SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File FOR QUARTER ENDED: SEPTEMBER 30, 1999 NO. 0-422 ------------------ ----- MIDDLESEX WATER COMPANY ----------------------- (Exact name of registrant as specified in its charter) INCORPORATED IN NEW JERSEY 22-1114430 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1500 RONSON ROAD, ISELIN, NJ 08830 (Address of principal executive offices) (Zip Code) (732) 634-1500 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that this registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 30 days. YES X NO ------- ------- Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT SEPTEMBER 30, 1999 ----- --------------------------------- Common Stock, No Par Value 4,944,982
INDEX PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements: Consolidated Statements of Income 1 Consolidated Balance Sheets 2 Consolidated Statements of Capitalization and Retained Earnings 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures of Market Risk 12 PART II. OTHER INFORMATION 13 SIGNATURE 14
MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Three Months Nine Months Twelve Months Ended September 30, Ended September 30, Ended September 30, 1999 1998 1999 1998 1999 1998 ----- ----- ----- ----- ----- ---- <S> <C> <C> <C> <C> <C> <C> Operating Revenues $15,392,145 $12,073,985 $40,884,826 $32,434,440 $51,508,352 $42,487,359 ------------ ----------- ------------ ------------ ------------ ------------ Operating Expenses: Operations 6,938,208 5,273,381 19,664,043 14,594,866 24,876,649 19,065,602 Maintenance 662,487 430,079 1,908,947 1,196,360 2,427,944 1,728,726 Depreciation 1,023,154 823,148 2,762,078 2,446,871 3,599,876 3,251,842 Other Taxes 1,952,789 1,666,111 5,245,111 4,580,355 6,766,475 5,984,220 Federal Income Taxes 1,200,064 903,758 2,762,344 2,422,447 3,339,185 3,167,443 ------------ ----------- ------------ ------------ ------------ ------------ Total Operating Expenses 11,776,702 9,096,477 32,342,523 25,240,899 41,010,129 33,197,833 ------------ ----------- ------------ ------------ ------------ ------------ Operating Income 3,615,443 2,977,508 8,542,303 7,193,541 10,498,223 9,289,526 Other Income: Allowance for Funds Used During Construction 241,946 301,100 1,318,782 653,156 1,715,670 737,431 Other - Net 101,714 278,551 484,718 562,806 667,234 607,894 ------------ ----------- ------------ ------------ ------------ ------------ Total Other Income 343,660 579,651 1,803,500 1,215,962 2,382,904 1,345,325 Income Before Interest Charges 3,959,103 3,557,159 10,345,803 8,409,503 12,881,127 10,634,851 ------------ ----------- ------------ ------------ ------------ ------------ Interest Charges 1,178,544 1,209,587 3,500,014 3,224,672 4,698,943 4,075,902 ------------ ----------- ------------ ------------ ------------ ------------ Net Income 2,780,559 2,347,572 6,845,789 5,184,831 8,182,184 6,558,949 Preferred Stock Dividend Requirements 77,697 79,697 237,090 239,090 316,786 319,256 ------------ ----------- ------------ ------------ ------------ ------------ Earnings Applicable to Common Stock $2,702,862 $2,267,875 6,608,699 4,945,741 $7,865,398 $6,239,693 ============ =========== ============ ============ ============ ============ Earnings per share of Common Stock: Basic $ 0.55 $ 0.52 $ 1.34 $ 1.14 $ 1.64 $ 1.45 Diluted $ 0.54 $ 0.51 $ 1.32 $ 1.13 $ 1.62 $ 1.43 Average Number of Common Shares Outstanding : Basic 4,931,874 4,357,571 4,915,835 4,326,337 4,794,792 4,309,949 Diluted 5,156,139 4,583,997 5,141,533 4,552,763 5,020,673 4,536,401 Cash Dividends Paid per Common Share $0.29 1/2 $0.28 1/2 $0.88 1/2 $0.85 1/2 $1.18 $1.14 </TABLE> See Notes to Consolidated Financial Statements.
