the status of the motel legionella litigation and the warehouse fire claims to assess potential uninsured liabilities.
- Debt Servicing: Review the impact of increased interest charges ($4.4 million in 1998) on future cash flows as debt levels remain elevated.