MIDDLESEX WATER COMPANY CONSOLIDATED BALANCE SHEETS ASSETS AND OTHER DEBITS <TABLE> <CAPTION> September 30, December 31, 1999 1998 ------------ ------------ (Unaudited) <S> <C> <C> UTILITY PLANT: Water Production $ 62,163,208 $ 28,154,961 Transmission and Distribution 120,858,867 118,234,900 General 19,633,795 19,300,406 Construction Work in Progress 4,612,085 25,794,061 ------------ ------------ TOTAL 207,267,955 191,484,328 Less Accumulated Depreciation 34,335,554 32,367,936 ------------ ------------ UTILITY PLANT-NET 172,932,401 159,116,392 ------------ ------------ NONUTILITY ASSETS-NET 4,042,541 3,710,437 ------------ ------------ CURRENT ASSETS: Cash and Cash Equivalents 4,475,657 9,388,822 Temporary Cash Investments-Restricted 2,692,751 9,776,072 Accounts Receivable (net of allowance for doubtful accounts) 6,386,050 4,886,067 Unbilled Revenues 2,899,948 2,298,148 Materials and Supplies (at average cost) 1,137,672 906,866 Prepayments and Other Current Assets 606,999 528,348 ------------ ------------ TOTAL CURRENT ASSETS 18,199,077 27,784,323 ------------ ------------ DEFERRED CHARGES: Unamortized Debt Expense 3,043,107 3,143,384 Preliminary Survey and Investigation Charges 389,700 276,202 Regulatory Assets Income Taxes 5,863,752 5,788,752 Post Retirement Costs 1,149,436 1,214,092 Other 2,334,438 2,467,674 ------------ ------------ TOTAL DEFERRED CHARGES 12,780,433 12,890,104 ------------ ------------ TOTAL $207,954,452 $203,501,256 ============ ============ </TABLE> See Notes to Consolidated Financial Statements.
MIDDLESEX WATER COMPANY CONSOLIDATED BALANCE SHEETS LIABILITIES AND OTHER CREDITS <TABLE> <CAPTION> September 30, December 31, 1999 1998 ------------ ------------ (Unaudited) <S> <C> <C> CAPITALIZATION (see accompanying statements) $152,687,774 $149,756,614 ------------ ------------ CURRENT LIABILITIES: Current Portion of Long-term Debt 144,285 71,730 Notes Payable 1,000,000 1,000,000 Accounts Payable 1,937,869 3,373,595 Taxes Accrued 6,382,926 5,220,669 Interest Accrued 681,886 1,701,330 Other 1,881,835 1,832,737 ------------ ------------ TOTAL CURRENT LIABILITIES 12,028,801 13,200,061 ------------ ------------ DEFERRED CREDITS: Customer Advances for Construction 11,993,118 11,275,660 Accumulated Deferred Investment Tax Credits 2,109,597 2,165,384 Accumulated Deferred Federal Income Taxes 12,013,103 12,070,474 Employee Benefit Plans 4,443,222 3,762,516 Other 879,144 791,460 ------------ ------------ TOTAL DEFERRED CREDITS 31,438,184 30,065,494 ------------ ------------ CONTRIBUTIONS IN AID OF CONSTRUCTION 11,799,693 10,479,087 ------------ ------------ TOTAL $207,954,452 $203,501,256 ============ ============ </TABLE> See Notes to Consolidated Financial Statements.
<TABLE> <CAPTION> MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION AND RETAINED EARNINGS September 30, December 31, 1999 1998 -------------------- -------------------- (Unaudited) <S> <C> <C> CAPITALIZATION: Common Stock, No Par Value Shares Authorized - 10,000,000 Shares Outstanding - 1999 - 4,944,982; 1998 - 4,897,069 $46,476,503 $45,507,172 Retained Earnings 23,432,905 21,222,294 -------------------- -------------------- TOTAL COMMON EQUITY 69,909,408 66,729,466 -------------------- -------------------- Cumulative Preference Stock, No Par Value Shares Authorized - 100,000; Shares Outstanding - None Cumulative Preferred Stock, No Par Value, Shares Authorized - 148,980 Convertible: Shares Outstanding, $7.00 Series - 14,881 1,562,505 1,562,505 Shares Outstanding, $8.00 Series - 19,000 2,214,858 2,331,430 Nonredeemable: Shares Outstanding, $7.00 Series - 1,017 101,700 101,700 Shares Outstanding, $4.75 Series - 10,000 1,000,000 1,000,000 -------------------- -------------------- TOTAL CUMULATIVE PREFERRED STOCK 4,879,063 4,995,635 -------------------- -------------------- Long-term Debt: 8.02% Amortizing Secured Note, due December 20, 2021 3,383,602 3,418,243 First Mortgage Bonds: 7.25%, Series R, due July 1, 2021 6,000,000 6,000,000 5.20%, Series S, due October 1, 2022 12,000,000 12,000,000 5.25%, Series T, due October 1, 2023 6,500,000 6,500,000 6.40%, Series U, due February 1, 2009 15,000,000 15,000,000 5.25%, Series V, due February 1, 2029 10,000,000 10,000,000 5.35%, Series W, due February 1, 2038 23,000,000 23,000,000 0.00%, Series X, due August 1, 2018 1,024,986 1,050,000 4.53%, Series Y, due August 1, 2018 1,135,000 1,135,000 -------------------- -------------------- SUBTOTAL LONG-TERM DEBT 78,043,588 78,103,243 -------------------- -------------------- Less: Current Portion of Long-term Debt (144,285) (71,730) -------------------- -------------------- TOTAL LONG-TERM DEBT 77,899,303 78,031,513 -------------------- -------------------- TOTAL CAPITALIZATION $152,687,774 $149,756,614 ==================== ==================== </TABLE>
<TABLE> <CAPTION> Nine Months Ended Year Ended September 30, December 31, 1999 1998 -------------------- -------------------- (Unaudited) <S> <C> <C> RETAINED EARNINGS: BALANCE AT BEGINNING OF PERIOD $21,222,294 $20,087,065 Net Income 6,845,789 6,521,226 -------------------- -------------------- TOTAL 28,068,083 26,608,291 -------------------- -------------------- Cash Dividends: Cumulative Preferred Stock 237,090 318,751 Common Stock 4,348,788 4,987,013 Common Stock Expenses 49,300 80,233 -------------------- -------------------- TOTAL DEDUCTIONS 4,635,178 5,385,997 -------------------- -------------------- BALANCE AT END OF PERIOD $23,432,905 $21,222,294 ==================== ==================== </TABLE> See Notes to Consolidated Financial Statements.
MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, Twelve Months Ended September 30, 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 6,845,789 $ 5,184,831 $ 8,182,184 $ 6,558,949 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 2,762,078 2,446,871 3,599,876 3,251,842 Provision for Deferred Income Taxes (132,372) 200,567 (197,963) 408,778 Allowance for Funds Used During Construction (1,318,782) (653,156) (1,715,670) (737,431) Changes in Current Assets and Liabilities: Accounts Receivable (1,499,983) (1,370,417) (1,220,773) (756,456) Accounts Payable (1,435,726) 532,093 (1,785,257) 2,030,888 Accrued Taxes 1,162,257 408,812 832,025 305,167 Accrued Interest (1,019,444) (488,681) (12,994) 234,610 Unbilled Revenues (601,800) (419,545) (304,469) (96,014) Employee Benefit Plans 680,706 741,655 954,331 988,293 Other-Net 53,056 19,249 979,411 420,440 ------------- ------------- ------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,495,779 6,602,279 9,310,701 12,609,066 ------------- ------------- ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Utility Plant Expenditures* (15,394,729) (18,764,047) (22,905,963) (21,740,080) Note Receivable 47,512 (1,644,308) 72,755 (1,638,345) Preliminary Survey and Investigation Charges (113,498) (36,694) (139,356) (2,018,189) Other-Net (225,676) (426,292) (453,989) (1,219,286) ------------- ------------- ------------- -------------- NET CASH USED IN INVESTING ACTIVITIES (15,686,391) (20,871,341) (23,426,553) (26,615,900) ------------- ------------- ------------- -------------- </TABLE> (continued)
<TABLE> <CAPTION> Nine Months Ended September 30, Twelve Months Ended September 30, 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of Long-term Debt (59,655) (31,671) (70,694) (44,496) Proceeds from Issuance of Long-term Debt - 23,000,000 2,185,000 23,000,000 Short-term Bank Borrowings - 3,935,299 (3,500,000) 3,935,299 Deferred Debt Issuance Expenses (1,864) (474,096) (29,968) (474,096) Temporary Cash Investments-Restricted 7,083,321 (11,277,788) 8,803,824 (11,277,917) Proceeds from Issuance of Common Stock-Net 803,459 1,855,942 13,235,973 2,159,163 Payment of Common Dividends (4,348,788) (3,697,527) (5,638,274) (4,911,122) Payment of Preferred Dividends (237,090) (239,054) (316,787) (318,787) Construction Advances and Contributions-Net 2,038,064 360,068 2,247,030 599,630 ------------- ------------- ------------- -------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 5,277,447 13,431,173 16,916,104 12,667,674 ------------- ------------- ------------- -------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (4,913,165) (837,889) 2,800,252 (1,339,160) ------------- ------------- ------------- -------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,388,822 2,513,294 1,675,405 3,014,565 ------------- ------------- ------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,475,657 $ 1,675,405 $ 4,475,657 $ 1,675,405 ============= ============= ============= ============== * Excludes Allowance for Funds Used During Construction SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash Paid During the Period for: Interest (net of amounts capitalized) $ 3,094,507 $ 3,052,732 $ 2,852,353 $ 3,060,069 Income Taxes $ 2,322,350 $ 2,206,125 $ 3,279,200 $ 2,806,125 </TABLE> See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - Middlesex Water Company (Middlesex) is the parent company and sole shareholder of Tidewater Utilities, Inc. (Tidewater), Pinelands Water Company, Pinelands Wastewater Company, Utility Service Affiliates, Inc. (USA), and Utility Service Affiliates (Perth Amboy) Inc. (USA-PA). Public Water Supply Company, Inc. (Public) and White Marsh Environmental Systems, Inc., 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 intercompany accounts and transactions have been eliminated. The consolidated notes accompanying the 1998 Form 10-K are applicable to this report and, in the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 1999 and the results of operations and its cash flows for the periods ended September 30, 1999 and 1998. Information included in the Balance Sheet as of December 31, 1998, has been derived from the Company's audited financial statements included in its annual report on Form 10-K for the year ended December 31, 1998. NOTE 2 - REGULATORY MATTERS On September 20, 1999, Tidewater Utilities, Inc. and Public Water Supply Company, Inc. jointly filed a petition with the Delaware Public Service Commission (PSC) for a base rate increase of $1.7 million or 38.3%. The increase is necessary to cover additional capital improvements and increased operating and maintenance costs. As prescribed by PSC regulations, Tidewater has requested an interim rate increase, subject to refund, of 14.8%, effective November 19, 1999. The PSC is expected to address this issue on November 16, 1999. Concurrently with the rate increase request, an application was filed and approved by the PSC for a corporate merger of Tidewater and Public. The last increase in base rates for Tidewater and Public were in 1991 and 1992, respectively. A rate decision by the PSC is expected in the second quarter of 2000.
NOTE 3 - CAPITALIZATION COMMON STOCK - During the three months ended September 30, 1999, 19,582 common shares ($0.3 million) were issued under the Company's Restricted Stock Plan and Dividend Reinvestment and Common Stock Purchase Plan. PREFERRED STOCK - In September, the number of authorized Preferred Stock, without par value, was reduced from 149,980 shares to 148,980 shares to account for the election to exercise the conversion privilege of 1,000 shares of the $8.00 Series into 6,857 shares of the Company's common shares. LONG-TERM DEBT - On November 5, 1999, the Company closed on a BPU approved $4.5 million, 20 year loan from the State of New Jersey and the New Jersey Environmental Infrastructure Trust (Trust) through the New Jersey State Revolving Fund. The loan, which is secured by First Mortgage Bonds designated as Series Z and AA, is comprised of a $2.15 million zero interest borrowing from the New Jersey Department of Environmental Protection and a $2.35 million borrowing from the Trust with the interest rate varying from 5.25% to 5.75 %, depending on the maturity date. Final maturity for both series of Mortgage Bonds is August 1, 2019. The interest paid to bond holders is exempt from federal and New Jersey incomes taxes, but is subject to the Alternative Minimum Tax. The proceeds will be used to fund the 2000 and 2001 capital projects to clean and cement line previously unlined pipes and mains. NOTE 4 - EARNINGS PER SHARE Basic earnings per share (EPS) are 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 the Convertible Preferred Stock $8.00 Series.
<TABLE> <CAPTION> (In Thousands) Three Months Ended Nine Months Ended Twelve Months Ended September 30, September 30, September 30, 1999 1998 1999 1998 1999 1998 BASIC: Income Shares Income Shares Income Shares Income Shares Income Shares Income Shares - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Net Income $2,781 4,932 $2,348 4,358 $6,846 4,916 $5,185 4,326 $8,182 4,795 $6,559 4,310 PREFERRED DIVIDEND (78) (80) (237) (239) (317) (319) ---- ---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Earnings Applicable $2,703 4,932 $2,268 4,358 $6,609 4,916 $4,946 4,326 $7,865 4,795 $6,240 4,310 to Common Stock BASIC EPS $ 0.55 $ 0.52 $ 1.34 $ 1.14 $ 1.64 $ 1.45 DILUTED: - ------------------------------------------------------------------------------------------------------------------- Earnings Applicable $2,703 4,932 $2,268 4,358 $ 6,609 4,916 $ 4,946 4,326 $7,865 4,795 $6,240 4,310 to Common Stock $7.00 Series Dividend 26 89 26 89 78 89 78 89 104 89 104 89 $8.00 Series DIVIDEND 38 135 40 137 118 137 120 137 158 137 160 137 ---- ---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Adjusted Earnings Applicable to Common Stock $2,767 5,156 $2,334 4,584 $6,805 5,142 $ 5,144 4,552 $8,127 5,021 $6,504 4,536 DILUTED EPS $ 0.54 $ 0.51 $ 1.32 $ 1.13 $1.62 $ 1.43 </TABLE> NOTE 5 - 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 and Delaware. It also operates a regulated wastewater system in New Jersey. The Company is subject to regulations as to its rates, services and other matters by the States of New Jersey and Delaware with respect to utility service within these States. The other segment is the non-regulated contract services for the operation and maintenance of municipal water and wastewater systems. On January 1, 1999 the Company began operating the water and wastewater systems of the City of Perth Amboy, New Jersey under a service contract. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to the Consolidated Financial Statements. 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.
<TABLE> <CAPTION> (Thousands of Dollars) Three Months Ended Nine Months Ended Twelve Months Ended September 30, September 30, September 30, Operations by Segments: 1999 1998 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Revenues: Regulated $ 13,514 $ 11,966 $ 35,409 $ 32,104 $ 45,922 $ 42,054 Non - Regulated 1,887 116 5,505 348 5,621 457 Inter-segment Elimination (9) (8) (29) (18) (35) (24) ------------------------------------------------------------------------------------ Consolidated Revenues $ 15,392 $ 12,074 $ 40,885 $ 32,434 $ 51,508 $ 42,487 ------------------------------------------------------------------------------------ Operating Income: Regulated $ 3,367 $ 2,914 $ 7,954 $ 6,997 $ 9,898 $ 9,036 Non - Regulated 248 64 588 196 600 254 Inter-segment Elimination -- -- -- -- -- -- ------------------------------------------------------------------------------------ Consolidated Operating Income $ 3,615 $ 2,978 $ 8,542 $ 7,193 $ 10,498 $ 9,290 ------------------------------------------------------------------------------------ Depreciation/Amortization: Regulated $ 1,016 $ 823 $ 2,744 $ 2,447 $ 3,582 $ 3,252 Non - Regulated 7 -- 18 -- 18 -- Inter-segment Elimination -- -- -- -- -- -- ------------------------------------------------------------------------------------ Consolidated Depreciation/Amortization $ 1,023 $ 823 $ 2,762 $ 2,447 $ 3,600 $ 3,252 ------------------------------------------------------------------------------------ Other Income: Regulated $ 928 $ 894 $ 2,970 $ 1,929 $ 3,672 $ 2,289 Non - Regulated -- -- -- -- -- -- Inter-segment Elimination (584) (314) (1,166) (713) (1,289) (944) ------------------------------------------------------------------------------------ Consolidated Other Income $ 344 $ 580 $ 1,804 $ 1,216 $ 2,383 $ 1,345 ------------------------------------------------------------------------------------ Interest Expense: Regulated $ 1,303 $ 1,262 $ 3,782 $ 3,341 $ 5,052 $ 4,219 Non - Regulated 57 40 161 91 209 110 Inter-segment Elimination (181) (92) (443) (207) (562) (253) ------------------------------------------------------------------------------------ Consolidated Interest Expense $ 1,179 $ 1,210 $ 3,500 $ 3,225 $ 4,699 $ 4,076 ------------------------------------------------------------------------------------ Net Income: Regulated $ 2,993 $ 2,546 $ 7,142 $ 5,585 $ 8,517 $ 7,106 Non - Regulated 191 24 427 106 392 144 Inter-segment Elimination (403) (222) (723) (506) (727) (691) ------------------------------------------------------------------------------------ Consolidated Net Income $ 2,781 $ 2,348 $ 6,846 $ 5,185 $ 8,182 $ 6,559 ------------------------------------------------------------------------------------ Capital Expenditures: Regulated $ 5,012 $ 8,471 $ 15,245 $ 18,764 $ 22,756 $ 21,740 Non - Regulated 2 -- 150 -- 150 -- Inter-segment Elimination -- -- -- -- -- -- ------------------------------------------------------------------------------------ Total Capital Expenditures $ 5,014 $ 8,471 $ 15,395 $ 18,764 $ 22,906 $ 21,740 ------------------------------------------------------------------------------------ <CAPTION> As of As of September 30, December 31, 1999 1998 ---- ---- <S> <C> <C> Assets: Regulated $ 225,202 $ 219,014 Non - Regulated 3,469 2,377 Inter-segment Elimination (20,717) (17,890) --------- --------- Consolidated Assets $ 207,954 $ 203,501 --------- --------- </TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999 Operating revenues for the quarter ended September 30, 1999 rose 27.5% or $3.3 million over the same period in 1998. Better than half of the increase or $1.8 million is due to the contract service revenues from the operations of the City of Perth Amboy's water and wastewater systems. Revenues from the May 1999 11.5% increase in Middlesex rates accounted for $1.3 million with consumption and customer growth in Delaware contributing $0.2 million. Record water usage during July and early August in New Jersey was completely offset by the statewide drought restrictions imposed by the Governor of New Jersey on August 6, 1999. Generally, these restrictions were subsequently lifted on September 27, 1999. At all times, Middlesex had adequate sources of water to supply its customers. This fact, along with the Company's objection to such a broad water restriction was communicated to State authorities. Operating expenses increased for the quarter over last year's comparative period by $2.7 million or 29.5%. Perth Amboy contract expenses were $1.6 million. Together, purchased water and electric costs increased by $0.2 million. Personnel costs rose $0.2 million. The improvements to Middlesex primary treatment facility, the Carl J. Olsen Water Treatment Plant (CJO Plant), were placed in service July 1999 causing most of the $0.2 million increase in depreciation expense. Other Taxes rose $0.3 million as a result of higher revenue related taxes. Federal income taxes also increased $0.3 million consistent with higher earnings for the period. Other income fell $0.2 million due to lower levels in the Allowance for Funds Used During Construction (AFUDC) and investment income. AFUDC was ceased once the CJO Plant was placed in service. Expenditures for the CJO Plant expenditures from October 1998 through 1999 lowered the amount of funds available for investment. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 Operating revenues for the nine months ended September 30, 1999 rose $8.5 million or 26% compared to the first nine months of 1998. The increase was made up of $5.2 million from Perth Amboy contract revenues, $2.2 million due to rate increases in New Jersey, $0.6 million from higher consumption in New Jersey and $0.5 million from customer growth in Delaware. Offsetting some of the higher revenues were increased operating expenses of $7.1 million. The primary components of this 28.1% increase are Perth Amboy contract expenses of $4.8 million, $0.4 million for purchased water and power and personnel costs of $0.6 million. Almost two thirds of the depreciation expense increase of $0.3 million is due to the CJO Plant additions. Other Taxes rose $0.7 million mostly due to higher revenue related taxes. Federal income taxes also increased $0.3 million consistent with higher earnings for the period. A higher level of AFUDC calculated on CJO Plant capital expenditures for the first nine months of 1999 over 1998 added $0.7 million to other income. This more than offset lower investment related earnings for the period. Debt service related to the Series W and Y First Mortgage Bonds, issued in March and November 1998, respectively, accounted for the year to date increase in interest expense.
Basic earnings per share increased $0.20 and diluted earnings per share rose $0.19. The per share dilution for the nine months ended September 30, 1999 is attributable to the two series of convertible preferred stock currently outstanding. RESULTS OF OPERATIONS - TWELVE MONTHS ENDED SEPTEMBER 30, 1999 Operating revenues for the twelve months ended September 30, 1999 increased $9.0 million or 21.2%. Contributing to this increase were Perth Amboy contract revenues of $5.2 million, rate increase related revenues of $2.7 million from New Jersey customers, increased consumption of $0.5 million and growth in our Delaware service area amounted to $0.6 million. Total operating expenses increased $7.8 million or 23.5%. Expenses incurred to operate the Perth Amboy water and wastewater systems amounted to $4.9 million. Other factors that pushed expenses up were salaries and wages of $0.9 million, purchased water of $0.3 million and purchased power costs of $0.2 million. Depreciation expense rose $0.3 million. Other taxes increased $0.8 million mostly due to higher revenue related taxes. A higher level of AFUDC calculated on CJO Plant capital expenditures added almost $1.0 million to other income and investment earnings increased to push other income up to just over $1.0 million. Basic and diluted earnings per share grew at a lower percentage versus net income due to the effect of the December 1998 common stock offering of 515,000 shares. CAPITAL RESOURCES The Company's capital program for 1999 is estimated to be $24.1 million and includes $15.0 million for the remaining expenditures for the upgrade of the CJO Plant, $2.0 million for the RENEW Program, which is our program to clean and cement line approximately nine miles of unlined mains in the Middlesex System. There is a total of approximately 170 miles of unlined mains in the 670 mile Middlesex System. The capital program also includes $3.3 million for water system additions and improvements for our Delaware systems and $3.8 million for scheduled upgrades to our existing systems in New Jersey. The scheduled upgrades consists of $1.6 million for mains, $0.7 million for service lines, $0.4 million for meters, $0.3 million for hydrants and $0.8 million for various other items. LIQUIDITY Proceeds from the $23.0 million Series W First Mortgage Bonds and the December 1998. $12.7 million common stock offering have been used to finance the CJO Plant expenditures in 1999. Middlesex issued $2.2 million of First Mortgage Bonds in November 1998 through the New Jersey State Revolving Fund (SRF) to cover the cost of the 1999 RENEW Program. The capital program in Delaware will be financed through a combination of a capital contribution from Middlesex and long-term debt financing from either a financial institution or the Company. Other capital expenditures will be financed through internally generated funds and sale of common stock through the Dividend Reinvestment and Common Stock Purchase Plan (DRP). Capital expenditures of $15.4 million have been incurred in the nine months ended September 30, 1999. The Company may also utilize short-term borrowings through $28.0 million of available lines of credit it has with three commercial banks for working capital purposes. At September 30, 1999, there were $1.0 million of loans outstanding against the lines of credit.
ACCOUNTING STANDARDS In June 1998, The Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. The Company is currently evaluating the requirements of the accounting standard, which is required to be adopted in the first quarter of 2001. YEAR 2000 READINESS The Company, through its year 2000 (Y2K) Committee, continues to advance in its efforts to ensure that our ability to provide service will not be interrupted by Y2K related problems. Responses to our critical vendor questionnaire have reached 100%. Critical vendors include electric utilities, chemical companies, bulk water suppliers and telecommunications providers. Each vendor has indicated their level of readiness. Middlesex contingency plans have been formalized and were submitted to the BPU in August 1999. Contingency plans for our Delaware water utilities have been submitted to the Delaware Public Service Commission. The costs to implement these plans are currently projected to be less than $0.1 million. The Y2K Committee has completed its inventory of equipment that may contain embedded chips. Y2K compliance statements have been received for all of the manufactured equipment in question. In each instance the manufacturer has indicated that the equipment or components in use are not Y2K sensitive. Based on the information received, Y2K testing for the respective equipment is not being considered. The ability of our financial system to recognize post 1999 dates was tested and determined to be compliant. Our customer billing and information system has been tested and classified as Y2k compliant. All customers have received notification of our plans to ensure service as usual on January 1, 2000. FORWARD LOOKING INFORMATION Certain matters discussed in this report on Form 10-Q are "forward-looking statements" intended to qualify for safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Such statements may address future plans, objective, expectations and events concerning various matters such as capital expenditures, earnings, litigation, growth potential, rate and other regulatory matters, liquidity and capital resources and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF 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 2009 to 2038. Over the next twelve months approximately $0.1 million of the current portion of three 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 earnings.
PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No. 10.13, Copy of Supplemental Executive Retirement Plan, As amended No. 10.15(a), Employment Agreement Between Middlesex Water Company and J. Richard Tompkins No. 10.15(b), Employment Agreement Between Middlesex Water Company and Walter J. Brady No. 10.15(c), Employment Agreement Between Middlesex Water Company and A. Bruce O'Connor No. 10.15(d), Employment Agreement Between Middlesex Water Company and Marion F. Reynolds No. 10.15(e), Employment Agreement Between Middlesex Water Company and Richard A. Russo No. 10.15(f), Employment Agreement Between Middlesex Water Company and Dennis G. Sullivan No. 10.15(g), Employment Agreement Between Middlesex Water Company and Ronald F. Williams No.11, Statement Regarding Computation of Per Share Earnings No. 27, Financial Data Schedule. (b) Reports on Form 8-K: None
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. MIDDLESEX WATER COMPANY (Registrant) /s/ A. BRUCE O'CONNOR --------------------------------- Date: November 12, 1999 A. Bruce O'Connor Vice President and Controller